-- Posted Sunday, 4 March 2007 | Digg This Article
| Source: GoldSeek.com
Rick’s Picks
Monday, March 5, 2007
“Phenomenally accurate forecasts”
Could this ugliness take another four-and-a-half years to run its course? That is the clear implication of the chart below. The deceptively demure graph, from economist Martin Armstrong, has taken on a significance and credibility it didn’t have one short week ago, when I reproduced it in the Intraday Notes section of Rick’s Picks as the stock market began to unravel. At the time, the chart was merely predicting a major top based on an 8.6-year business cycle that Armstrong had described nearly a decade earlier. By Tuesday afternoon, however, the chart was evolving from prediction into manifest fact, and the ensuing days of pain on Wall Street have turned Armstrong, currently in prison for stock fraud, from rumor to legend.
If we have indeed begun a bear market that is not slated to end until late 2011, as the chart implies, what might lie ahead for the economy? My guess is that mounting worries about the stock market are about to deliver a devastating blow to a housing sector already verging on collapse. It doesn’t take a rocket scientist to see that that a full-blown housing bust could further depress stocks, setting in motion a destructive spiral as powerful as the financial-asset boom that preceded it.
‘Unthinkable’ Has Arrived
Fed to the rescue? For years we’ve been hearing that the central bank would never allow such a thing to happen. Well, it is happening, or at least it is beginning to happen, and the Fed has barely shifted gears. Meanwhile, for all of his unconvincing talk about the supposed threat of “inflation,” one could say in his defense that Bernanke has merely been trying to distract us from the infinitely worse menace of deflation. To believe otherwise is to infer that the guy lacks the intelligence and the imagination to foresee how the deleveraging of the world’s $370 Trillion derivatives market might play out. We think he is smarter than that, and that is why we are holding to our lunatic-fringe prediction that administered rates are not only about to fall, but to fall quickly.
If so, and the Fed funds rate is on its way down to one percent or less, we would have to concede that the catastrophic debt deflation that lies ahead could conceivably be held at bay for another year or more. With the Fed’s tacit assurance of steadfast, aggressive easing, the hedge funds would turn ravenous for Treasury paper, gorging themselves on as many Ten-Year Notes as Uncle Sam could print. But mortgage rates would have to come down very steeply, perhaps to record lows under four percent, to turn the current housing bust into a boom powerful enough to induce yet one more economy-sustaining credit binge. For, anything less would hardly suffice to overcome the deflationary drag already beginning to suck the life from the U.S. economy (and whose destructive power will have increased as a psychological consequence of last week’s sharp drop in the stock market).
‘Easy’ Mortgages Crucial
A report just out from Merrill Lynch’s David Rosenberg raises the possibility that even a significant fall in mortgage rates might not do the job. “What drove the housing-led cycle was not as much the cost of credit,” notes Rosenberg, “but rather the widespread availability of credit – irrespective of your FICO score.” Rosenberg further questions whether the Fed can play a role as knight in shining armor after having acknowledged in a report published last August that “only a third of the parabolic run-up in the home price-to-rent ratio was due to low interest rates. The other two-thirds reflected other non-price influences, such as lax credit guidelines by the banks and mortgage brokers.”
But you don’t need me or David Rosenberg to strip the veneer of hope from the bullish case. If someone you know has had a “For Sale” sign on his lawn for six months or more, as many sellers have, and this person has attracted no serious buyers at $350,000, ask him how low he thinks mortgage rates would have to fall -- or the stock market to rise -- to bring buyers galloping to his door with bids of $500,000 or more. And, to be sure, it will take nothing less than that – an unmitigated housing mania -- to reignite an economy whose chief stimulus in recent years has been money borrowed on artificially inflated real estate values.
$8 Begets $1
Keep in mind as well that it has been taking upwards of $8 of new borrowing to engender a single dollar’s worth of GDP growth. This ratio has been growing steadily more preposterous since the late 1940s, and we can be sure it will become even moreso, approaching the metaphysical, if borrowing totals are ratcheted up to an even higher plateau (assuming that is even possible with real estate collateral currently in precipitous decline).
Place your bets if you dare, but do not imagine for an instant that another round of inflation will put the economy back on sound footing, or that it will prevent a debt deflation that by now is all but ordained.
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Want to Forecast Like a Pro?
Plans for the first online Hidden Pivot seminar are nearly complete. The two-day event will be held via Webex in late March or early April, most probably on successive weekend mornings. There will also be at least one lengthy Q&A session to follow, just as there has been on Sunday afternoons to conclude the on-site course.
This will be an excellent opportunity for those of you who were unable to attend the classes I gave last year in New York, Sydney, Vancouver, San Francisco and Denver. If you’ve visited the chat room and marveled at the forecasting skill of seminar grads, it’s a great chance to learn exactly how they do it. While I cannot guarantee that the course will turn you into a fabulously rich trader, I can promise that with a little diligence and practice, your ability to forecast will be at least as good as anyone whose forecasts you have ever paid for..
I will be able to offer this course for under $1,000, since many of the expenses that I've incurred in holding a “live” seminar – including hotel and travel costs, and the rental of a conference facility -- will not be a factor. If you are seriously interested in attending, click here to get on the mailing list.
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Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2006, Rick Ackerman. All Rights Reserved.
-- Posted Sunday, 4 March 2007 | Digg This Article | Source: GoldSeek.com
