What Will Happen In The Stock Market?
The US and UK stock markets seem to be hanging on by a thread at the moment, and that’s an understatement. Those who rode the artificial momentum of the market all the way up to DOW 12,600 are feeling as though what’s taking place right now is a disaster. However, these are often the same people who rode the wave up all the way up from DOW 6,600. What these people and the majority of the general public fail to understand is that not much has changed since the summer of 2008 when people were still buying shares with little concern.
The good news is that we don’t have the shock factor in the banking sector anymore. The bad news is that the trouble in the banking sector is still very disturbing. Many of the banks are hiding bad debt and a few of them are insolvent. The UK banking sector – or financial sector if we’re talking about stocks – also has over $66 trillion in debt. This is more than the government. Since the financial sector tends to be the biggest factor when determining the direction of the stock market, this is a bad sign. That said, it’s only one factor.
Another obvious factor is the Federal Reserve having run out of bullets. The Operation Twist announcement was proof of that. QE1 and QE2 had a lot of power, but all they did was feed drugs to a drug addict, that drug addict being the economy. In order for our economy to heal, it must go through detoxification, which in the case of the economy pertains to deflation. Most people think deflation is bad. In the short term, they’re correct. However, it’s necessary for long-term economic health. When deflation follows its brutal course, which is usually 5-7 years, it allows everything to become affordable again once it’s complete. This means businesses are capable of innovating again, people can afford homes and food and gas are at realistic prices.
Based on current circumstances, it’s highly likely that we will see deflation in the near future. The DOW should fall to around 9,000 by the end of 2011 and 5,000 by the end of 2012 and who knows with the UK FTSE. Gold and silver will also crash because precious metals cannot handle a deflationary environment. Oil will drop significantly to around $20 to $30 per barrel. The good news here is much cheaper gas prices. Since debt will need to be paid off at record levels, there will be fewer dollars in the system. This, in turn, will increase the value of the dollar. Expect the euro to crash. It will be non-existent within three years. Another version of the euro is possible.
Needless to say, if you currently own stocks, it would be wise to sell them. When you’re in cash during a deflationary phase, you’re actually making money because everything becomes cheaper.