familiar with my views know that I believe that the current stock market
rally is a bullish chapter in an otherwise bearish novel. In the spring of
this year, I had said I would not be surprised if the Dow were to hit 10,000 by
the end of summer. While I was a little too optimistic on that particular
forecast, it now looks as if U.S. stock markets are a bit 'toppy' and a
reversal may be in the cards. Seven factors, five tactical and two strategic,
cause me to see a change in the wind.
the employment situation, falling house prices, tight credit, a sliding U.S.
dollar and depressed world trade are cause for deep concern. But as these
factors could show rapid changes over the short term, I am less inclined to
set my investment bearings by these readings. More troubling are the two
strategic issues, the continued creation of excessive debt in the United States and the continued growth of consumer spending as the overwhelming driver of U.S. gross domestic product (GDP). In order for a bull market in U.S. stocks to be
sustainable, these problems must be brought to heel. However, making a dent
in these imbalances would require the sort of political courage that is
vanishingly rare in D.C.
tactical investor, the following portends a coming correction:
Wall Street cheerleaders seized on the falling rate of unemployment growth as
a sign of economic recovery. In July, the official figures showed
unemployment increasing by some 216,000. If this were a reflection of
reality, it would be a sign of possible improvement. However, the
often-ignored figure for employment, as opposed to unemployment, showed some
980,000 less people employed, or 4.5 times more than the unemployment figure!
these two vitally important totals differ by some 764,000? The short answer
is that the government excludes from the unemployment figures all those who
have given up hope of finding a job and all those who have settled for
part-time jobs. In other words: if you have stopped looking for a job,
congratulations, you are no longer unemployed! So much for government
statistics. The true level of unemployment has been estimated at 20 million,
or double the official figure.
days, reports have emerged to show that home prices have stabilized. Given
the dismal fundamentals of the real estate market, we had projected that
national home prices would have needed to fall an additional 20 percent from
current levels in order to return to the Case-Schiller 100-year trend line. But
given the massive and continued Federal involvement in every facet of the
home buying process, there is nothing at all 'fundamental' about home prices
today. Absent this intervention, prices would continue to fall. Since the
federal treasury does have its limits, the outlook for real estate subsidies,
and therefore the entire sector, is still negative.
reckless federal efforts to boost liquidity, credit remains tight. This
reality is the market's own discipline signaling that the fundamentals remain
unsound. Meanwhile, the Fed is inhibiting liquidity to shore up the money
center banks by, for the first time, paying interest on bank reserves it
holds. The banks thus have little incentive to lend to small businesses, the
largest job creators, or to individuals. As an aide, this may also be serving
to hide the effects of the Fed's currency expansion by slowing the velocity
of new cash.
for Americans, the plummeting U.S. dollar is forcing up the price of most
commodities, despite decreased demand. This stagflation is a dangerous recipe
not only because it neuters any attempt at policy manipulation of the market,
but because it hits the underemployed and unemployed with rising prices for everyday
some investors fixate on the symptomatic issues above to determine their
strategy, we choose to focus on the underlying malady itself. Keeping your
eye on these unfortunately static conditions will provide a solid point of reference
by which to navigate:
Administration has shown no appetite for allowing consumers to reign in their
spending habits. So, consumption still accounts for some 70 percent of
American GDP. Where individuals have tried to reduce spending and increase
savings, stimulus programs and quantitative easing have overridden their
gains. Indeed, President Obama's massive expenditure plans for health and
educational entitlements will serve to magnify this crucially damaging strategic
contrary to election promises of "change," the Administration shows
no signs of controlling its expenditure and massive debt. Indeed, the
ill-advised wars fostered by President Bush in Iraq and Afghanistan continue to drain blood and treasure. This Administration appears set to
continue its predecessor's mission of unending debt expansion.
our failure to restructure, America is finding it harder and harder to
compete globally. Instead of taking our lumps, Washington is lashing out with
suicidal measures like this week's Chinese Tire Tariff, an ominous prelude to
next week's Pittsburgh G-20 meetings.
markets just don't get it. Technically, S&P profits are down some 90
percent, but the Index has risen to push P/E ratios to levels not seen since
1929. The financial media's cloying banter about 'green shoots' is
reminiscent of "Baghdad Bob," the comically delusional Iraqi
information officer who denied the advances of American forces even as U.S. tanks o verran Saddam's headquarters.
of a "jobless recovery." In the past, such an event could only
occur when an asset boom (such as a real estate bubble) provided Americans
with non-employment income. Today, there is little prospect of such a boom.
markets tend to reflect financial hope. Given today's situation, investors
might be wise to prepare themselves for economic reality by investing
selectively in more prudent economies abroad.
more in-depth analysis of our financial problems and the inherent dangers
they pose for the U.S. economy and U.S. dollar, read Peter Schiff's 2007
bestseller "Crash Proof: How to Profit from the Coming Economic
Collapse" and his newest release "The Little Book of
Bull Moves in Bear Markets." Click here to learn more.
importantly, don't let the great deals pass you by. Get an inside view of
Peter's playbook with his new Special Report, "Peter Schiff's Five
Favorite Investment Choices for the Next Five Years." Click here to dowload the report for free. You can
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all the other articles written by John Browne
For a more in-depth
analysis of our financial problems and the inherent dangers they pose for the
U.S. economy and U.S. dollar, read Peter Schiff's just released book "The
Little Book of Bull Moves in Bear Markets." Click here to order your copy now.
importantly make sure to protect your wealth and preserve your purchasing
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John Browne is the
Senior Market Strategist for Euro Pacific Capital, Inc. Mr. Brown is a
distinguished former member of Britain's Parliament who served on the
Treasury Select Committee, as Chairman of the Conservative Small Business
Committee, and as a close associate of then-Prime Minister Margaret Thatcher.
Among his many notable assignments, John served as a principal advisor to
Mrs. Thatcher's government on issues related to the Soviet Union, and was the
first to convince Thatcher of the growing stature of then Agriculture
Minister Mikhail Gorbachev. As a partial result of Brown's advocacy, Thatcher
famously pronounced that Gorbachev was a man the West "could do business
with." A graduate of the Royal Military Academy Sandhurst, Britain's
version of West Point and retired British army major, John served as a pilot,
parachutist, and communications specialist in the elite Grenadiers of the
In addition to careers
in British politics and the military, John has a significant background,
spanning some 37 years, in finance and business. After graduating from the Harvard Business School, John joined the New York firm of Morgan Stanley & Co as an
investment banker. He has also worked with such firms as Barclays Bank and
Citigroup. During his career he has served on the boards of numerous banks
and international corporations, with a special interest in venture capital.
He is a frequent guest on CNBC's Kudlow & Co. and the former editor of
NewsMax Media's Financial Intelligence Report and Moneynews.com. He holds
FINRA series 7 & 63 licenses.
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