Interesting predictions from "True Contrarian' Steve Kaplan.
The Fed soon pauses but this triggers a surge in long rates. That in turn collapses the housing bubble and the economy enters a serious recssion in 2006. Oil and gasoline prices plunge as does the stock market.
Ther dollar gets smashed and gold surges.
THE REAL AFTERMATH OF HURRICANE KATRINA (September 5, 2005): The media has done an excellent job of portraying the enormous physical and psychological devastation of Hurricane Katrina. However, it has done a poor job in explaining both the short-term and long-term financial consequences of the hurricane, obsessing solely with the effect of high gasoline prices, which are virtually certain to decline given the all-time record high ratio of the price of unleaded gasoline to the price of crude oil. Already, the U.S. dollar has seen a sharp fall in value against almost all major world currencies since the hurricane, although the media has almost entirely ignored the greenback's collapse. Given the necessary increased Federal borrowing in order to deal with the aftermath of Hurricane Katrina, combined with increasing signs of a significant economic slowdown in the U.S., it is likely that the recent steady pattern of interest-rate increases by the Fed will soon come to an end. The Chicago Purchasing Managers' Index showed the greatest decline in new orders in history. The Fed will be unable to fight inflation, and may even feel compelled to lower interest rates in the near future, because of the risk of otherwise exacerbating the upcoming recession. This will cause the real interest rate to become increasingly less positive, and possibly even negative, over the next year. The result of increased Federal borrowing, combined with the inablility of the Fed to raise short-term interest rates, means that long-term interest rates, including mortgage rates, will begin to choppily rise, and likely reach multi-year highs within the next year. The U.S. housing market, already dealing with falling condominium and new home prices, as well as total inventory at the highest level in more than seventeen years, will have to handle a potentially significant rise in mortgage rates, as well as a slowing economy, and an all-time record ratio of housing prices to rental values. Consumer spending, which constitutes two-thirds of the U.S. economy, has been almost entirely driven by mortgage-related borrowing in recent years. Once housing prices begin to decline, banks, already saddled with the highest ratio of mortgage debt to total credit in history (as detailed in the previous week's Barron's), will be much less eager to lend to those of limited means, who recently have enjoyed essentially unlimited mortgage borrowing ability. As many speculators in the housing market experience their first ever lifetime shock of seeing real estate prices decline, speculative buying will suddenly stop almost completely. Thus, real estate speculators will stop buying just as lenders are tightening their lending standards, thus creating far fewer buyers for each potential seller, and causing prices to accelerate their collapse. Over the longer run, the inevitable surge in foreclosures from borrowers who cannot meet their mortgage payments, or who choose not to do so because the amount owed on the mortgage substantially exceeds the asset value of the property, will cause bank liquidation sales into an already weak market. Whoever the successor is as Fed chairman as of January 31, 2006, when Alan Greenspan's term is complete and cannot be extended, will likely be tempted to try to solve this problem by massively flooding the system with liquidity, just as Japan did in the early 1990s when their real-estate bubble burst. Those who observed what happened in Japan from 1990-2002 will see almost exactly the same scenario played out in the U.S.: massive bank failures from mortgage defaults, persistently and artificially low short-term interest rates (meaning a negative real rate of interest, thus causing a huge surge in precious metals prices), a 60% average nationwide decline in real estate prices (more than 70% in coastal U.S. cities), a 70% drop in equities valuations, and most significantly, a prolonged recession that lasts for over a decade. The best way for investors to prepare for the next year is to gradually sell all real estate, stocks, and bonds, purchase precious metals and their shares, and to diversify into non-U.S. currencies as much as possible.
PRECIOUS METALS BEGIN A MASSIVE RALLY; HI HO SILVER! (September 5, 2005): On Tuesday, August 30, 2005, HUI touched an important low of 198.78, marking yet another higher low in a long sequence of higher lows dating back to May 16. On the same day, silver briefly touched a nadir of $6.63, its lowest level since January 10, before rebounding sharply to close slightly above $7 an ounce on Friday, just three days later. Gold's traders' commitments improved substantially in the past week, but are still worse than historic norms, while silver's traders' commitments showed the smallest (most bullish) commercial net short position in two years. When combined with the fact that silver is usually one of the best investments whenever there is an increased likelihood of a worldwide economic slowdown, as well as the existence of an above-average ratio of gold to silver at this time, silver is likely to significantly outperform gold in percentage terms over the next year or two.
THE NASDAQ IS MAKING A CLEAR PATTERN OF LOWER HIGHS (September 5, 2005): Since it peaked on August 2, the Nasdaq has made a pattern of progressively lower highs, while semiconductor shares have been leading the way to the downside. Astoundingly, the stock market actually moved higher in response to the hurricane, because the likelihood of the Fed being less aggressive in its interest-rate hikes has temporarily overshadowed the very negative long-term implications of what may well be the worst recession in the U.S. since the early 1980s. Aggressive investors should add to their short positions in technology shares and in corporations which have benefited greatly from the housing boom, such as homebuilders and mortgage companies. As detailed beautifully in this week's Barron's, pages 36-37 (and, amazingly, not even promoted on the cover page), Lee Mikles and Mark Miller explain in precise detail why the U.S. consumer is broke, and why that fact is about to have very negative consequences for U.S. housing prices and for U.S. equities.
WATCH THE PRICE OF UNLEADED GASOLINE COLLAPSE (September 5, 2005): Here's a bold prediction: the price of retail unleaded gasoline in the U.S, currently averaging $3.45 per gallon nationwide, will plunge by more than $1.00 per gallon over the next few months. This would not even require any drop in the price of crude oil, although that is likely to happen also, given normal seasonality patterns and a recent surge in supply combined with gradually falling demand. The ratio between the price of unleaded gasoline and the price of crude oil is at a record high, by far. As this spread inevitably returns to normal levels, even a modest drop in the price of crude to $63 per barrel would result in an average retail price of $2.42. If crude reaches $55 per barrel, that would put unleaded gasoline at $2.12. My guess is that we will actually see prices below $2 per gallon in some states before the drop is over. Recessions and falling gasoline prices usually go hand in hand.
DO YOU KNOW WHAT IT MEANS TO MISS NEW ORLEANS? (September 5, 2005): Those who have any emotional attachment to New Orleans should start making plans now to visit the city as soon as possible, once the rebuilding has sufficiently progressed so that tourists are once again welcome. The current surge of public aid is likely to subside once the process of draining water and establishing order has been completed, while the media will almost completely stop covering the story by November, if not sooner. The historic French Quarter and Garden District, both slightly above sea level, survived relatively intact, and visitors will be sorely needed by the city. The cool late autumn and winter months, as well as early spring, are the best times to visit New Orleans, and also southern Mississippi and Alabama, so be sure to save your vacation time and plan to spend at least several days, if not longer. Conventioners' and other visitors' money has supported New Orleans for decades, and the Crescent City has a unique legacy of culture, music, art, and architecture well worth preserving. Revitalizing the mostly small businesses in New Orleans will be the real key to its long-term survival.
AI
