#1 Many people do not understand how markets work. (Unfortunately for you, some of those people are a certain kind of salesperson called a broker.)

Markets are driven by buying and selling. Thus the only two factors in prices changing are the ability and willingness of investors to buy and sell.

Prices only rise when investors are both able and willing to buy. They are willing to buy stocks when they perceive that, given the amount of cash they have available, buying stocks is THE VERY BEST alternative available. Otherwise, they would rather invest any available money in consumer goods, commodities, bonds, or their own businesses. Sometimes, rather than invest a given amount of cash, potential investors loan their money to banks for a small return through a savings (deposit) account.

However, if something changes in stocks OR in some other market such that investors perceive that stocks will outperform another existing investment, they will buy stocks and stock prices will rise. If stock returns are exceeding the rate of return that a bank offers (by either a change in the interest rate or a change in stock performance), investors might cash in any "under-performing" investments to be more able to buy stocks. That is the ONLY way for stock prices to rise: re-allocation from some other resource.

Prices fall only through the activity of selling. Whenever people prefer to re-allocate their assets away from stocks to some other investment, they will of course sell stocks in order to fund those investments. Prices will keep dropping if more and more stockholders attempt to exit stocks by enticing buyers with lower and lower prices. Again, this could result from change in the performance of stocks or in some other market (or both).

For instance, if an investor perceives that pursuing a certain real estate opportunity has greater value than holding certain stocks, those stocks will be sold (driving prices lower) as the investor pools cash for the real estate investment. If an investor expects a greater profit from ANY other opportunity than from a holding a certain stock, the investor is likely to cash in at least enough to cover the new investment and will likely start with those stocks that are expected to perform least well (and thus maintain a few preferred stocks).

So, whenever an investor expects a higher return with some other investment than their current investment, they will cash in the existing investments. That's how markets work in general.

#2 Many people do not understand what happened with stocks in the 1990s. (Fortunately for you, you could just skip to #4 if you want.)

So market price changes are based on willingness and ability to buy and sell. People invest however they perceive will earn them THE VERY BEST return. If stock markets change or some other market changes, people will re-allocate accordingly in order to maintain exposure to top-performing markets.

In the 1990s, the major re-allocations involving stocks were largely fueled by factors outside of the stock market. Yes, the ONLY reason people were willing to buy stocks was because they were performing well. However, the major change was not a fundamental improvement in the performance of stocks, but a fundamental change in the ability to invest (cash available) dating back to the 80s and federal subsidies to provide mortgages at artificially-low interest rates.

Politically, this was genius because it increased home sales and, bottom-line, got people re-elected. With the increased market of home buyers (people who previously did not qualify), what happened? People were more willing and able to buy, so prices rose.

If you already owned a home, that was good, right? After all, you could sell your home for a profit, get out of your late-seventies interest-rate mortgage, and buy a home with an artificially-attractive mortgage.

Again, do not confuse this policy change (the creation of Fannie Mae or Fannie Mac) will a fundamental shift in the value of homes or land. This mania was not driven by a technological breakthrough that revolutionized the construction or housing industry, but a political intervention. (Compare this government-driven mania to a market-driven advance as in the ballooning of real estate values in Florida and Arizona in the 1950s subsequent to the development of something called air conditioning.)

Easy credit (and perhaps a little incompetence on the part of government overseers) contributed to such famous footnotes as the junk bond mania. As easy credit fed the stock market hysteria, stocks performed even better, so people took even more risks. They piled up consumer debts, but more importantly than spending at the mall, they spent more on stocks. Many even rushed to refinance homes again (trading equity for cash) to create the final wave of the 90s stock mania.

In other words, the stock mania of the 90s was perhaps not the result of increasing stock dividends or any other increase in the fundamental value of stocks, but of the increasing availability of housing credit. By refinancing (or, in my case, using credit cards to pay household bills), investors could allocate more money to invest and they invested this new excess in the ways they thought would generate the best returns. Investors were not only willing to invest more in stocks, but more importantly, because of loose lending, more able.

In review, a change in price always reflects a change in the balance of willingness to sell and pressure to buy. When there is no change in the willingness to sell (performance is steady) and an increase in momentum to buy ("I just got another credit card!"), prices rise. Likewise, prices decline whenever there is either increasing willingness to sell. We'll come back to this, but again note that selling pressure can come from within a market ("Blue Chips sued for fraud and collusion, offer to settle out of court") or from another market ("Gold surges past $330!"). Either way, investors will sell to re-allocate to markets that they perceive will provide best returns.

Obviously, the same is true of single stocks and single investors, but the momentum can build. For instance, a single major corporation going bankrupt because of pension shortfalls means that every other company they owed money will probably not get it. Or, if a rising wave of investors are behind on their mortgages or other debts, they may sell other investments (such as stocks) to avoid foreclosure or bankruptcy. Every high volume panic starts as a small wave of selling.

#3 Many people do not recognize how to accurately forecast changes in pricing. (Unfortunately for you, some of those people are recognized as "expert advisors" anyway.)

The basic weakness in stock markets for three years now is that the buying power of investors peaked and reversed. It was not so much a lack of willingness to buy stocks that stopped the balloon, but the INABILITY to continue buying. How? Investors no longer qualified for loans.

