Originally published August 11th, 2010.
I took some stick over the past week for my predictions that the market was about to "come a cropper", in the Message to Wall St and Friday`s Candlestick Warnings articles. So it is gratifying to see markets plunging today, and US markets breaking down from their weakening uptrends to enter what is expected to a be phase of protracted and severe decline. The classic atmosphere of panic is nicely captured in the photos in this Bloomberg article.
Fundamentally it was almost inevitable that the markets would turn lower after the latest Fed meeting. They had been rising for a month or so in the hope that the Fed would "pull the rabbit out of the hat" by announcing QE2, not to be confused with the old ocean liner QE2 which stood for Queen Elizabeth 2. QE2 in the financial world stands of course for Quantitative Easing 2. Even if they did announce a full fledged QE2, what would it mean? - it would mean that their bankrupt and desperate policies up to now have not been sufficient to straighten things out, and if they didn't the wilting economy would continue to stall into outright deflation. So it was a lose - lose situation for dim-witted investors expecting the Fed to come to the rescue.
You don`t fix the problems created by excess debt by creating even more debt - you "pull your horns in" and exercise discipline and restraint and get your house in order, but like some hopeless drunkard or junkie the US government and Fed don`t want to do that - they are caught in a vicious cycle of servicing debt and obligations by creating ever more debt. We have all as children watched some younger child blowing a balloon up bigger and bigger until it explodes in his or her face.That is exactly what the Fed and US government and Treasury are doing with their expanding debt game, and they are getting ever closer to the whole thing exploding in their faces.
Alright, so what now? The problem is that the Fed is "out of bullets". They got away with QE1 in 2008 - 2009, but now that they have little or nothing of long-term value to show for it their credibility is in tatters. So if they attempt an all out QE2 the result will be to crash the dollar and ultimately the all-important bond market as well. The market's verdict this morning is that the deflationary train is on track and is not going to be stopped by these shenanigans. What the world actually needs now is a good deflationary depression, good not because of the economic dislocation and privation that it will cause, but because it will purge the system of debt and other accumulated trash like derivatives, and clean out the vast layers of parasites that have bred like flies in this cesspool of debt, like much of the financial services industry. Actually, these forces of depression and deflation have built up over many years to reach explosive proportions and are now regarded as unstoppable, and continued attempts to obstruct them will simply add hyperinflation into the mix.
What should investors do to sidestep this maelstrom? The best investments during another deflationary episode, which will be like 2008 in its effect on the markets, only worse, will be cash and short-expiry bonds, and bear ETFs. The dollar should recover strongly and is already beginning to as predicted on the site. Pretty much everything else will crash, including most commodities and stocks. Gold should hold up better than in 2008 and then go on to recover with great vigor once the crash phase is over, as it will have ultimate safe haven status and really come into its own. Silver will get treated as an industrial metal during the crash phase and be smashed as in 2008.
After the crash phase spike the dollar should go into renewed decline and will eventually be incinerated along with the Treasury market, as the paper of a bankrupt country are finally recognised as the worthless trash that it is.
Bloody Well Right was a song by a band called Supertramp in the 70's. This was a crude song, which Maund doesn't like, but it is very appropriate in its association with last week's articles on the broad stockmarket. Fortunately, this band composed much better songs.