There’s a lot of buzz hitting the contrarian financial news circles around the web regarding recent market weakness and the possibility for the end of the rally which began in March of 2009.
Many contrarian investors have been waiting for the crash that is inevitably to follow the largest US market rally in modern history, and this may be it. We caution our readers, however, that over the last year there have been various false signals, and rather than seeing a crash in the Summer of 2009 or Fall of 2009, stock markets continued to push up, despite abysmal economic fundamentals.
Is it the real thing this time?
Bert Dohmen, publisher of the Wellington Letter, says “This is the time for the bears to make money. Sell short any rally attempts.”
Dohmen, who suggested in December 2009 that early January would see a continued rise in stocks, anticipated a down-turn in late January. In his most recent letter, dispatched to subscribers January 21, 2010, Dohmen says that we can forget about the theory that “hyperinflation is right around the corner,” and that deflation and debt implosion is the major problem:
“Market analysts expect 2010 to see a rise in corporate earnings and sales. They are probably correct. But that will be met by further market weakness. You see, thatâ€™s what the stock rise of the prior 10 months was all about. Stocks are already priced for the best news that could possibly develop this year. When all the fund managers are positioned for this â€œgood news,â€ there is no further money to go in. And thatâ€™s when the selling gets serious.
The recent news out of China is just what we have been warning about: tighter lending and monetary policies! Economic growth in the last quarter was a blistering 10.7% (officially), which obviously creates worries about inflation. Tighter money dampens speculative fever. And all the sins of the speculative bubble of 2009 will surface.
As a result, the US dollar is now in demand and is soaring. That kills the most important reasons for buying commodities. The dollar rally will be a lot stronger than even the few dollar bulls imagine. There will be a massive rush to close out short positions.”
In our earlier post this morning, Chinese Fed Shuts Down Lending, Capital Flees to Dollar, we suggested that the pullback in Chinese bank lending and stimulus, may force capital speculating in Asian stocks back to safety in the US Dollar. Dohmen seems to agree with this assessment.
J Derek Blain, of Investophoria.com, also thinks the stock markets may be turning. His view is that not only will the dollar rebound, but we will see equities prices, commodities, and precious metals turn to the down-side in the near term, as more capital flows into the US Dollar. Blain is quite bearish on short-term precious metals prices, so if you haven’t stocked up on gold and silver, perhaps you’ll have yet another opportunity in the near future because Blain says The Big One Could Finally Be Here:
“But here’s the interesting thing – finally, after 5 weeks of watching gold top and begin its bear market decline, and the major stock indexes make new highs, we might have just witnessed the turning point in all “risk assets”.
And that is really one of the keys, and one thing we have been saying for several months now.Â Â Whenever the precious metals are treated as risk assets for the purposes of capital gains, they are not in a bull market but in a false rally.Â The psychology that drives this sort of rally is hope-based, completely mood-driven, and ultimately comes unwound like the thread in a poorly knit sweater.
What we are looking for, here at Investophoria, is despair.Â Until we see such a thing in the precious metals we cannot recommend buying them.Â If we did without it, we would be advising you to get in line and be “the sucker” who is willing to pay a higher price.”
“The next leg down in both gold and silver should be very fast and will take many more by surprise who have run to them seeking to make back the losses they sustained in stocks in the last bear-market leg.”
If the global stock markets start to pull back, gold and silver are going with them. While gold is a safe haven asset in times of distress, it is important to note that the broader picture for the time being is that gold has not decoupled from the stock market in general and remains closely tied to the inverse movement of the US Dollar, as was evidenced by gold’s reaction to the Dubai stock market collapse in November 2009.
For traders (not investors) looking to make short term profits, precious metals are just as dangerous as the stock market right now. If you are a long-term precious metals investor, turn off the news and stop watching daily price movement in precious metals, you should be fine when gold does finally decouple from other assets and becomes a safety asset, not because of inflationary fears, but because instability in the public (government) sector.
When this will happen is anybody’s guess, but there should be a floor for gold, because as the price collapses, it will become attractive for large buyers, especially central banks in China, India and Russia. So, there really is no need to run out and sell all your gold bullion to Cash4Gold at 60% less than it is worth. The longer trend for gold is still entact.
The dollar seems to be the beneficiary of recent market mini-panics, as evidenced by corrections in US markets last year, Dubai and now the shift in capital out of Chinese assets.
