You’re at a unique crossroads. We’ve had almost four years of relative calm in the financial markets. Corporate earnings have rebounded from their lows in 2003 and the depths of the 2000 – 2001 stock market collapse. There have been no terror attacks on U.S. soil. Interest rates have remained artificially low.
But now, even as foreign economies continue to gather strength, the U.S. economy’s second breath — as I call it — is ending.
Coming next: A series of shocks in U.S. financial markets that will catch most investors with their pants down.
I’ve been warning you about the U.S. economy’s shallow second breath for some time now. And I’ve been telling you over and over again that the strength in the world economy comes from Asia, not the U.S.
And though the U.S. economy has held up longer than expected, I have no doubts whatsoever that it is rolling over now. I’ll give you some steps to take in a moment. First, let’s start with what I see for the Dow …
The Dow’s Double Top
Spells Trouble for Stocks
Take a look at the Dow Jones Industrials index in this chart.
While it certainly looks strong, notice the large “double top” that’s forming. Technically, this is a very bearish sign, especially when I couple it with many of the other indicators I study. All of them are suggesting a large downside move is imminent.
How far down? If certain signals are hit — and I will alert you when they are — then I would expect the Dow to fall to at least 11,500, a 2,000-point drop.
What could set this off? I see three main triggers. Alone, any one of them can cause havoc. Combined, they could have disastrous consequences …
Trigger #1: Further declines in U.S. real estate and the subprime mortgage markets.
As Martin and Mike have been warning you, this is not something that should be underestimated in any way, shape, or form.
The entire financial system is at risk. We’ve already seen one hedge fund blow up. And while the damage seems to be contained, no one really knows how leveraged the U.S. real estate markets are, or how much selling can be caused if investors — and homeowners — start to panic.
Banks could default. Companies that seem totally unrelated to real estate could then get hurt as financial institutions tighten up credit. Corporate earnings in virtually every industry could get hit hard.
I hope and pray the real estate markets are not as bad as some fear. But if I’m wrong, this is one trigger that could cause serious damage to the economy … and it could take years to recover. It could easily send the Dow down a few thousand points, consistent with what the chart above suggests.
Trigger #2: A crash in the dollar.
Even now, the greenback can barely lift its head off the mat. It sits near record lows against many major currencies, and even at multi-year lows against minor currencies like the Thai baht.
A dollar crisis could force overseas investors to yank their money out of the U.S. in droves, setting off a row of financial crises:
- Banking, already starting to hurt from falling property values and rising mortgage delinquencies and defaults, would get killed.
- Currency markets could enter a period of extreme volatility, setting off more disasters in the highly leveraged hedge fund industry.
- Big U.S. companies that are already in deep financial doo-doo (think Ford, GM) could go bust.
Despite comments to the contrary, China seems to be pulling back on its purchases of U.S. Treasuries. In April, Beijing sold more U.S. Treasury bonds than at any time in the last seven years, dumping a net $5.8 billion in bonds.
A sign of things to come? I think so. Keep in mind, if other central banks and treasuries follow suit, the dollar could spiral lower and lower. A vicious cycle of lower bond prices and higher rates would ensue. And virtually every company under the sun here in the U.S. (not to mention the real estate markets) could get squeezed.
Ironically, it would also set off …
Trigger #3: Another spike in inflation.
So far, the inflation we’ve seen — while certainly higher than what Washington is telling you — has not been all that bad. It’s allowed companies to raise prices … fatten up their profit margins … and show great earnings over the past few years.
But like everything else in life, too much of a good thing ends up being bad. If the U.S. dollar plummets, inflation could easily spike much higher, becoming a beast of burden for companies and consumers.
Price resistance could become commonplace … consumer buying could hit the skids … and corporate earnings would plummet. Stocks could get killed, especially companies such as retailers.
In short, I do think the U.S. economy is heading for what I’ve been calling the “Big Squeeze”, a period of massive stagflation — rising inflation coupled with flat, or even negative, economic growth.
The big question: “How would natural resources hold up?”
And here’s my answer: They too could get hit, though I would not expect to see anything more than a temporary correction unfold.
There’s just too much demand for natural resources emanating from the rest of the world, especially India and China.
By my estimates, there’s enough demand to keep natural resource prices, and the stocks of companies that specialize in them, mostly stable and trending higher — even as the U.S. economy goes into a recession and other stocks fall.
That’s not to say the risks of owning natural resource stocks during this upcoming period are negligible. In fact, you should stay on high alert to grab profits on any natural resource positions you have.
Unfortunately, I cannot give you specific sell instructions. Those are reserved for subscribers to my Real Wealth Report. But I will tell you this …
You Can Prepare for the Upcoming
Turmoil by Taking the Following Steps …
First, minimize your exposure to the Dow. In my opinion, this is the perfect time to get out. I think we’re very near an important peak and I believe the risk of staying in far outweighs the potential rewards. Reduce your exposure as much as possible.
Second, carefully monitor the natural resource stocks you own. If at any time you see a share price fall by 10%, get out. Pull in your horns and wait for a better chance to get back in.
Third, if you have not done so already (per my earlier warnings), get out of long-term bonds. U.S. Treasury bonds have fallen by as much as 10 full points, or $10,000 per $100,000 of face value, in just the last seven months. They are bound to fall further. And a tanking dollar virtually guarantees that the bond markets are going to get hit hard.
Fourth, don’t buy any real estate right now. Later this year, when the dust from the dollar’s plunge starts to settle, you may see a major bottom in real estate prices. And foreign investors — especially wealthy Asians — could come rushing back into the U.S. to buy properties on the cheap with their strengthened currency. But until then, residential real estate prices could easily fall further.
Fifth, most of your keep-safe money should be in liquid, short-term investments such as money markets and Treasury-only money funds.
Sixth, no matter what, hold your core gold positions! Gold can thrive in an environment like this, even when the U.S. economy is slowing.
In my view, the best way to hold gold is through the streetTRACKS Gold Fund (GLD). Each share represents 1/10 of an ounce of gold. And the fund eliminates storage and shipping worries because the gold is held in trust for you. If you don’t already own some gold, now looks like a great time to buy.
Stay safe and cautious,
Larry
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