Heavy stuff but critical to key an eye on for those who have IRAs, EFTs, stocks and those who want to save their cash. Economic cycles are part of life, until 2008 we’ve had it good for a long time, the next leg down of the bear market is coming.
John Mauldin writes:
It was relatively easy for me to forecast the recessions of 2001 and late 2007 over a year in advance. We had an inverted yield curve for 90 days at levels that have ALWAYS heralded a recession in the US. Plus there were numerous other less accurate (in terms of consistency) indicators that were “flashing red.” (For new readers, an inverted yield curve is where long-term rates go below short-term rates, a [thankfully] rare condition.)
And since stocks drop on average more than 40% in a recession, suggesting that you get out of the stock market was not such a challenging call. Although, when Nouriel Roubini and I were on Larry Kudlow’s show in August of 2006, we got beaten up for our bearish views. And you know what? The stock market then proceeded to go up another 20% in the next six months. Ouch. That interview is still on YouTube. Timing can be a real, um, problem. There is no exact way to time markets or recessions.
Think about this. The Fed announced this week that it would extend low rates until 2013. They are practically pushing people into higher-risk assets in a search for yield, at PRECISELY the time we may be slipping into recession, which will put those assets at their highest risk (Mike’s note: for example many government retirement accounts are behind so higher risk funds is a way they think they can catch up). I think this could end in tears and land those who are close to retirement in even worse shape.
If we are headed into recession, and I think we are, then the stock market has a long way to go to reach its next bottom, as do many risk assets. Income is going to be king, as well as cash (and cash is a position, as I often remind readers).
If we go into recession, we’ll know several things. Recessions are by definition deflationary. Yields on bonds will go down, much further than the market thinks today. And while the Fed may decide to invoke QE3 to fight a deflation scare, the problem is not one of liquidity; it is a debt problem.
So, I guess I am going out on a limb, without any help from an inverted yield curve, and saying that we will be in recession within 12 months, if we are not already in one. This will be unlike any recession we have seen, as there is not much that can be done, other than to just get through it as best we can. Sit down and think about your own situation and prepare.
Also from Toby Connor:
As I have been warning investors for many months, stocks have now entered stage III of the secular bear market. Gold on the other hand is now in the final parabolic phase of a 2 1/2 year C wave advance.
My best guess was that we would see a Dow:gold ratio of between 5-6 before this C wave ended. The ratio was at 5.71 as of today. For reasons explained in the nightly reports I think we may still have a little further to go on the downside for stocks and a little further upside in gold. So it’s entirely possible that we could see a Dow gold ratio of 1:5 before the trends reverse.
Stocks on the other hand, after what should be a very convincing bear market rally, will roll over and continue down into a final four year cycle low, probably in the late summer or early fall of 2012.
Depending on whether or not the Fed tries to fight the cleansing process stocks should either test the March 09 lows, or if Bernanke tries to stop the bear market with another round of quantitative easing, we could see the March 09 lows breached.
Either way I expect that 2012 will go down as one of the worst years in human history. Certainly in the same category as 1932 if not worse.
1 – Save your cash
2 – Bank at a top rated safe bank
3 – Pay off debt
4 – If possible, hold off on that large purchase
5 – Exit any high-risk stock positions