Out of Control

This is the scariest market I have ever seen. How can anyone be expected to trust their investments when the market can drop 300 points in less than 30 minutes? Day after day after day this is happening, and if you’re wondering what the heck is going on….what’s causing this massive, never before seen volatility…here’s the answer; The stock market is expecting something big to happen, and that something “big” is not a positive expectation. As I’ve been writing, the economists and Wall Street analysts are way off on how bad this economy is…it’s almost like they are forecasting a completely different economy, maybe on planet Utopia.

The economist’s projections…90% of them… are still projecting just mildly negative GDP growth for the next two to four quarters. What do you think they will do when they see consecutive quarters with -5% growth? That is, if the numbers that the government puts out can even be trusted. Much like they’ve done with the CPI, Unemployment and M1, our friendly government bean counters will likely find a way to massage the numbers so that we sheeple don’t become overly alarmed. Here’s the problem with putting out fake numbers; Mr. Market is a wise old man and sees through these shenanigans. The market will continue to sell off regardless of the cooked books that come out of Washington.

The Next Shoes to Drop

While the market may be able to continue some sort of weak seasonal bear market rally, I wouldn’t bet on it…or invest on it. If you own mutual funds or stocks that you don’t want to hold as the market drops to new lows, I would use this opportunity to either sell those positions or lighten up aggressively. 80% of our economy is based on consumption, and guess what? People are putting the brakes on their spending at a record pace. The money just isn’t there, the credit certainly isn’t there, and even if it were, people are very concerned about even having a job come 2009. Employers don’t like laying people off before Christmas, so look for massive layoffs starting January 1, 2009. Without the consumer supporting growth, the US economy is going to go into a death spiral…this is what has the Federal Reserve and Treasury Dept. scared to death, and it’s why they have committed $7 trillion to try and keep this bubble inflated. The problem, however, is that they are only making the problem worse, and their playbook is straight out of the 1930’s and Japan’s 1980’s.

All of the bailout money is being wasted, and it’s happening with zero transparency. It’s absolutely mind boggling what Bernanke and Paulson, along with our corrupt politicians, are being allowed to get away with. This incestuous, criminal relationship is beginning to cause a groundswell of real anger like we haven’t seen in a long, long while. WHERE’S THE PERP WALK?? It won’t be over until we have them and then lots and lots of people locked up and keys thrown away, at least in my opinion. People are mad as hell and just don’t want to take it any longer…at least that’s the way I feel, and I don’t think I am alone. Before it’s all over we will be in debt well over $100 trillion (national debt, entitlements, deficit, etc), and the powers-that-be know that this is impossible to pay off…they just don’t want to see the implosion happen today…5-10 years buys them some more time to escape, or so they think.

The next shoes to drop will be credit cards, commercial real estate, insurance companies, individual states, cities and municipalities. California has declared a fiscal emergency session of congress, and at least 15 states are bankrupt, not including their unfunded state pension liabilities. This is truly the perfect storm of the worst financial situation possible, and the tsunami that is headed our way is just getting started.

Credit card companies have started reducing/cancelling lines of credit, and the average consumer will find out the hard way in the first quarter of 2009. Commercial real estate has held up well until now but over $1 trillion in debt will have to roll over by mid-2009 and the bank loans simply won’t be there. Because insurance companies are the largest owners of commercial real estate, they will all be standing in line to receive 100’s of billions of taxpayer’s money in 2009 as well. And I haven’t even mentioned the 3 bankrupt auto manufacturers that have combined debt in excess of $300 billion (which by the way is the same amount of debt that we just guaranteed for Citi Group). The car companies will get enough money to make it at least a few more months until we’ve thrown enough good money after bad to realize that this country has no need for 3 terribly run major auto manufacturers.

Slowly but surely we are making colossal mistake after colossal mistake, and literally trillions of dollars in debt are being burned to a crisp right before our eyes. In good faith I cannot make a single recommendation outside of precious metals at this time. And, because the biggest current fear is deflation, even they aren’t going up in price right now. Once hyperinflation fears begin…and that day is most likely closer than we think…gold and silver will have their day in the sun. The timing is the only question here…it’s not a matter of if, but when.

I continue to believe that the market will hit new lows before we reach a bottom, and once this bear market rally is over, the next move down will be substantial. Could I be wrong? You bet I could, and when this becomes a bull market rather than a bear, we will be ready to buy…my shopping list is coming together nicely. For the first time in 50 years, the stock markets dividend yield is greater than the bond market, so this is clearly a positive. I’m just not at all confident that current dividends will remain at existing levels…they are being cut on a weekly basis by scores of companies. In the meantime, cash is king!

Kip Herriage

Editor, VRA

www.kipherriage.com

www.vraletter.com

Comments

[Bob Clarke]

Kip,
What you are describing is truly and very scary scenario. And from watching and listening to you in the past, I have no doubt that it is accurate. Your description of the credit situation is right on. Rosemary and I have already felt it, where we tried to get a measly $10,000 raise on our credit card, one that we have had for years and paid off regularly and on time, and were denied. And this from 2 people who make over $200,000 between us with virtually no debt. Amazing!

I can't help but feel ashamed over the state of an economy and a world that we are leaving for our children. While the economy will recover (how long will it take?), who knows what kind of long lasting effect the choices we (the Fed) are making today will have on generations to come. And it is OUR fault for putting up with it.

Thanks again for your insight and your candor. It's refreshing to hear someone speak out with the truth, instead of the garbage you hear from the talking heads on CNBC, FOX News, and alike.

Keep it coming. We look forward to every post!

Bob Clarke

PS When you say that you are only recommending precious metal investment at this time, are you pulling back on your prior recommendation to invest in SDS?

[Linda]

This a scary time. you are right with the credit cards being next. The way the companies that have been bailed out, supposedly, I am watching that money go through their fingers like water. Nothing to show for it.

When do the trials start and lets make sure that bush, cheney, along with the financial gurus are sitting beside them.