Tuesday 3 January 2012

Steve Keen: Dow to drop 35%, housing 40%?

Australian economist Steve Keen has previously argued that it is far more beneficial to bail out consumers than the banks, and now has made it part of a manifesto for avoiding a worse-than-the-1930s economic depression.

As part of his analysis, he looks at the Dow:

... and the US housing market:

If his exponential trend lines are correct, stocks will have to fall by a further 35% and houses 40%, ignoring overshoot.

If that seems overly pessimistic, consider James Howard Kunstler, who revisits his "Dow 4,000" mantra and modifies it to 1,000 by 2014. Unbelievable? Only if you think tomorrow will be no worse than yesterday, and ignore how freakish the whole period from the mid-1980s has been. I had a go at reading the patterns back in February 2011 and the next Dow low looked around 4,500 - adjusted for CPI, in view of our inflation-happy leaders.

What would I know about it, you may say. Well, what does anybody know, and more pertinently, what do they know?

I have to say that I may soon need to modify my investment disclosure, as it may be prudent to begin buying physical gold in regular small quantities, against the possibility of a serious market breakdown and savaging of the value of cash. The gold price is still rather rich for my taste, but what's the alternative?

Do you really think our politicians, bankers and economists have a credible plan to sort out the problems? I like Keen's, but I'll give you long odds against it ever happening. Still, better noble failure than dishonourable compromise, I think the Japanese would agree: 判官贔屓.

INVESTMENT DISCLOSURE: None. Still in cash (and index-linked National Savings Certificates), and missing all those day-trading opportunities.

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content.


Anonymous said...

Sorry back with a "I don't get it comment"

Are these views deflationary and isn't that good for an all cash position?

Sackerson said...

That has been my view for a long time. But what I fear is that the pain of deflation is so extreme that the powers that be will prefer inflation. Already trillions have been poured into the banks and while the theory is that the liquidity will be withdrawn again once the economy recovers, in practice that may not happen or not in a timely way.

Two years ago, the Bank of England was already explaining that QE was about targeting a desired figure for inflation. As deflation continues, the temptation will be to continue boosting the GDP with cash created out of thin air - somehow.

You'll se from my last post that a veteran personal investor, David Collum, has more than half his wealth in precious metals, with a further 14% or so in energy; as well as, yes, cash.

Anonymous said...

Yes I understand now.

Only thing I have to invest is my pension, currently I'm 15 percent commodities (no gold only option), 30 percent cash and rest spread in equities.

It's unclear to me what the dynamics are or will be between the massive deflationary forces of the inevitable private sector deleveraging and what government and CBs will do to prevent that. We really do seem to be at the mercy of politics rather than economics re investing.

Paddington said...

Part of that spike is the disproportionate flow of money to the top 1%. Since they cannot possibly spend that much, it winds up in the stock market, further driving up the valuation.

Sackerson said...

Good point.

Sebastian Weetabix said...

I suspect you are excessively gloomy about the level of the Dow. Think back to Weimar Germany, when the money printers went mad. Throughout the time of the hyper-inflation, share prices rose... all that new money had to go somewhere. When trillions of dollars have been created out of nothing share prices simply won't collapse to the levels you suspect. Also, look at corporate balance sheets right now - the Fortune 500 companies are all sitting on a mountain of cash they don't know what to do with. Some of it is going to end up in shareholder's hands.

And why pile into bonds or metals right now? They are oversold and experiencing their own bubble. If you bought gold 3 or 4 (or more) years ago, well done, but buying now just puts you at the wrong end of a momentum investing strategy. I think I'll stick with dividend yielding ATF shares, with a wild crazy punt on a few banks. Since the banksters have rigged the system to the point that they cannot be allowed to go bust, are being given unlimited cash at <1% by central banks to go buy government bonds at >3% or more, it's got to be worth the risk of holding a few percent of your portfolio in some of the more secure banks such as Standard Chartered or HSBC. (I declare my interest at this point, since I own some shares in the latter.)

Sebastian Weetabix said...

oversold? wtf am I typing? I meant the opposite, of course.

A bit like the Rev Spooner: "in my sermon just now, whenever I said Aristotle, I meant St Paul"

Sackerson said...

Hi, SW. I take your points, though actually the initial reaction of the German stockmarket was to crash, maybe because the middle class had to cash in to pay for their carrots and peas.

Bonds yes, not tempted. Gold, agreed the price is rich, but other countries - and central banks - now seem to be keen supporters.

Banks: it's just possible that some will NOT be too big (or important) to fail.

The dark pools of money are a highly complicating factor.

As is the now extreme disparity in wealth, so that the rich may not need to sell. Though if that is the case, why TWO steep corrections (-50%) in the last decade?

Fact is, I and many of my clients would be content with a financial system where you could simply put money away and be confident it would retain its purchasing power.

What price civil disorder?

Sebastian Weetabix said...

Hi Sackerson - I agree with you that some of the banks will fail, but I cannot see a total systemic collapse being allowed to happen when the central banks have the tools to monetise the debt. Even the Germans will get in line when their banking system is on the skids.

I also think we are way past the point of money maintaining it's purchasing power, which is why I prefer equities to cash. But if it does get to the point of systemic collapse and civil disorder, I won't care about my savings and investments any more - I'll just be worried about getting food to eat and preventing the mob getting through my door!

Paddington said...

The big crash will come when and if the people with money to invest finally figure out that our cash and stocks have no real value, given the way that the system is manipulated.

Mark Wadsworth said...

Top man, that Steve Keen, big price drops it is, then.