Former "Third World" countries are resource-rich, virtually debt-free and have vast cash reserves. (Most troubling is that it’s mostly our cash!) And the so-called "advanced" nations — in Europe and the United States — are nearly bankrupt, drowning in debt; most available cash, borrowed or printed.
As happens every half-millennium or so, the economic sun is setting in the West and is rising in the East.
Moral lessons aside, the reality is that a revolution of this magnitude — the historic changing of the planet's leadership — can be expected to impact the value of every conceivable store of wealth. And it's only natural that these changes be as extreme as the events that drive them.
When those on the left of the economic paradigm, like Nobel laureate, New Times contributor and liberal fascist mouthpiece for the current regime, Krugman himself began to use the “D” word ( as in depression), I realized just how radical this “Road of Change” was becoming . So what where the “Road Signs” that even the most leftist of the economic elite couldn’t ignore?
Road Sign #1— Key Reversal Signal in Stocks
After retracing nearly 10 percent from its June low, the S&P 500 topped out on the day China announced its new currency policy. That marked a bearish outside day, a key technical reversal indicator.
Now the stock market ( S&P) has formed the historically dreaded “head and shoulders pattern” that suggests a move down to 860 ... 24 percent lower than the peak level seen just two weeks ago.
I know that I usually comment on the Dow Jones numbers as that is the most visible index, but it’s S&P that is calling the important shots at this time. The Dow is playing follow the leader.
Road Sign #2—Ten Year Yields Below 3 Percent
While many market followers have been forecasting higher interest rates, the ten-year Treasury market is responding with the exact opposite.
As risks of sovereign debt problems rise and the probability of a return to recessionary GDP’s for the world increases, global investors are continuing to pile into the U.S. Treasury market for safe haven. And that's driven 10-year yields back below 3 percent.
Road Sign #3—Commodities Breaking Down
There's a famous historical study on sovereign debt crises that suggests sovereign defaults are typically triggered by a collapse in commodity prices.
So what are commodities telling us?
A surprise to me, the second quarter has been the worst quarter in more than a year for commodities. The total return index of 24 raw materials plunged 10 percent since the end of March. So I suppose that study is right.
This week the price of crude oil broke through trendline support. Moreover, the technical pattern suggests crude could fall to the mid-50s, at minimum, as hard as that is to get my head around. The only causality I can render is that global consumption must be way off.
To sum it up, the key barometers of stocks, interest rates and commodities are all pointing to lower levels. And from a big-picture standpoint, the combination of these signals should concern anyone who is not prepared to weather another economic and financial market storm.
Roads Signs to Come.
#1. Breaking down of local & state pension funds.
One may even say collapse in some states. Many are already borrowing to keep up pension commitments.
#2. Cutting loose of government sector employees.
Estimates run to as high as 400,000 public sector jobs being cut by states, counties and municipalities in the coming year as tax revenues founder and stimulus goes wherever stimulus goes – which seems to usually be up in smoke. If this developes as a trend, it will send the employment issue to a crisis level.
#3. Municipal Debt Default.
And why not? If the states go, what is there to prevent the debt crisis of major cities & municipalities from spilling over into the general debt crisis? How much is there and who will buy it?
#4. Mortgage collapse.
The return of mortgage defaults as front page news. And again, who will buy it?
These are all signs of further deflation of value. We are in the grips of Deflation in every market except debt.
If you bought real estate in May, while you got a tax credit, you probably paid too much.
Gold is in a “reset”, awaiting inflation to leapt back to new highs. Hold it.
Buy silver. It has the most headroom at this time.
Shed debt. I know I will ASAP.
Omar P Bounds III
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