Crashing Markets Soaring Gold
It's a question on nearly everyone's mind, "is the stock market ready to crack?" The talking heads would have us believe the Dow is headed for 16,000 - 18 - even 20,000. Expert after expert is paraded past the TV screen sharing their blissful outlook based on improving economic data. The economy is growing by 2 percent or so, the unemployment rate is slowly falling and recent housing data is said to be the impetus behind the last mini-run on stocks.
Now to the reality. The $85 billion dollars the Fed is pumping into treasuries and mortgage backed securities, every month, is an amount of money equal to 6% of GDP. That be the case, how is it a positive to put 6% in, get 2% out and call it growth? And unemployment? Please! Talk to anyone and you know, full time employees have been converted to part-time workers, the workforce is shrinking and at 7.5% the unemployment rate itself is horrible. In May 2008, five years ago and just prior to a major stock crash in March 2009, the unemployment rate was 5.5%.
On to housing. Days ago, data was released showing the average home price rose 1.1% and the markets had a party. Let me explain what's really happening here that gives the illusion of rising home prices. See if you don't agree. Abandoned homes are being sold by banks, Freddie and Fannie for cents on the dollar. Slowly, the inventory of bank-owned properties is shrinking.
As investors buy up these homes, homes often go through extensive rehab and are then sold at market prices still well below pre-crisis values. For example; A house is bought from the bank for $50,000, rehabbed for $30,000 and is then sold for $100,000. The two selling prices recorded in the deed transfer are $50k and $100k. It looks like this home price rose 100%.
The pain in housing is hardly over. According to Zillow's first-quarter Negative Equity Report, 44 percent of all homes are still worth less than their mortgage amount or if sold would not provide enough equity to buy another home. Were it not for trillions of dollars in new debt and bailouts, this number would be worse. Which means, to the extent housing has recovered, the bill for that recovery stills needs to be paid. And, if you are one with any wealth left after the 2008 crisis, it is you who will have to pay the bill - some day!
Will stocks crack? If this is the kind of data the markets are relying on, it's not a matter of if but when. To answer the when, perhaps we can find the answer in the charts.
As you see, highly leveraged markets began a 33% decline in '01, from 11,497 in December '09 to 7,591 in September of '02. In late '07, stocks reached record highs again but by 2008, it was apparent a highly leveraged economy was failing. By March '09 stocks fell 50 percent. On the heels of trillions in stimulus and bailouts, it began to rise, but each time a bailout program ended, stocks faltered and another QE program was invented.
What about Gold? As stocks hovered near record highs in early 2000, gold began a 19 percent decline. By February, 2001, gold bottomed at $256 an ounce. At that time, stocks maintained near record levels, but the over-leveraged markets began to crack and then fell 33 percent from prior highs.
By early 2008 gold reached new highs above $1000 an ounce then fell by more than 25 percent to a price below $750 an ounce. As gold fell in price and out of favor with investors, stock prices continued to hover near record highs. But, by March 2009, our debt problems manifested themselves in crashing market prices and stocks fell 50 percent.
Today, the same scenario is developing. The gold price has fallen 28% while stock prices hover near record highs. It's deja vu all over again. Stocks do well, money comes out of gold and pours into stocks that crash. As stocks crash, more money moves to gold and gold heads for record highs.
In my humble opinion, the cycle is repeating. But that is my opinion based on my interpretation of the data. You may share that opinion or you may not. If you wish to share my opininions on a regular basis, continue to visit LearCapital.com or follow me @DaveTheGoldDR.
Now to the reality. The $85 billion dollars the Fed is pumping into treasuries and mortgage backed securities, every month, is an amount of money equal to 6% of GDP. That be the case, how is it a positive to put 6% in, get 2% out and call it growth? And unemployment? Please! Talk to anyone and you know, full time employees have been converted to part-time workers, the workforce is shrinking and at 7.5% the unemployment rate itself is horrible. In May 2008, five years ago and just prior to a major stock crash in March 2009, the unemployment rate was 5.5%.
On to housing. Days ago, data was released showing the average home price rose 1.1% and the markets had a party. Let me explain what's really happening here that gives the illusion of rising home prices. See if you don't agree. Abandoned homes are being sold by banks, Freddie and Fannie for cents on the dollar. Slowly, the inventory of bank-owned properties is shrinking.
As investors buy up these homes, homes often go through extensive rehab and are then sold at market prices still well below pre-crisis values. For example; A house is bought from the bank for $50,000, rehabbed for $30,000 and is then sold for $100,000. The two selling prices recorded in the deed transfer are $50k and $100k. It looks like this home price rose 100%.
The pain in housing is hardly over. According to Zillow's first-quarter Negative Equity Report, 44 percent of all homes are still worth less than their mortgage amount or if sold would not provide enough equity to buy another home. Were it not for trillions of dollars in new debt and bailouts, this number would be worse. Which means, to the extent housing has recovered, the bill for that recovery stills needs to be paid. And, if you are one with any wealth left after the 2008 crisis, it is you who will have to pay the bill - some day!
Will stocks crack? If this is the kind of data the markets are relying on, it's not a matter of if but when. To answer the when, perhaps we can find the answer in the charts.
As you see, highly leveraged markets began a 33% decline in '01, from 11,497 in December '09 to 7,591 in September of '02. In late '07, stocks reached record highs again but by 2008, it was apparent a highly leveraged economy was failing. By March '09 stocks fell 50 percent. On the heels of trillions in stimulus and bailouts, it began to rise, but each time a bailout program ended, stocks faltered and another QE program was invented.
What about Gold? As stocks hovered near record highs in early 2000, gold began a 19 percent decline. By February, 2001, gold bottomed at $256 an ounce. At that time, stocks maintained near record levels, but the over-leveraged markets began to crack and then fell 33 percent from prior highs.
By early 2008 gold reached new highs above $1000 an ounce then fell by more than 25 percent to a price below $750 an ounce. As gold fell in price and out of favor with investors, stock prices continued to hover near record highs. But, by March 2009, our debt problems manifested themselves in crashing market prices and stocks fell 50 percent.
Today, the same scenario is developing. The gold price has fallen 28% while stock prices hover near record highs. It's deja vu all over again. Stocks do well, money comes out of gold and pours into stocks that crash. As stocks crash, more money moves to gold and gold heads for record highs.
In my humble opinion, the cycle is repeating. But that is my opinion based on my interpretation of the data. You may share that opinion or you may not. If you wish to share my opininions on a regular basis, continue to visit LearCapital.com or follow me @DaveTheGoldDR.