Wednesday, March 11, 2015

10 Reasons for "Da Bear" : Reason #1

No one has a crystal ball to say when the bull market will end, but it will. It is past 71 months. Experience helps and a few very smart people will get rich in forecasting trouble. Paulsen did it. Back in 2006 he foresaw the housing bubble. He had money to gamble in his beliefs. He shorted the security swaps for home loans. It took two years, but he's glad he did.
For the rest of us it was not losing your hard earned money in the market. I, too also saw the housing bubble. My only claim to fame was not buying an over-priced house.
I'm not buying over-valued stocks. I do still own a municipal bond, but I'm gambling that the Fed delays an interest hike until September. Eventually, I will have to sell because higher rates lowers the value in this fixed price asset. 
With That Said
I remind you, dear reader that in my Forecast 2015, I predicted a 10% correction in the first quarter. Now, I believe it could be worse.
The first and foremost reason under the ten is the $. In my forecast I saw 97. People, the dollar burst through that number and is heading for 101.
Something Goes Up...
something must go down and the Euro is "it." Spring will come and with it is the beginning of golf season. Can you say, "Par?"
A move this fast in a short period of time is dangerous for global trading. A rising dollar exports inflation to emerging markets and lowers revenues for commodity exporters. Both are serious problems that central banks respond by printing which only reinforces the negative cycle.
In addition, many loan agreements that no one knows about will be under stress. These are multiple problems, but are hidden unless they persist past a quarter and of course, there is no funny book keeping like in China, Greece and elsewhere.
Copper and Oil
are used as collateral against these loans. A rising dollar lowers the value of both assets. This is the same effect as people buying a house and the mortgage is worth more than the property.
There are many other aspects of worry in the market, but no one knows them all. I fear derivatives the most. These insurance obligations will come into play as the commodity loans sour. Keep this in mind: it is the greatest danger because derivative deals exceed $700 trillion and the total value of the earth's GDP is around $72 trillion or 10x the amount. No company could ever cover their agreed obligation and a chain reaction could happen. People, GE has more debt than Greece!
These loan deals come to light twice a month. One at the middle(A) and one at the end(B). Do you recall Shakespeare's, Ides of March?
Add this to the above. Inflation has not shown its ugly face due to the aspect that central banks have made credit an asset. They have lowered the cost of credit with QE and money printing, however everyone has too much credit and not enough dollars to pay for it. We have had the misfortune to allow fiat money thinkers control our economy. Just compare their thinking to our founding fathers.
1) government tries to force-feed inflation as central banks plan their strategy around a target of 2% inflation while at the same time pay a negative return in interest rates.
2) Consumers are encouraged to borrow with credit like your many cards while saving is frowned upon. Of course, you have to have a job to save and if you do, your money is worth less due to the low interest rate bearing accounts.
3) the stock market cheers bad news because it means the Fed is likely to hold interest rates negative for longer. You do remember what happened to the market with just the thought of tapering?
Gold was a currency. It kept prices stable both present and future. This allowed everyone to plan. The idea was to limit debt because the more you saved the more you had for your future plan. You also had a peace of mind that the Fed didn't exist and you knew that the government would not meddle with the market.
This is the first reason of the ten and why I say, End the Fed!