Do you remember how everyone said the real estate market would keep going up, up, up just before the last real estate crash? Then it crashed. Well, the stock market is selling for about 33 times earnings right now. Does it sound overpriced to you? Does that worry you?
Just a reminder, the DOW Jones Industrial average dropped 264 points yesterday. I think the top has been made. Perhaps it's time to get out of stocks and get into money market funds. Then wait for the crash; then buy back in at the low.
Why do I think a crash is coming?
1) Janet Yellen of the Fed announced last week that the Fed is "tapering" (cutting) the Fed's purchases of Mortgage Backed Securities by $5 billion per month or $60 billion per year. This is in addition to all the other tapering that's been going on. So, if the Fed is not buying as many Mortgage Backed Securities will someone else do so at today's low interest rates? I don't believe so. I expect long-term rates to go up. The Fed controls short-term rates to a degree, but they don't control long-term rates. Once long-term mortgage rates begin to rise there will be a very short pop up in the residential real estate market and then it will begin cool. How much it cools depends on how high the rates go.
2) Janet Yellen of the Fed also announced last week that the Fed is tapering (cutting) the Fed's purchases of Govenment Securities by $5 billion per month. Will the government have to now raise interest rates that it offers on its debt instruments in order to attract other buyers? Will the government continue to issue debt instruments? You bet it will. It hasn't cut spending and it continues to run gargantuan deficits. Furthermore, let's not forget the U.S. government's credit rating was downgraded a couple of years ago, meaning it's securities are more risky. To attract debt buyers to its more risky debt instruments government will have to eventually raise the interest rates being offered. This competition will put pressure on the private bond market to raise interest rates too. It will. I know, I know, we're still the flower in the weed patch and/or the best house in the neighborhood….but the U.S. is trying hard to become a third world country.
Taken together, these signals from the Fed suggest that long-term interest rate hikes are not far off. When that happens, the stock market will drop (as it's already begun to do in anticipation of higher long-term rates), the real estate market will cool, and lay offs will begin in the private sector (although the government may just keep hiring people by creating fake jobs to bouy up their jobs numbers and to prove that socialism works). One of these big recessions will turn into a depression one of these days.
Meanwhile, your dollar, relative to most commodities, continues to lose purchasing power, just as it has ever since the Federal Reserve started issuing Federal Reserve Notes (counterfeit dollars) in lieu of silver and gold certificates (real dollars) over 100 years ago. This is why the candy bar I used to buy for $.05 is nor $1.05, the gas I used to buy for $.20/gallon is now $3.50/gallon, and an 8 oz bottle of water now costs as much as $2.00 in some places. The dollar's purchasing power is less, and less, and less each year. Houses, cars, cotton, steel, lumber, etc., etc., etc. cost much more than they did when I was young despite the fact that we have become more efficient at producing these things. This is the ultimate effect of a century long policy of monetary inflation enabled by the Federal Reserve. The dollar is still an acceptable trade item, but you don't want to use it as a store of value. It is a guaranteed vehicle of destruction of wealth. Remember the card game "Old Maid". That's what today's paper currencies are, the card that nobody should be holding at the end of the game.
The government is now in so much trouble from it's high taxation and deficit spending policies that it's trying to staunch the flow of corporations that are working feverishly to re-domicile their companies headquarters to another, lower tax, country. Who can blame them? They work hard for their 4-6% net profit before tax, and then the government steals a bunch of that before anything goes to the shareholders. Then the state and federal income taxes suck up a bunch of the dividends that are paid out as well. As taxes continue to escalate to pay for the cornucopia of unearned benefits given out in social programs, those paying the bills will try to escape from being further fleeced.
Let's not forget that 70 million baby boomers are reaching retirement age. Many of them are poorly prepared for retirement. The Social Security system is printing a warning about the future of it's ability to fund the "scheduled benefits" that it has promised. It prints the following on its statements given to those who have contributed to the system: " Without changes, in 2033 the Social Security Trust Fund will be able to pay only about 77 cents for each dollar of scheduled benefits.*" Retiring boomers who are facing these massive challenges in the midst of a terrible jobs market are cutting their spending and consumption. Many of them are in the process of downsizing their lifestyles. Many of them will be selling assets over the next couple of decades in order to fund their retirements. That will put continuing downward pressure on the real estate market, the bond market, the stock market, and even on the precious metals market.
If ye are prepared ye shall not fear. D&C 38:30. Now may be a great time to minimize your debt, to take profits off the table, to store some essentials, and to build a cash reserve somewhere other than in the bank. The precious metals market has fallen as the dollar strengthens because of Janet Yellen's remarks last week about ongoing tapering. Remember to buy into weakness and sell into strength. Just a thought, perhaps this is a good time to sell dollars and buy precious metals.
P.S. (I think there was an article in the WSJ yesterday saying that the U.S. is becoming a renters' market rather than a home owners' market. Once that is fully established the socialist oligarchs and their stoodges in Hollywood and their stoodges in the mass media may start to complain about private ownership of apartments and other income properties. Then they will suggest that those profits should go to the government to support the poor. It's not hard to imagine that it won't be long after that that they will suggest that all corporate profits should go to the government as well. That's one of the very last of Karl Marx's ten planks of Communism that hasn't yet been swallowed by Americans. First the socialists will vilify the "greedy landlords" and, of course, the "greedy wall street people". Then, I can imagine a liberal majority voting to take property from the "greedy landlords" and the "greedy stock market investors". At that point, economic hope is dead for all, but for the cronies of government officials in high places and for government officials in high places. At some point, landlords may wish to diversify out of income producing real estate, and maybe out of the United States, though it kills me to say that. Just what does one diversify into once the government begins to either nationalize the means of production or to simply take control and most of the profit as it does in fascist nations? Already corporate earnings are double taxed. How much is enough for the liberals? 100% taxation? How does one hide net wealth for one's own family from the greed, and avarice of institutionalized jealousy, covetousness, envy, and the theft that it leads to?)
P.S.S. (See: http://moneymorning.com/2010/01/27/retirement-plans/ and see: http://pro.moneymappress.com/MMRBSLG39/WMMRQ930/?pub=mmr&cookie=no_mm&h=true)
Disclaimer: I am not a financial advisor. Do not make any economic or financial decisions based solely on my opinions as expressed in this article. I do not guarantee positive results by following my advice. In fact, I don't guarantee anything. Markets may be manipulated, and market timing is important to secure positive results. Check with your own financial advisors before making any investment decisions.