This may sound remarkable, but consider this. Conventional wisdom, which I do NOT recommend, allegedly includes the idea that when the Federal Reserve eases lending policies, this will ALWAYS spark borrowing and spending (such as investing in mutual funds and thus driving up the prices of stocks).

Why did approach this not work despite huge cuts in the prime lending rate in the last few years? Like I said, people no longer qualified for loans.

In a desperate attempt to attract borrowers, some companies offer things like 0% interest and no payments for a year, but there just aren't many investors left who can qualify. If investors are already concerned about defaulting on their past-due debt consolidation payments, low interest rates will not change that.

They will not borrow (maybe because banks refuse to lend to them?). They will not consume or invest. Some may join the rising wave of bankruptcies. But most specifically, many are liquidating assets (STOCKS) to cover their excessive liabilities and simply retain collateral.

I know this in part because I was a credit card junkie. I didn't refinance a home in the 90s or get a sub-prime loan in the 80s, but I played my part in the credit bubble as much as anyone else.

Excessive debt INEVITABLY leads to a sudden reversal in buying power and what I mean is this pattern is not new. It has happened before. 1929 is one famous example in which excessive debt in Great Britain apparently led to a global crisis (though US debt levels were also excessive). Largely because of that specific clear historical precedent, many (extremely wealthy) analysts recognized the indications of the recent market shift before it happened- EVEN FORECASTING THE PRECISE TIMING OF THE CREST (the turning point or beginning of the huge, ongoing decline).

I personally wasn't studying markets at the time of the shift, but what excuse do all the "experts" have that missed this shift? Or, if they did not miss it, what excuse do they have for misleading you (or do you really want to know)? Actually, if you are still following their suggestions after 3 years of poor performance, the more appropriate question is what excuse do you have?

Maybe you have run out of excuses. All excuses aside, here is what changed at the end of the 90s.

Yes, there was a lot of spending around Y2K which produced absolutely nothing but simply corrected an entirely avoidable oversight in programming (the famous Y2K "bug" which somehow did not account for the fact that shortly after 1999, years would no longer begin with the digits 1 and 9). The short-sightedness of that common software flaw is a fitting metaphor for the decade of the 1990s (if not longer).

However, the Y2K "bug" did not infest the stock markets. Indeed, "Y2K" spending near the end of 1999 is part of what fed the peak of excess leading into the great turning point of 2000. The first two months of 2000, the mania of technology stocks was so hot that people were apparently selling their other stocks to invest in tech stocks! But that was actually the end of the tech "bubble."

Tech stocks (as measured by the NASDAQ index in black) were rising sharply while "blue chip" stocks were falling. That is not normal. That pattern did not fit with recent years. It was a historic divergence.

Thus, it was a clear signal. Something big was shifting.

When the NASDAQ index fell about 25% in just 14 days early in the spring of 2000, any analyst who did conclude that something very big had already changed does not deserve the description "analyst." (Again, brokers are really just elite salespeople, so I doubt they were even looking for signals because they have NO INCENTIVE WHATSOEVER to give you advice that is ACTUALLY GOOD FOR YOU, but yes they do have incentives!)

So what exactly was different in early 2000 that brought about the inevitable shift? Investors were still scrambling to ride the technology balloon- same as before- but suddenly they could no longer afford to go into debt to buy more tech stocks, so they had to liquidate some other investment. The investment they began to liquidate was other stocks. (I am probably oversimplifying, but the logic is sound enough.)

However, even before investors sold their other stocks to join in the last hurrah of the "dotcoms," some analysts already knew that the stock bubble was about to burst. How? Again, it wasn't primarily a stock bubble, but a credit bubble. They could no longer go into debt to finance more speculative stock purchases, so their ABILITY TO BUY decreased. They were still willing to buy tech stocks and sell other stocks, but they couldn't borrow any more to buy because they had "maxed out" their debt to income ratio.

Overloaded with debt accumulated during the credit mania of the 90s, investors could not get a fourth mortgage at 125% of appraised value nor a second home for zero down, and not even six more "pre-approved" credit cards. They couldn't re-allocate any other investments to purchase stocks, so prices stopped climbing (though tech stocks did make that one final surge which so ironically sparked the selling of other stocks and started the general crash).

Again, this was not so much a fundamental shift in tech stocks or the market in general, but a direct consequence of a fundamental shift in debt and lending markets. Further, the excess of the credit (and stock) market was the indirect result of government intervention: specifically, the artificial support of risky lending practices. (And, yes we could even go further back to 1971's final divorce of the dollar from gold, 1965's currency debasement act, 1933, 1913, etc….)

But back to today, investors are selling stocks to cover their obligations made in the excessive 90s (or earlier), so prices are still falling. Further, as this continues, more and more investors will notice the declining prices of stocks and re-allocate to more stable investments like bonds or more lucrative investments that are rising dramatically like commodities (especially gold and oil). Indeed, the last few years of rising gold prices seemed to follow the decline in technology stocks as investors sold stocks for dollars, then flooded the commodity markets, thus driving down the dollar's exchange rate.

