[color="Red"]TIME FOR EXTREME CAUTION
by Christopher Laird
PrudentSquirrel.com
November 27, 2006
In a moment, I will delineate reasons why you need to be super cautious going into 2007. I have been reading analysis discussing the fact that the US stock market continues to have possibly one more bull phase, before its due crash. Frankly, this is a risky way to look at many things financial today.
First, it is the editorial policy of Prudent Squirrel to be out of ‘investments’ (read gambling and risky speculation in today’s markets) at this time. Yield possibilities are too low, and risk is high. Bond prices are high, stock prices are high. Hedge funds are wandering dark stars waiting to cause a financial panic with their leverage. Not to mention the derivatives death star. At about $1000 trillion, (BIS figures are as high as $600 trillion and I figure that number needs to be doubled) that is just going to go out of control by itself, it is not controllable, growing at 30 to 50% a year.
Consider markets at 100 to 1 leverage
It is no secret that great leverage is infused in all financial markets, stocks, bonds, and even non PM commodities. Just go take a look at Doug Noland’s incomparable Credit Bubble Bulletin at PrudentBear.com (no relation to Prudent Squirrel). In it, you will find a vast array of weekly credit statistics, and the clear conclusion that leverage is now at pathological levels in markets.
I have told subscribers to consider all financial markets at about 100 to 1 leverage. The reason is that, at the margins, where stock prices are determined, there is such leverage by hedge funds and in derivatives, that you cannot consider stocks at some normal rate of leverage. Between hedge funds and derivatives, it is easy to get 100 to 1 leverage, or at least 25 to 1. That being the case, just consider all markets at 100 to 1, prices being determined at the margins.
So, you combine wild speculation with wild leverage, and big time complacency, and you inevitably come to a gigantic financial crash. Of course, many writers have discussed this pathological situation for years, so an impeding financial crash is not exactly unexpected.
The point is that we are faced with two options: we can either stay in financial markets in the hope of gathering the last of the harvest, or we can wisely go to ground. Trying to stay in markets when they are all screaming about speculative froth is not wise.
Stock crashes and financial crashes very due
Earlier this year, world stock markets had big crashes. These affected every major financial market, and at the time, gold rocketed to its mid 700 level.
Russian, Middle Eastern, resource nation, some Asian markets, all crashed.
Right now, Middle East stock markets are crashing again, and oil billionaires are fleeing into gold, buttressing that price, and of course oil is showing some signs of renewing strength. This is a principal reason why gold is detaching from the CRB, though that is not completely finished.
Middle East a mess
Iran is convincingly winning a power struggle in the Middle East with the West. Iraq is already in a state of non declared civil war. Recently, Cheney went to Saudi to discuss options of resisting the fundamental Islam forces cascading over the region. No less that Bush is slated for a Mid East conference with Iraq and moderate Mid East nations to discuss strategy to stabilize the situation.
Democracy is not working in Iraq. It will not work. We are looking right now at the prospect of an Iran centered Iraq. Eventually, Iraq will have to move to another dictatorship, probably Iran centric. One or another of the three principal antagonists – Shiite-Sunni-Kurd will have to brutally suppress the others.
The overall situation is one of the US attempting to garner its allies for a final push to see of Iraq can be stabilized. Clearly, the US vision of ‘democracy’ for the Middle East is going to fall victim to sectarian wars. All the US and other western forces can do in Iraq is to avoid being hit in the escalating Shiite/Sunni wars that have basically paralyzed Baghdad, and about ¾ of the whole of Iraq.
The Kurds are in the process of creating an effectively separate entity in North Iraq, to the great dismay of Turkey. Iran is fostering civil war in Iraq, Palestine, and Lebanon. The recent assassination of an anti radical Lebanese minister last week is yet another strike at dismantling any democratic regime, and Syria is all too happy to step back into Lebanon. Democratic officials in Iraq are not reporting to work. Terror reigns.
