We live in a world where everything is go, go, go. A world where a yellow traffic light means speed through instead of slow down.
In last week’s newsletter, Another Shot at Glory, we urged our readers to prepare for a correction that will soon take place before 2010 is over. Despite the fairy tales Wall Street is telling you about strong corporate earnings, market data, and insider buys, do not succumb to the glitter of green arrows. That’s exactly what they want you to think…so they can dump their profits on you before the next crash.
The Obama administration, with the help of Wall Street, is leading us to believe that the markets have not only recovered, but are ready for growth. Is it really possible to experience what we have experienced over the last 2 years and already be on the road to strong economic recovery?
That’s exactly the mentality that got us into this mess . And that’s why we need to be patient.
Fundamentals, corporate earnings, market data, and historic events can all help us determine and predict what may happen in the future. We’re not saying we can use this information to predict what happens tomorrow, but we can use it to help us predict what happens in the years ahead of us.
We need to look at the road ahead, and not just the road we are on.
Economics 101 teaches us about cycles. Right now, we’re in a cycle of a long economic recovery that could stretch many, many years. Regardless of what we’re being told by the press, we are still in a depression stage as true US unemployment numbers are closer to 20% (see A Hidden Agenda).
The economies of the world are still collapsing:
- The Eurozone is in trouble with no sight of what is to follow
- Commercial real estate losses could reach 45% this year (see Another Shot at Glory)
- 81% of the option ARMs originated in 2007 are expected to default, with many ending in foreclosure (see Another Shot at Glory)
- Amount of debt per US citizen continues to rise
- Slow economic growth and high unemployment, accompanied by inflation from the printing press (stagflation) (see we’re back and its time to prepare)
These are just a few of the signs that will ultimately lead to another correction this year or early 2011.
Our recent stock market recovery since the bottoms of March 2009 to January 2010, reminded us of a comparable recovery during the crash of October 1929. The recovery in market prices, much like ours today, stemmed from government intervention via loose monetary policy, the spending of hundreds of billions of borrowed money, and extremely low interest rates. This helped the Dow recover close to 50% of the losses incurred in the October 1929 crash.
In the past, government incentives gave investors a renewed optimism and sent retail investors flocking back towards stocks, only to see another correction months later in April 1930.
Despite being in a completely different era, we are expecting the same thing to happen again. We predict the markets will correct itself later this year, with debt being the catalyst for our next economic and stock market decline.
Even with the best banking system in the world, Canada is at risk.
Household debt in Canada rose to record levels in 2009, with almost two-thirds of families reporting that they would be in financial trouble if their pay cheques were just one week late, according to a report by the Vanier Institute.
In its 11th annual assessment of the state of the Canadian family, the institute found that average household debt rose to $96,100 last year. That resulted in a debt-to-family-income ratio of 145%, the highest ever, with the level set to climb to 160% by 2012.
Based on our cycle theory, the debtload per household, and a rise in interest rates, we can expect real estate prices to drop significantly in Canada some time within the next three to five years.
It’s scary, but it’s not all bad
This time around, we can not only protect ourselves, but reward ourselves by being prepared (see We’re Back and It’s Time to Prepare)
Precious metals such as gold and silver were the investments that allowed investors to reap strong returns during the recovery of the 1930 crash, with precious metal shares outpacing metals prices themselves.
While we like the prospects of gold and silver, we favour the junior miners even more (see A Clear and Present Danger)
We are likely going to witness another a resumption of the economic and financial problems that began in 2007 this year. This will presage another move from fiat currency into gold and silver, driving precious metals prices higher once again.
Until next week,
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