MV Classic: Precursors of 2008 - ACHTUNG! POTENTIAL MARKET MELTDOWN!
In Switzerland, as in any mountainous region, summer thunderstorms tend to erupt at higher altitudes around the mountain peaks. Thus, it is not uncommon to have perfectly calm and sunny weather down below, while large masses of rain will already be falling higher up. Locals and experienced outdoor folks know the implications. Swimming in alpine rivers under such circumstances is not a good idea. Every summer, we hear of unfortunate tourists drowning when they find a calm and picturesque river suddenly turning into a tidal wave and deadly trap.
The locals obviously know of this danger and will warn unsuspecting visitors – “ACHTUNG!”. However, there are a lot of mountain creeks and rivers. And there are a lot of tourists unaware of these perils. Yes, it might be a pleasant experience to drink from the cold glacier water, or to simply jump in after a long hike. However, one should always beware of the bigger picture and general weather conditions when going into mountain terrain.
There is an old saying reminds us of that: “You needn’t swim in the river to drink its water!” This very basic and common-sense piece of wisdom actually applies to all aspects of life. And it certainly applies to current financial markets.
Note: This article was originally published in the Mountain Vision Newsletter in early September of 2007. We are posting this article as part of our blog’s “Mountain Vision Classics” series. After all, history might not repeat itself, but it does rhyme. While a few years old, we feel that this article is worth revisiting, as it accurately reflects where we stand today – if anything, once again getting closer to a market meltdown!
In the short-term, either in September or October, we expect a retest of the August lows in equity markets. Beyond that, our expectations are dependent on a multitude of factors. It is possible that stock markets at that point could go back into another “bull-market” type rally. However, in view of the overall issues as discussed in our Global Economic Highlights [Editor’s Note: not included here, possibly to be posted in a few weeks], the downside risks far outweigh the upside potential in “mainstream equity allocations”. We are increasing our liquidity and decreasing stock market exposure, even in our favored themes of precious metals mining, energy, and commodities.
Remember, managing risk and protecting your assets needn’t result in low returns, not in the short term, and certainly not in the long term. To the contrary, those who protect their assets today will be the ones to benefit the most from a potential meltdown tomorrow.
This is not the time for procrastination, nor is it the time to run with the sheep. We recommend you benefit from our version of INTREGRATED WEALTH PRESERVATION. It considers not only the risks and opportunities of financial markets but also integrates equally (if not more) important structural considerations to achieve solid legal protection from litigation, confiscation, and other key risks that can reduce or destroy your wealth.
Beyond the “little correction” – what to expect…
Don’t be fooled! What is currently and widely being considered as a “brief storm”, a “healthy and long-overdue correction”, a “short-term technical pause in the bull market”, is but the ugly messenger of more to come. August 2007 [Editor’s note: compare this to spring of 2018…] should have served as a welcome warning to the prudent and savvy investor …
In late September of 2006, statistics were published that clearly exposed a serious problem in the US housing sector. The Housing Market Index had fallen from above 70 to 30 within only a few months. Toll Brothers, the US homebuilder, considered the slump in residential construction “the worst in the past 40 years”.
In our Newsletter in October 2006, we alerted our readers to the possibility that decades of accelerating credit expansion and debt had finally reached the boiling point. We emphasized the growing threat of a severe credit crunch. In our view, a “soft landing” was the best possible, but least likely, scenario to hope for. Here’s an excerpt from that 2006 Newsletter:
“ALL credit transactions are INCOMPLETE exchanges. They are never completed until full due payment is made. In this respect, we may be facing a massive crisis: The US owes the world more than its own internal economy can even get close to producing. Furthermore, tens of millions of Americans owe their banks more than they can ever hope to earn and repay.
"Thus, a double bankruptcy is in the making: The US economy cannot repay the world what it owes. Americans cannot repay what they themselves owe to their lenders. Credit is to be repaid in the future. When the future arrives, all credit is DEBT. The US Treasury is bankrupt. If it tried to cover its present spending and future liabilities with matching taxes, it would drive American businesses and households into bankruptcy under the load of said taxes. The government can’t help Americans and Americans can’t help the government.”
This was written a year ago! Obviously, things have evolved since then. In particular, August ‘07 surprised everyone with the “Subprime Crisis“. In the past, we encountered the Tequila Crisis, the Russia Crisis or the China Crisis. Financial market crises tend to be named according to their “birthplaces”. Therefore, this latest financial market crisis should be termed the “US Crisis”. That is precisely where the epicenter lies. And although the crisis is currently more conveniently termed the “Subprime Crisis”, one should easily recognize that Mr. Subprime is but a scapegoat for a much larger and very American culprit…
We quite simply call the true culprit “EASY MONEY”. This fellow is a smooth operator - manicured fingers, perfect nose job and all the rest. Many are fooled by his looks, not recognizing the cesspool beyond the deceitful smile. In our books, ‘Subprime’ is but a pimple on Easy Money’s rear end. It is a symptom of a larger problem, one that unfortunately has become a very particular and entrenched element of the American lifestyle. And one which has spilled over into international financial markets and global economies…
So, was that it? Did the August “correction” re-boot and purify global financial markets? Has the legacy of Easy Money been purged by a few weeks of market revolt? Has Mr. Bernanke avoided the consequences one would expect from decades of loose monetary policies with the wave of his magic discount wand?
Possibly, just possibly, if that trust can be kept alive for just a bit longer, and then a few days more, you might experience the much hoped for “soft landing”.
We don’t think so. We ask you this: Has anything really changed? Was the subprime imbalance the fundamental problem, or was it a mere symptom of a more serious, larger-scale issue? Dear reader, we expect more to come. The subprime imbalance is not corrected yet. Nor has the system been cleansed of other Easy Money “pimples”…