A Current View

The headline this morning in our local mullet wrapper needlessly screamed, “HURRICANE IRENE APPROACHING, BE PROACTIVE.” Please, you think I don’t know? My shutters are almost up, my generator is gassed and tuned, I have a plan for storing the deck furniture, I’ve got water and emergency supplies. All I need is to get by Home Depot to replace all the batteries in the flashlights and the portable radio, no big deal. Thank you, but I don’t need to be told what to do.

Of course, my super preparedness is due to the fact that in September 2004 my village took two direct hits two weeks apart from category three hurricanes. I bought my generator and my storm shutters AFTER these storms decimated us. I’ve lived in a hurricane prone area for forty years, but it took catastrophe to motivate me to prepare in a serious way. Prior to that, I went with the lame notion that, well, I ought to get ready for hurricane season this year, and I will—but not today.

On the other hand, the complacency of retired investors as well as forty seven million participants in 401k plans who remain heavily invested in stocks is not that they don’t care, they just don’t understand what they are facing. And if they do get worried, the conventional advice from the suits who masquerade as financial advisors is, “Don’t panic.” This will change, but not until the bear market ruins their clients.

To understand what is afoot, you have to get the nomenclature right. This is not a recession, one dip or two. This is a deflationary depression. The principle characteristic of a deflationary depression is economic collapse brought on by the crushing default of government, corporate and private debt, all in a cataclysmic implosion, all at the same time, causing a mad scramble by all sectors for cash to pay bills, causing asset prices to plummet as everything from stocks to beanie babies is put out on the curb for whatever passersby will offer. The news is now bearing this scenario out. The markets are telling us the time is at hand:

I interpret the action of the S&P 500 as having made the double top of a mania in late summer ‘07. All manias in history have been fully retraced after they topped out. The decline from August ’07 into the March ’09 low was the first leg down. The intervening rally was a typical reaction within the downtrend, and we appear to be getting underway with the next leg down, which should be the most violent.

To date, the average investor has pretty much hung in there. This also is normal. The crowd will stay in until about half way down in the Markdown phase. Somewhere below Dow Industrials 6,000 should do it. After that, it’s just mopping up for a few years until we reach a final bottom. The Elliott Wave studies project a low in the Dow of just below the high of the 1929 top of 389.

I’ve just said a mouthful. I been making the case for this outcome for a long time. If my readers have not been motivated to investigate further and decide for themselves, there’s not much I can do about it.

What to do

Get out of the rain.

Cheers,

Rod

The author makes no representation as to the accuracy of the quoted material, but believes the sources to be reliable. No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.

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