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Monday, August 8, 2011


The stock market decline is in an early stage.  The S&P 500 in March, 2009 tested an up-sloping trend line going back to the early 80's - the very beginning of two decades of speculative excess.  I doubt if  anyone has given much thought to this line since the mid-90's or earlier, when the index took off on an exponential track.  That line is now a little below 800, and creeps up about 0.9 point every market day.  It will get broken, badly - just like the support line from 2009 was broken on August 2.  The ultimate low will be below 600, wiping out 15 to 20 years of gains.

Inflation is dead.  RIP.  Deflation is a horrible business environment.  The best we can hope for is some piddling core inflation in the 1% range.  Worst case is a deflation spiral, as the debt situation Art has been warning us about unwinds.  God help us if that happens.

Gold is an inflation hedge.  Period.  It is now in the very late stages of the last bubble standing.  Anyone who buys gold now will be very sorry, indeed

All of this means a strengthening dollar.  That's right, the dollar index will increase in the medium term - several months, at least.

The Euro and dollar have been negatively correlated for a long time.  Look for the Euro to falter badly, possibly even crash.  I will be surprised if the European Economic Union survives in its present form.

Markets will give the S&P rating downgrade of U.S. debt all the respect it deserves.  Look for U.S. government bond rates to fall.  Bond values, of course will move in the opposite direction, and go up.


Stagflationary Mark said...

The stock market decline is in an early stage.

Like you, I don't think investors today realize just how far the stock market could theoretically fall.

I updated my chart that adjusts the DJIA for inflation and includes peak to peak and trough to trough analysis (using assumed long-term exponential growth trends that may no longer apply).

Stock Market Risk Analysis v.2

If history is a guide, it can fall a long, long way.

Jazzbumpa said...

Amen, brother!


BadTux said...

By 1933, when FDR took office, the stock market had lost 95% of its value from the 1929 peak.

'Nuff said on that.

- Badtux the History Penguin