Israel is being forced into a corner, and they are attempting to give concessions to the Palestinians, as if that will help the situation. All the while, the EU is pressuring Israel, and not allowing any real anti Hezbollah measures in Lebanon.
Afghanistan is another mess, the Taliban rallying. British troops there state they are losing control, and are fighting for their own life. Forget stabilizing that mess too.
Bush is attempting to rally his Iraq president, and the poorly equipped Iraq army cannot stand up to the better armed militias. In fact, the Iraqi army is torn between Sunni and Shiite sympathizers, and often does not intervene. The Shiites and Sunni are fighting themselves, killing over 100 a day, even burning each other alive.
The Iraq president has lost the confidence of his people, and it is clear that Al Sadr, among others, now runs the show, with the direct instigation of Iran.
All of this adds up to a big fear premium for gold and oil, and is causing the Mid East stock markets to crash.
Top US officials out trying to stabilize the USD and the Middle East
In the past week, we hear that no less than President Bush, Cheney, Bernanke, Paulson- all have been dispatched to high level talks overseas. It looks as if the US is in a panic mode.
First, Paulson and Bernanke are in China, and we can guess the nature of that visit- To stabilize the USD, and even perhaps discuss an orderly unwinding of the USD. China has laid out groundwork for an eventual sway away from the USD, and clearly if Bernanke and Paulson are over there this week, there must be smoke somewhere.
Bush and Cheney are flying all over the Mid East, trying to rally moderate regimes in support, but those regimes are clearly wondering if the old US footprint in the Middle East is going to last – or if the old order of security for cheap oil will stay.
Iraq just got a new president, Talabani, a Kurd. The former president had lost confidence of the warring Sunni and Shiite. To be brief, there is a panicky attempt to stabilize a rapidly disintegrating Iraq.
All of this means that the Middle East is on the very threshold of a region wide Iran instigated civil war. This could easily overthrow other moderate regimes. Oil again may go to new heights. We are at the very cusp of this. And, of course gold, will follow that higher.
And, of course, gold will benefit from continued flight to financial safety over the falling USD. The trouble with the USD is that any clear weakening below 80 on the USDX could cause a stampede out of the USD, and is probably why Bernanke and Paulson are in China this week.
Basically, things look very dicey. If there are major negative developments for the USD or the Middle East, stock markets will crash. They already have huge speculative overhang anyway.
So, given the fact that any major deterioration in the Middle East or the USD could hammer US and world stocks, and the fact that the US stock market is poised to be heavily shorted, why would anyone be in it?
Clearly, if they are, they are ignoring many warning signs.
This is far worse than late 04
In late 04, there were serious issues with the USD, when it was tanking in the late fall/winter of 04. At that time, there was talk of an impending USD crisis. Big investors such as Buffett had moved billions out of the USD, and things looked quite grim.
Of course, the USD stabilized just above 80 on the USDX, and even rallied well into 05. But that was then.
The former forces that buttressed the USD then are now gone.
With the emerging chaos in the Middle East, combined with worsening US economic and fiscal situations, and the fact that the Asians are saying, and have been saying, they have had about enough of ever increasing USD assets, it does not look good for another early 05 type USD rally. In that case, several things combined to strengthen the USD at the right time, central bank support and foreign interest in US bonds, and repatriation of USD foreign income.
This time, with rising EU interest rates strengthening the Euro, and the fact that the US cannot even conceive of any further rate hikes, means there is a weakening rationale for the USD to say strong going into 07.
All of the support mechanisms of the last two years for the USD are disappearing. And, there is not a lot the Fed can do about this. Ultimately, US interest rates would have to rise to keep investors in it, but the Fed cannot even think of raising on their own. But ultimately, the bond market will bid up rates on its own.
The trouble is, that will kill the US consumer….
Things do not look good for the USD going into 07.
All in all, there is little rationale to stay in the US stock market. It is time to be super cautious. Of course the US stock market can go higher from here, but it is not worth the risk of a loss to capital.
-
-
-
All is for naught without a good edJEW(K)shen.
[ Educational sites ]