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Author Topic: The Coming Stock Market Crash... and Boom  (Read 1141 times)
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tamo42
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« on: 2011 May 17, 11:20:21 pm »



I was reading a blog post today about a day with Harry Dent. I like Harry Dent. A lot. I think his insights into demographics as a leading indicator of the economy are very interesting. I think his call for the Dow Jones Industrials to hit 3,000 is right in spirit, but wrong in reality.

Basically, Dent's argument is that the Baby Boomers are retiring. As a result, they are spending less money. Less money being spent means economic contraction. So far, so good.

Additionally, the Baby Boom has more people than the generation that came afterwards (Gen X). So the spending wave that we have ridden over the past 10-15 years is over. Really over. I agree here too.

The current "Great Recession" is following a very similar pattern as the 1968-1974 doldrums after the conglomerate mania. Yep, so it is.

Therefore, history will rhyme with itself and the Dow will hit 3,000 (a 75% crash). Sorta.

Equities will definitely crash. But then they will rebound again. My guess is they will bounce very hard. What Dent's analysis lacks is understanding of how the political landscape today is different than the political landscape of 1968-1974. Back then there wasn't a Fed chief willing to invent new 'tools' in order to bolster stock prices through buying defaulted paper at face value. Back then there was a check on the money printing in the form of the international gold exchange standard (at least until 1971 - and things really hit the skids after that). Back then they didn't have QE, QE lite, and QE II.

These differences in the way the financial world work mean that any crash in the paper markets will be short-lived. Consider the .com market crash of 2000. Yes, there was a 50% fall over the course of a year or so (more on the NASDAQ), but once the fall was over, stocks started marching back up rather quickly. The financiers know that Americans count their wealth in two primary ways: house values and stock portfolios. House values are harder to push up because they involve real resources that have to be created and maintained. But paper? Pfft. You can make those numbers anything you want if you control how much money is floating around.

So yes, there will be a crash. I expect at least a partial crash when QE II ends. I also expect full freak-out response from the Fed and the government. Like today, the Treasury can't issue any more debt, so they are taking money from the federal workers' pension accounts. They will do whatever they have to in order to keep the party going.

So the crash will be much shorter than people expect, and will be followed by a resumption of a gradual up-trend. I can see the talking heads now, "The market was rattled by the ending of open market operations by the Fed, known as QE II, but this rebound shows that real growth has taken hold." Of course it will be the same characters doing the same things, but with different names.

Where Dent is right is that there will be a crash in purchasing power, aka real terms. I expect that the Dow may very well lose 75% of its value in terms of how much it can buy in commodities. If the Dow drops 30% while commodities go up another 50%, the purchasing power of the dollars in the Dow will buy 60% fewer commodities - you know, actual stuff that you can use.

So if you are exposed to paper markets, protect yourself. You can turn these turbulent times into very profitable opportunities if you learn the strategies to do so. If you don't know about how options can protect your positions through strategies like insurance puts and collars, learn. Somewhere along the way, it became accepted to put money at risk without educating yourself as to what the risks are or how to manage them. Don't be a sheep that is told, "just be patient, it will all work out in the end." It's your money!

And yes, badon, I know that this is why you prefer Chinese coins. Tongue
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Neal McSpadden
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« Reply #1 on: 2011 May 18, 09:25:42 am »

So is this going to happen in US only, world-wide, or select countries? Should we speed up our timeline to migrate to your preferred nations?
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tamo42
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« Reply #2 on: 2011 May 18, 11:53:41 am »

I think this will be a US-led, but worldwide phenomenon. All the capital markets are tied together. As far as social dimensions, all I really foresee is an intensification of current trends. In other words, governments will become more autocratic as random laws are passed to 'fix' the situation. So if you have found a place that you like, has a high standard of living, and has a government that is willing to leave you alone, then go for it. Otherwise keep your head low.
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Neal McSpadden
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« Reply #3 on: 2011 May 18, 11:55:08 am »

I think the US will lead this decline and other markets around the world will follow in "sympathy" but to a lesser degree. But the printing presses (unlike the last time it happened) will help the market recover much much faster. Of course, that also will usher in hyperinflation. I would not try to time my exit. Your migration plans should be based on very solid ground and reasons. You should migrate when it is the best time for you personally.
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