Crash Stew: Signs Point to Global Stock Market Meltdown

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There’s
a lot of buzz hitting the contrarian financial news circles around
the web regarding recent market weakness and the possibility for
the end of the rally which began in March of 2009.

Many contrarian
investors have been waiting for the crash that is inevitably to
follow the largest US market rally in modern history, and this may
be it. We caution our readers, however, that over the last year
there have been various false signals, and rather than seeing a
crash in the Summer of 2009 or Fall of 2009, stock markets continued
to push up, despite abysmal economic fundamentals.

Is it the real
thing this time?

Bert Dohmen,
publisher of the Wellington
Letter
, says “This is the time for the bears to make
money. Sell short any rally attempts.”

Dohmen, who
suggested in December 2009 that early January would see a continued
rise in stocks, anticipated a down-turn in late January. In his
most recent letter, dispatched to subscribers January 21, 2010,
Dohmen says that we can forget about the theory that “hyperinflation
is right around the corner,” and that deflation and debt implosion
is the major problem:

“Market
analysts expect 2010 to see a rise in corporate earnings and sales.
They are probably correct. But that will be met by further market
weakness. You see, that’s what the stock rise of the prior
10 months was all about. Stocks are already priced for the best
news that could possibly develop this year. When all the fund
managers are positioned for this “good news,” there
is no further money to go in. And that’s when the selling
gets serious.

The recent
news out of China is just what we have been warning about: tighter
lending and monetary policies! Economic growth in the last quarter
was a blistering 10.7% (officially), which obviously creates worries
about inflation. Tighter money dampens speculative fever. And
all the sins of the speculative bubble of 2009 will surface.

As a result,
the US dollar is now in demand and is soaring. That kills the
most important reasons for buying commodities. The dollar rally
will be a lot stronger than even the few dollar bulls imagine.
There will be a massive rush to close out short positions.”

In our earlier
post this morning, Chinese
Fed Shuts Down Lending, Capital Flees to Dollar
, we suggested
that the pullback in Chinese bank lending and stimulus, may force
capital speculating in Asian stocks back to safety in the US Dollar.
Dohmen seems to agree with this assessment.

J Derek Blain,
of Investopedia, also thinks the stock markets may be turning. His
view is that not only will the dollar rebound, but we will see equities
prices, commodities, and precious metals turn to the down-side in
the near term, as more capital flows into the US Dollar. Blain is
quite bearish on short-term precious metals prices, so if you haven’t
stocked up on gold and silver, perhaps you’ll have yet another
opportunity in the near future because Blain says The
Big One Could Finally Be Here
:

“But
here’s the interesting thing – finally, after 5 weeks
of watching gold top and begin its bear market decline, and the
major stock indexes make new highs, we might have just witnessed
the turning point in all “risk assets”.

And that
is really one of the keys, and one thing we have been saying for
several months now. Whenever the precious metals are treated as
risk assets for the purposes of capital gains, they are not in
a bull market but in a false rally. The psychology that drives
this sort of rally is hope-based, completely mood-driven, and
ultimately comes unwound like the thread in a poorly knit sweater.

What we
are looking for, here at Investophoria, is despair. Until we see
such a thing in the precious metals we cannot recommend buying
them. If we did without it, we would be advising you to get in
line and be “the sucker” who is willing to pay a higher
price.”

“The
next leg down in both gold and silver should be very fast and
will take many more by surprise who have run to them seeking to
make back the losses they sustained in stocks in the last bear-market
leg.”

If the global
stock markets start to pull back, gold and silver are going with
them. While gold is a safe haven asset in times of distress, it
is important to note that the broader picture for the time being
is that gold has not decoupled from the stock market in general
and remains closely tied to the inverse movement of the US Dollar,
as was evidenced by gold’s reaction to the Dubai
stock market collapse
in November 2009.

For traders
(not investors) looking to make short-term profits, precious metals
are just as dangerous as the stock market right now. If you are
a long-term precious metals investor, turn off the news and stop
watching daily price movement in precious metals, you should be
fine when gold does finally decouple from other assets and becomes
a safety asset, not because of inflationary fears, but because of
instability in the public (government) sector.

When this will
happen is anybody’s guess, but there should be a floor for
gold, because as the price collapses, it will become attractive
for large buyers, especially central banks in China, India and Russia.
So, there really is no need to run out and sell all your gold bullion
to Cash4Gold at 60% less than it is worth. The longer trend for
gold is still intact.

The dollar
seems to be the beneficiary of recent market mini-panics, as evidenced
by corrections in US markets last year, Dubai and now the shift
in capital out of Chinese assets.

How can this
be, you ask? Isn’t the dollar supposed to be on an unstoppable
collapse to a value of exactly zero? Well, yes, it is on a collapse
trajectory, but it is important to note that this will not happen
in one fell swoop. There are gyrations in the markets, and since
the US Dollar remains the world’s reserve currency, regardless
of talk from Russia and China, this is where the money will go when
everything else is collapsing. We strongly believe that this trend
will eventually end and the ultimate safety asset class will become
precious metals, but in a paper world, when the SHTF, capital flees
to the safest paper around, which ironically, is the US Dollar.

Considering
that the US Treasury needs to fund roughly $1.5 Trillion in new
debt via Treasury sales in 2010, a global stock market collapse
could be the US government’s saving grace, as Graham
Summers recently pointed out
:

“So
how do you create interest? [In US Treasuries]

Simple,
let the stock market collapse. The “flight to safety”
that would follow would push billions if not hundreds of billions
of dollars into Treasuries, soaking up the debt issuance and roll-over
with little difficulty.”

It sounds mad
scientist sinister, but quite realistic when you give it the consideration
it deserves. The Fed, Treasury, Congress and the administrations
have continually taken ridiculous, if not criminal, actions over
the last several years. What’s to stop them now? It’s
really a quite simple plan – pull back on stimulus in the US
and China, have the big investment banks rip their profits out of
equities and shift into US Treasuries, and leave panicked investors
who thought the economic recovery was sustainable scrambling for
the exits.

Theoretically,
this all sounds quite feasible, but how are we looking from a technical
perspective? Tyler
Durden of Zero Hedge weighs in
on the argument for the dollar:

“The
DXY is about to break the 78.449 high last achieved on December
22: at 78.320 we are very close. Greece is helping. When that
resistance is breached, look for Europe to start panicking and
also all those who still have the dollar short trade on to start
rushing through the exits.”

Though it may
still be too early to tell, the technical signals suggest that the
ingredients for a crash seem to be in place and conditions for a
serious down-turn are now more likely than anytime in the last ten
months.

January
23, 2010

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