By Jen Bawden
August 12, 2007
I write this on Sunday night from my close friend Matey’s home in Toronto. I think we are seeing major history in the making. This is why I wanted to get my thoughts across to you today before the market opens Monday. I have been watching the gigantic credit bubble grow bigger and bigger in the past few years concurrently with out of control inflation. (I do not believe the numbers the government dishes out, Just look at the dollar drop for starters.)
Living in Florida I have seen first hand that real estate goes down just as fast as it goes up. (You will see that now in New York and the Hamptons.)
These huge bubbles, mentioned above, popped last week. The massive amount of bulls feel its just a pull back, a correction, I feel it is the tip of the iceberg and that we are now entering a period where credit will shrink further, exacerbating the problem. Banks and other financial institutions will take a much larger beating than we saw over the past week.
In a short term fix, to keep us out of a smaller recession after the tech crash, credit was offered to almost anyone creating a housing buying frenzy. (A massive credit bubble.) I fear the piper will now be paid in spades.
Where can prices fall to in the housing market? To BELOW 2000 prices, that is where.(South Florida real estate has almost tripled since then, by the way.)
Now I ask you, do the fed and the central banks have enough bullets in their gun or rabbits in their hat to keep this bubble from hemorrhaging? That is the big question I ask myself.
Will the huge bailout on Friday be enough to keep the huge number of bulls racing ahead? Temporarily, I think they will see this as fuel to help them run faster. As the banking problems coupled with inflation keep rearing their ugly head could heavy deflation unhinge the US Dollar? Hell, yes.
Then why did Gold go down with the market until Friday? I just did not understand. BECAUSE ALMOST NOBODY HAS FIGURED OUT WHAT’S GOING ON?
As soon as the bulls run out of speed from last Fridays huge injection I think the flight to safety will become a stampede. I think any market recovery will seem short lived when history looks back on this period.What does that mean?
Jens predictions: 1) When everyone runs for safety in currency jitters. Watch Gold shoot past $1,000 an ounce. If the fed can’t stop this bull that is racing towards them, I would not be surprised if Gold hit 2,000 or even 3,000 an ounce in the next 2 years.
Gold stocks like Newmont and Gold Corp will give you much more bang for your buck then Gold. Tom Meredith who many of my readers know is an expert on the smaller Canadian gold companies and he believes that although they have not jumped up yet they will when this flight to safety starts.
Gold and strong revenue positive selective private companies that are not subject to the market moves should be excellent opportunities to make money in the downturn.
2) I am very bearish on stocks, even blue chip will be sold when smart money runs to cash, especially financial stocks, will continue to suffer as the sub prime market further infects the system.
It will NOT be isolated as the Bulls promote and this is NOT just a routine market correction it is a glimpse at the cancer that has not been diagnosed yet. Watch out for banks that are in deep trouble from all the credit that has come home to roost.
3) Even if interest rates drop shortly as one of the Band-Aids the fed uses to try to clean up the sub prime problem, If fear of US instability starts more selling of the dollar interest rates will have to eventually rise considerably to lure the world back to buying the dollar.
Before loans become much harder to get if you have an adjustable mortgage change it on Monday for a fixed rate.
4) Real estate could fall to 2000 prices in your city before it hits the bottom and some condo and coop owners could be stuck paying large maintenance costs for neighbors who cannot. Many buildings could go bankrupt. (Hold off on those Real Estate deals that look like bargains.)
5) After what could be a good rally from all the money pumped in last Friday when the other shoe drops you will see large banking layoffs, an immediate shut down on private company buy outs, private equity injections and of course companies going public. This is just the nature of any strong bear market which I think we are entering.
I submit the following. What is happening now and what happened in 1929 share a lot of common denominators. A recipe for disaster which is presently unfolding before our eyes has happened before. Had it not been for the fed’s actions on Friday the banking system would have started a hard and fast collapse. People would have been left scratching there head trying to understand how this could happen. Let me show you using history.
I am enclosing some interesting facts on how inflation followed by deflation affected us in 1929. The following excerpt is taken with thanks from Wikipedia.
There are multiple reasons as to what set off the first downturn in 1929, concerning the structural weaknesses and specific events that turned it into a major depression, and the way in which the downturn spread from country to country. In terms of the 1929 small downturn, historians emphasize structural factors like massive bank failures and the stock market crash, while economists (such as Peter Temin and Barry Eichengreen) point to Britains decision to return to the Gold Standard at pre-World War I parities (US$4.86 vs 1 GBP).
Macro economists, including the current chairman of the U.S. Federal Reserve Bank System Ben Bernanke, have revived the debt-deflation view of the Great Depression originated by Arthur Cecil Pigou and Irving Fisher.
In the 1920s, in the U.S. the widespread use of purchases of businesses and factories on credit and the use of home mortgages and credit purchases of automobiles, furniture and even some stocks boosted spending but created consumer and commercial debt. People and businesses who were deeply in debt when a price deflation occurred or demand for their product decreased were often in serious trouble, even if they kept their jobs, they risked default. Many drastically cut current spending to keep up time payments, thus lowering demand for new products. Businesses began to fail as construction work and factory orders plunged.
Massive layoffs occurred, resulting in unemployment rates of over 25%. Banks which had financed a lot of this debt began to fail as debtors defaulted on debt and bank depositors became worried about their deposits and began massive withdrawals. Government guarantees and Federal Reserve banking regulations to prevent these types of panics were ineffective or not used. Bank failures led to the evaporation of billions of dollars in assets. Up to 40% of the available money supply normally used for purchases and bank payments was destroyed by all these bank failures.
Bank failures snowballed as desperate bankers tried calling in loans which the borrowers did not have time or money to repay. With future profits looking poor, capital investment and construction slowed or completely ceased. In the face of bad loans and worsening future prospects, the surviving banks became even more conservative in their lending.  Banks built up their capital reserves, which intensified deflationary pressures. The vicious cycle developed and the downward spiral accelerated. This kind of self-aggravating process may have turned a 1930 recession into a 1933 great depression.
Are any of our readers Bears? What do you think about my gloomy predictions? Let us know. My goal is not to be spreading fear, rather to make sure you are safe and at least think about these issues.
Well funded, strong private companies will be one of the safest investments thank god as they are much less vulnerable to market fluctuations. It is good news for IAT, my homeland security co. and Neogenix my cancer research co. that they did not go public prematurely.