-- Posted Friday, 17 August 2007 | Digg This Article
| Source: GoldSeek.com
Rick’s Picks
Friday, August 17, 2007
“Phenomenally accurate forecasts”
Read John Kenneth Galbraith’s classic book on the 1929 Crash if you think there is something unusual about the stock market’s wild swings of late. In fact, such craziness was routine as shares worked their way toward the historical top of August 1929. We’re running a little ahead of schedule this time, having seen the Dow Industrial Average peak just above 14000 in mid-July. But that’s only a few weeks’ difference, and we’d be surprised if it turns out that history has not repeated itself, more or less.
Even so, no less a sage than Richard Russell, a permabear until relatively recently, put out a memo on Wednesday that gave bulls something to look forward to. Here is what he wrote, as posted in the Rick’s Picks chat room yesterday:
Just a ‘Hard Shake’?
"My take is that we're seeing a ‘mini-bear market’ coming within the framework of a much larger primary bull market. I don't think this is the end of the world, I just think we're seeing the financial world being grabbed by the neck and shaken, shaken hard. At this point I want to go over the all-important 50% Principle again. The Dow rise from its 2002 low of 7286 to the 2007 high of 14000 took the Dow up 6714. points. The 50% or halfway level of that rise is 10643. As long as this "mini-bear market" halts above 10643, I will consider the primary trend of the stock market to remain bullish."
Mind you, this isn’t some self-serving, narcissistic jackass who knows exactly what to say – and would say it no matter what he believes – in order to get in front of CNBC’s cameras. No, this is a guy who has seen it all, and who has experienced bear markets up-close in a way that might have destroyed any investor who had failed to imbibe the important lessons each time. But is Russell going to be right this time? We don’t think so, even if it is difficult to fault his technical logic. As he says, a 25 percent sell-off in the Dow, taking the blue chip average down to 10500, would not be the least bit unusual within the perspective of a long-term bull market. That will not much console investors and money managers who are planning to sit out the storm, since a 25% hit is bound to devastate quite a few of them. But there is no refuting the interpretation that a 3,500-point selloff, even over a relatively short period of time, would be as right as rain for a bull market that had become as extremely overbought as this one was.
This Is the Big One
But putting technical logic aside for a moment and focusing on fundamentals – something we almost never do – we are incapable of imagining that a 3500-point dive in the Dow would not topple the U.S. economy from its already shaky pins. Now, that’s a far more speculative assertion than Russell’s emotionless and guardedly optimistic take on the frenzied selloff that has seized stocks of late. Russell implicitly believes that a 3,500-point bear market would occur in a vacuum, with no mortal effects on the all-important U.S. housing sector. Either that, or he thinks it would have an impact, but not a fatal one. On that very crucial point we must disagree, especially since we have written for years that the U.S. and global economies were headed unavoidably toward a ruinous deflation. If so, than the deterioration we have seen so far – in housing, but now in stocks as well – must surely be the start of the Big One.
We’ve offered numerous, persuasive reasons why this is so, but one to consider now is that it is currently requiring nearly $9 of new borrowing to create a dollar’s worth of GDP growth. Writing in the early 1990s, we believed America’s consumption-based economy had maxed out because it took a then-unprecedented $2.40 of new borrowing to engender a single dollar’s growth. In retrospect, our error in timing was a failure of imagination. But that was before the country had leveraged out its housing stock to produce what in retrospect has been only modest economic growth in the last five years. There being nothing else for us to hock, we have serious doubts that Russell will be right.
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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 © 2007, Rick Ackerman. All Rights Reserved. www.rickackerman.com
-- Posted Friday, 17 August 2007 | Digg This Article | Source: GoldSeek.com