How can this be, you ask? Isn’t the dollar supposed to be on an unstoppable collapse to a value of exactly zero? Well, yes, it is on a collapse trajectory, but it is important to note that this will not happen in one fell swoop. There are gyrations in the markets, and since the US Dollar remains the world’s reserve currency, regardless of talk from Russia and China, this is where the money will go when everything else is collapsing. We strongly believe that this trend will eventually end and the ultimate safety asset class will become precious metals, but in a paper world, when the SHTF, capital flees to the safest paper around, which ironically, is the US Dollar.
Considering that the US Treasury needs to fund roughly $1.5 Trillion in new debt via Treasury sales in 2010, a global stock market collapse could be the US government’s saving grace, as Graham Summers recently pointed out:
“So how do you create interest? [In US Treasuries]
Simple, let the stock market collapse. The â€œflight to safetyâ€ that would follow would push billions if not hundreds of billions of dollars into Treasuries, soaking up the debt issuance and roll-over with little difficulty.”
It sounds mad scientist sinister, but quite realistic when you give it the consideration it deserves. The Fed, Treasury, Congress and the administrations have continually taken ridiculous, if not criminal, actions over the last several years. What’s to stop them now? It’s really a quite simple plan – pull back on stimulus in the US and China, have the big investment banks rip their profits out of equities and shift into US Treasuries, and leave panicked investors who thought the economic recovery was sustainable scrambling for the exits.
Theoretically, this all sounds quite feasible, but how are we looking from a technical perspective? Tyler Durden of Zero Hedge weighs in on the argument for the dollar:
“The DXY is about to break the 78.449 high last achieved on December 22: at 78.320 we are very close. Greece is helping. When that resistance is breached, look for Europe to start panicking and also all those who still have the dollar short trade on to start rushing through the exits.”
Though it may still be too early to tell, the technical signals suggest that the ingredients for a crash seem to be in place and conditions for a serious down-turn are now more likely than anytime in the last ten months.
It just never gets old…
IF my understanding is correct (very doubtful), and IF we follow what happened during the Great Depression (and/or the last 20 years inÂ Japan)Â (debt deflation?), things should be getting interesting again real soon…I think.
Then again, maybe it “should” have happened already…so who knows?
What great advise! I bought physical gold last year,at close to peak but I wanted to get the purchase done.I suspected we would have a dip.But like you say if you are in it for the long term ignore the day to day stuff.
As of c. 1 PM in Japan on 1/22, the Nikkei is downÂ 328.
Let’s see how contagious, and long lasting, this is.
My full disclosure, I just recently picked up some GDX… While my assessment here is based on historical performance, these are interesting times, so i am in ‘accumulation’ mode, not just with gold stocks, but hard commodities as well (foods, clothing, etc.)… There are some brilliant minds out there (Katz, Rosenberg, Faber, to name a few) that suggest a floor for gold is in the $950 – $1050 range, and they have been pretty right thus far… so even if the markets totally collapse, we may surprised by gold’s resilience.Â I guess as a prepping investor I could argue that I am dollar cost averaging in and going long hyperinflation on all of my ‘investing’ decisions…
Rick, it’s a blood bath over there! As much as I would love to jump into an inverse ETF or two (SPXU and FAZ come to mind) and try to trade this market, 2009 was a good lesson, so I am wait-and-see on that right now. Stock trading is fun here and there, but I think my overall focus is elsewhere for now…However, I think some great opportunities for investing into equities, especially in Asia, Canada, Australia and Brazil lie ahead — I don’t believe we have yet seen the buying opportunity of the century, as some have claimed happened in March 2009.Â My entry point to the long side will probably happen when I hear total desperation in the mainstream media.. that could be months — perhaps even years — or never, since it’s just a scripted reality show these days…
For now, we shall see if the crash is in progress and the shift to US Treasuries goes full speed ahead… I think it is going to happen eventually.. perhaps now or perhaps in April when the Foundation for the Study of Cycles forecast a cyclical down-turn..
Whatever the case may be, I am sure it’ll be a great show!
-216 on the Dow today…not bad…well, not that I “want” the markets to crash, I think I just see it as something that “should” happen as part of the “purge” we still need.
I’m still not remotely convinced that this is “it”…and the “it” may not be a straight drop of a cliff per se.
Note the series of “steps” down after the rebound in 1930:
Then again, obviously, there is NOTHING that remotely guarantees that we will see the same thing happen this time around.
At least we are living in interesting times…so, we’ve got that going for us…which is nice.
Nice article and thanks for the inclusion – just a note for future hotlinks, the site I have is called Investophoria.com (yes sometimes commonly confused with Investopedia).
Otherwise great reading and take advantage of these opportunities over the next 12 months!
Derek, thank you for visiting. My apologies on the name mix up. I have updated the article with the correct information!