A Crisis is Coming… Which Crisis Will It Be?
Graham Summers
November 11, 2009
As I have stated numerous times on these pages, MOST of the gains coming from stocks in 2009 were the result of the dollar losing value. Investors, like politicians, tend to be "short-term" thinkers and consequently they see stocks as an inflation hedge. A quick glance at a chart of the S&P 500 in the '70s, (the last period of serious inflation for the US) proves this theory (stocks as inflation hedges) as a load of bunk.
As you can see, stocks staged some massive rallies and collapses in the '70s, but largely traded sideways. Those who were able to time the Collapse did quite well. However, for most investors, unless you were investing in gold, stocks were largely a pointless bet in nominal terms.
However, in REAL terms, those who invested in stocks LOST considerable money for the decade: with stocks roughly break-even but inflation in the double digits, anyone who sat in stocks ended up losing a considerable amount of purchasing power.
On that note, I find the above chart of stocks' performance during the '70s to be of GREAT interest because it is eerily similar to the S&P 500's chart for the 2000s:
As was the case in the '70s, stocks rallied AND fell from 1998-2008… but largely anyone involved in "buy and hold" investing didn't make a dime. The reason for the similarities between the '70s and '00s chart is simple: the '00s were ALSO a period of great inflation (although it was hidden by a massive credit bubble). Indeed, between 2000 and 2008, the Dollar lost 40% of its value. That's a staggering amount of currency debasement.
Put bluntly, virtually ALL of stocks' gains from the last ten years can be attributed to the US Dollar losing value. In REAL terms (measured against Gold), stocks have actually LOST 80% of their value since the Tech Crash as the below chart shows:
The above chart CLEARLY shows that stocks are not a good inflation hedge: when you price the S&P 500 in gold, instead of dollars, the losses from investing in stocks since 2000 have been ENORMOUS.
This also puts the nail in the coffin of the "new bull market" hypothesis floating around the mainstream media. Indeed, from a technical perspective, the S&P 500 (priced in gold) has been in a decided BEAR market since 2000: as you can see, the weekly chart of the S&P 500 (priced in gold) fell below its 50-ema in 2001 and has YET to break above it.
Here's a close-up of the daily chart for the S&P 500's rally started in March 2009 (priced in gold). As you can see, stocks were totally REJECTED by the 200-ema and 50-ema in September. They've since failed to remain above these levels several times.
Put another way, this latest stock rally which everyone proclaims is incredible because stocks rose 50% is not nearly as impressive when you account for Dollar devaluation. I hope this analysis is not getting too "out there" for you. The main points I'm trying to make are:
- Stocks have NOT generated REAL wealth for ten years
- The stock rally started in March 2009 is MOSTLY about dollar devaluation, NOT real gains
- Stocks (priced in gold) have JUST hit a major point of downward resistance. Any break below this level (meaning gold continues to rally or stocks continue to fall) forecasts a MAJOR collapse in stocks is HERE and we are likely to see a re-test of the March lows
This final point is key. Stocks have largely rallied due to the Dollar falling. But gold has rallied EVEN farther. If this trend does not reverse, then we're going to see a MAJOR full-scale collapse in stocks: which is what I've been forecasting for months.
As I wrote earlier this year, the US's monetary policy has already laid the seeds of the next Crisis. Is now no longer a question whether or not another Crisis is coming; instead, it's a question of which Crisis and when. I've detailed what I think are the three general options below:
Quite a few people wrote in last week telling me I was insane for even claiming that the US Dollar could rally. But in reality, this is the outcome Americans should all be praying for given the alternatives: a Dollar rally would only damage stocks and commodities, whereas a Currency Crisis would effectively destroy the economy and a Country crisis… well, that one is obvious.
Stocks, generally get all the attention from the media, but in reality they are relatively small fries compared to the Bond and Currency markets. As of 2008, the world stock market was roughly $36 trillion in size. In contrast, bonds were $67 trillion and FOREX (currency) which TURNS OVER $3.2 trillion PER DAY: ten times the daily volume of EVERY stock market in the world.
Suffice to say, a Crisis in stocks would be the lesser of three Crises. And those of us in the US should be hoping it's the Crisis we get as opposed to a Crisis for US debt or the Dollar.
The good news is that it seems this is what we're heading for: in the last two weeks, the US Dollar broke its downtrend:
And stocks broke their uptrend:
I also want to point out that the Wilshire Index (the index containing every publicly traded US company) broke below its uptrend as opposed to the downtrend set by the beginning of this bear market (2007-present):
Looking at these, it seems that Crisis #1 (stocks collapse and the Dollar/ Treasuries) rally is the most likely candidate for the upcoming Crisis. However, to be sure of this, we need to see long-term Treasuries hold their 20+ year uptrend.
As I've written before, the Federal Reserve accounted for nearly half (49%) of ALL Treasury purchases in the second quarter. During the same time period, foreign investors (China, Japan, etc.) decreased their purchases of US debt by 40%.
In simple terms, foreign investors are not interested in buying US Treasuries at current yields (with the 30-year yielding 4.4% and the Dollar losing 15% in value this year alone, I can't say I blame them).
Now, to get higher yields you need bond prices to fall. The Fed's Quantitative Easing program (in which the Fed bought Treasuries to artificially create demand) just ended… so we're about to find out what the bond market thinks of US debt without life support. If demand is so low that Treasuries break their 20+ year trend-line, then LOOK OUT, we may be heading for Crisis #2 or Crisis #3.
Looking at a close-up of the 30-year's chart, it looks like we'll know the deal (whether bonds will collapse along with stocks) sooner rather than later.
In conclusion, my main point is this: it's now certain that A Crisis is coming… it's now just a question of which one and when. So far it looks like it will be a Stock Crisis (a replay of last year in which the Dollar rallies and commodities and stocks fall). However, DON'T get too caught up watching stocks right now. The BOND market is larger and much more significant in terms of forecasting what's to come. And with the Fed's artificial support for Treasuries just ended, we may be about to find out.
Keep your eyes on the long end of the Treasury market and the Dollar. THEY (not stocks) will be dictating what's to come.
I'm already preparing investors for what's to come with a FREE Special Report detailing THREE investments that will explode when the next Crisis hits. I call it Financial Crisis "Round Two" Survival Kit. These investments can help protect your portfolio from the coming carnage. And they can also show you enormous profits: they returned 12%, 42%, and 153% last time stocks collapsed.
Swing by www.gainspainscapital.com/roundtwo.html to pick up a FREE copy today!
Good Investing!
Graham Summers
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