So when will this stock market decline end? When will the willingness to sell and the pressure to buy shift again?

The answer is simple. While stocks are the worst-performing investment in the world, willingness to sell will continue to accelerate. Once some other market does even worse than stocks, investors will want to re-allocate away from those investments. Then, stock prices will flatten (stabilize).

Once all other investments complete any rallies (commodities) or crashes (probably real estate and already paper, including not just bonds, but currency as in dollars) and everything is basically flat, then the decline will be over. Remember the issue is not fundamentally about stocks, but about the returns of various investments, including the perceived returns for lending institutions offering consumer loans. Further, if prices are so flat that even credit-worthy investors are not willing to borrow for trading, then the credit collapse is definitely complete.

Then, only after most people are completely disillusioned with investing, some people will have assets left to invest (ability) and they may just be open to risking some of it on stocks (willingness). Then, after months and months when no one is talking about stocks at all and even the media seems to have forgotten they ever existed (kind of like recently with gold), stocks may once again start a slow return to becoming the top-performing investment, but I wouldn't bank on it happening soon.

#4 Many people do not understand how to profit from a declining stock market. (Fortunately for you, you may know someone who can show you how.)

First, ask yourself if you want to be one of the people who have some assets left to invest after this all is over. If a year ago you were banking (betting) on markets recovering, you were wrong. If you are still banking on markets recovering any time soon, go back to the beginning of this article and read more carefully, making note of any questions that arise.

If this is the third time you are reading this line, you get an "A" for effort (not that you can pay your mortgage with that). Nevertheless, have some mercy on yourself and just skip down to my contact information and call.

Yes, we can profit from the collapse of the credit bubble and the subsequent stock market divestment. However, real estate has not yet joined in a decline of prices fed by selling (and foreclosing). Unless you have a very specific reason to believe that real estate will outperform all other investments for several years, you may deem this prime time to liquidate investment property (for use in more lucrative markets).

Finally, underlying the credit bubble is another more subtle bubble, though bubble is perhaps not the right word for the following market. Paper currency, specifically the Federal Reserve Note (a.k.a. US Dollar), has been on a steep decline for nearly one hundred years.

We may call that decline inflation, but like any other market, currencies are exchanged with each other (or for stocks or commodities) based on the balance of willingness to buy and sell which is in turn based on perceived returns. Unlike any other market, the Federal Reserve can just inject more dollars hot off the press.

This gives paper currency a unique weakness. Political expedience may spark enormous inflation. We need not look to Argentina or Mexico for examples.

For instance, in the last 18 months, for whatever reasons you care to believe, the US Dollar has lost almost 20%. (Once again, isn't it just a bit odd that the CORPORATE media isn't all over this?)

As with liquidating real estate investments, unless you are clear that dollars will outperform every other currency and every other investment in the foreseeable future, you may deem this prime time to join the ranks of those who have been re-allocating their assets from dollars to something more stable. As bonds are denominated in dollars, they are basically the same: just a big promise from a big government.

However, for all the declining markets, note that commodities have been the best performing investment for the last few years. (Another hint from someone who has been on the inside of corporate media and advertising: if brokerages are advertising stocks to entice SOMEBODY to PLEASE buy them, and no one is advertising "gold for sale" because they don't need to, then only an "expert advisor" would sell gold to buy stocks!)

So does the trend of the last few years mean commodities will continue to be the top performing investment for years to come? The multi-billion dollar question is not on the corporate media's agenda.

Not for me. As well as commodity markets have done recently, and as much better as they may do in the near future, the issue is very best performance. Sure, the HUI Index which represents select "unhedged" gold stocks has shown a 250% profit across 18 consecutive months of the last few years. (Yes, you read that right. And the mass media you probably actually pay for is silent on this dramatic performance.)

However, the question is not how much profit did you and I already miss out on, but what is the top-performing investment strategy available NOW? I am willing and ABLE to do much better than even HUI has done. If you also are willing, but not able YET to generate such a return through your existing strategy, then you may want to contact me about an opportunity that may interest you.

While the banks and media are addressing the next Y2K bug, we can position ourselves to be the ones they come to for loans. Again, keep in mind that they have a precedent for defaulting, and that is the origin of the word bankruptcy. Also, note that a certain federal government has set a precedent for confiscating gold from it's citizens, so you may want to consider not just what strategy you can use for enormously profitable investing, but how to secure privacy including establishing accounts that hostile governments cannot access (or even locate).

All this may seem incredibly complicated… until you compare it to, say, politics (actually, this is politics) or how about this- until you compare investing to… women (or for women, until you compare this to men). But simplifying your financial future is the first step to optimizing it.

If you want to consult with someone about re-evaluating your financial future, especially if you ever had the misfortune to rely on "expert advice," (and are now consequently "missing a fortune"), read the following sentence as many times as it takes for it to sink in. Maybe it is time for you to consult an actual investor with a consistent record of optimal performance… and one who is willing to put his MOUTH where his MONEY is!

To contact The Income Investor, leave a message at (309) 424-1284 or email at jrhunn@wmonline.com.

©2003 Jeffrey Robert Hunn©
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