But we are at a very important juncture in the economy, and based on the state of the world, I do not have high hopes for our world economy going forward. I will elaborate on my thinking of the state of our economy.
First of all, I will reference the US market, and economy, as whatever happens to America, will happen to Canada, and the rest of the world. Year 2000 was basically the last year of real economic prosperity. Prior to yr 2000, the last time the world had a very painful recession and declining stock prices was during the 1970s when the world had massive inflation, inflation that was ultimately cured by jacking interest rates to almost 20%. But since the bear of year 2000-2002, we encountered another vicious bear market in year 2008-2009, second in seriousness only to the stock crash of 1929. And if I'm correct about my forecast, we will experience the next vicious bear very shortly in the coming weeks this year.
All this is caused by money printing. In response to the yr 2000 internet bubble, the US cut interest rates to 1%, and printed money, causing a real estate and credit bubble that started in yr 2008, and supposedly ended in 2009 when stocks staged an almost 100% recovery from the lows. But this is a fake recovery that is caused by devaluing the US dollar through printing. What did the devalue of the USD brought us? In 2008, aside from artificially inflating stock prices, they also brought us record oil prices, gasoline prices, food prices. What happened when you have record prices on things you need to live on like oil and food? People are forced to cut back spending, and when spending is cut enough, it killed the economy. What is happening right now in 2011? High oil prices, gasoline prices, food prices? all checked... sounds eerily similar to 2008?
In the last year I took a hiatus from the blog, I learned a technique called cycle analysis. The basics is that a cycle dictates when lows in the market will occur. For long term cycles, the US dollar has a 3 year cycle, from low to low. For stocks, it generally is a 4 year cycle low to low. There are shorter cycles like a yearly cycle, a half year cycle, and a daily cycle, which one can use to pinpoint more accurate timing as to when to enter and exit markets. But to keep it short, I'll explain hypothesis above using the longer term cycle. Lets start with the US dollar.
The US dollar has been in a long term decline since year 2000. This decline has made it possible for the US (and therby the world) to inflate stock prices and give an illusion of prosperity. (See the SPY chart below) From the dollar chart, one can see that lows in the US dollar generally occur every 3 years. What happens at the end of the 3 year cycle? The US dollar stages a vicious rally, even though the longer term trend of the US dollar is down because of US money printing. But when the US dollar rallies viciously, commodities stages a vicious correction. In the chart when the USD rallied in 2008, what happened? Stock prices collapsed, oil prices collapsed from $147 to $30, gold corrected from $1000 to $700, and it was very nasty for the world economy. Well since it's now 2011, 3 years from the low of 2008, and the US dollar has record bearishness and almost a record low, guess what the US dollar is going to do in the near future? I'll give you a hint, look at what happened in 2008, 2005, 2001.
Lets look at the S&P 500. Cycles from low to low generally last 4 years. Because of money printing it is possible to stretch the cycle so the last stock cycle lasted almost 6 years from the lows of 2003, to the lows of 2009. A previous cycle that ran long usually means that the next cycle will run short, and my projection is for the next cycle low to occur in 2012 or 2013.
Companies recently have been announcing record earnings. What has the stock market done? It appears to be just churning around, not really breaking any new ground. Kind of similar to what happened in 2007. The big boys were busy dumping their shares to little fish like you and me while they prepare for the downturn. They rally the market enough to get people excited about the market, break resistance to the upside, and then the market keels over. Although I didn't include the charts of the oil services, semi conductors, financial and housing sectors, they all have very ugly down-trending charts. A healthy economy should and these sectors should be strong, the fact that they are ugly give us clear warning signs about the economy, and the strength in the S&P 500 and broader market is not going to last. Plus the fact that the US dollar is ready to rally viciously adds confirmation to what I think will be a nasty stock correction, and an economy that is ready to experience a scare of deflation just like 2008.
How will the powers that be react this time? What they should do is allow the natural cleaning process to get rid of morally and financially bankrupt companies like Goldman Sachs, Citi, Bank of America, admit that debt has to be defaulted as it has no hope of being paid off, endure a few years of extreme pain, and then rebuild a real economy from scratch. But what is likely going to happen when the correction gets vicious enough, or when cities and state governments run out of money and cannot borrow money, is that the US will launch another round of money printing. But that has to occur after a vicious correction. It is currently politically not feasible for the US to launch another round of money printing when the economy 'seems' to be good. In the long term, it will kick the problem down the road, and make the problem even more vicious when it comes to fruition.
My conclusion, is to prepare yourselves for tough times ahead.
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