Random Thoughts

US Market Horizon and Gathering Storm Clouds

Most of us are unaware of the huge indebtedness that the foolish neo-liberal economic policies of US presidents from Reagan onwards has led to. The problems have worsened due to the worse negligence of Bush Sr., Clinton and Bush the lesser. Our national debt is approaching our annual GDP. This year our current account and trade deficits are 800 billion dollars each and our budget deficit is nearly 400 billion dollars. We need to borrow two billion dollars everyday from Japan, China, Taiwan, South Korea and oil producers. Our unfunded medicare and social security deficits are nearly fifty trillion dollars.

We are printing dollars everyday almost like the former Weimar Republic of Germany used to. This caused the price of a pack of cigarettes in Germany at that time to rise to over a billion marks. We are not there yet because of our military might and because our debt is denominated in dollars which we can print at will and in abundance without limit, otherwise we would be in the position of Argentina today. All governments steal from its citizens without their being aware, by debasing their currency. The dollar convertibility to gold which Nixon abandoned makes the US dollar a paper and fiat currency. Other countries have followed our example and the sloshing liquidity has led to record asset values in stocks and housing all over the world. These are bubbles waiting to burst. The unending quagmires in Iraq and Afghanistan are causing loss of blood and treasure.

Today, April 7, 2006 three unusual events occurred. The Dow, Nasdaq and the S&P indices showed a one day reversal. They opened high went higher and then collapsed closing near their lowest level. This has happened at other times in the past few weeks and then the markets have gone higher, but the other two events have given a confirming signal in addition to a narrowing advance decline ratio and diminished breadth and dearth of new highs. It is the loss of faith in all currencies that is causing high oil prices and today gold briefly touched 600 dollars an ounce, a price unseen since the Carter era, twenty-five years ago. The third ominous event was that the thirty year US treasury bond rose above 5% in yield. Thus it becomes a serious competitor for investment funds desiring to leave the stock market. When the ten year treasury note also yields over 5% and so do three month treasury bills, many risk averse individuals and corporate treasurers will prefer to park their money there. Furthermore the rising interest rates will take the air out of the housing bubble and put an additional burden on the debt ridden consumer struggling with higher home heating and cooling bills and gasoline bills. If the housing market crashes it will put a lot of people with interest only and adjustable rate mortgages in jeopardy and wipe out the housing asset wealth effect felt by many homeowners and particularly those who have withdrawn equity through home loans.

The final nail in the coffin is that the chart of the US dollar is suggesting that it is in the process of topping out or has already topped out. These multiple storm clouds bode ill for the stock market which is overpriced by the standard analysis of price to book, price to earnings, price to cash flow and the flood of insider selling suggesting a distribution pattern in many stocks.

This is not meant to be investment advice or a recommendation and persons should make their own decisions or consult professional advisors. These predictions are not that the apocalypse is on Monday or next week but in the near future and the beginning of the end may be sooner than I think. In the interest of fair disclosure I have already taken action by shorting the dollar, the market and some stocks, so I am obviously biased. negatively. Finally, a caveat about my personality ' I am often wrong but never in doubt and have a penchant for putting to pen random thoughts!   


More by :  Gaurang Bhatt, MD

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