Tuesday, October 07, 2008

90% down day in stocks: 2 days in a row

Almost behond belief, today was a second day in a row in which a 90% down-day was produced. The stock market appears to be in full panic mode.

The market, bigger than Putin -- Bloomberg -- Russia halted stock trading for the second day after a record 19% rout, with its exchanges at their lowest level in three years. European stocks and US index futures advanced while Asian shares pared declines today after Australia's bigger-than-expected 1% interest-rate reduction ignited speculation other central banks will also cut borrowing costs to cushion their economies. Russell Comment -- I expect a half percent cut in Fed Funds from the Fed and soon.

Yesterday was another 90% down day, which produced the mind-blowing number of 1973 new lows on the NYSE. In other words, an incredible 59% of all the stocks traded on the NYSE yesterday broke to new lows. This was by far the worst performance I've ever seen on the NYSE. Because 90% down-days are usually followed by 2 to 7 days of "bounce" (rallies), we might expect such action for the rest of the week. But a rally here would not mean that much, it would be just be typical action following a 90% downside day.

Fear and panic is starting to spread across Wall Street, Main Street and the world. Most investors have never seen market action like what we're seeing now. This is real bear market action such as we've not seen since 1973-74. I expect this downtrend to end with an all-out panic-type crash. That would clear the air and serve to reduce the huge inventory of stock for sale. When the store of "stock for sale" is emptied out, we will be close to the time when the institutional bargain hunters are ready to re-enter the market. That action will be characterized by a 90% up-day.

Unfortunately, all the current action is taking place below the halfway level of the 2002 to 2007 advance. Thus, the 50% Principle has been activated, and it's conceivable that the Dow will decline close to or at the level of the 2002 low (which was 7286). What I'm saying is that it's been my experience these big bear market declines tend to go further on the downside than most people are prepared for, just as the great bull market of 2002-2007 climbed further than most people thought possible. The 50% Principle is in no way part of classic Dow Theory, but I follow it because it has proved useful -- George Schaefer used it with great success during the 1950s.

I've suggested over and over that subscribers move to cash (T-bills and T-notes) and gold bullion. As for gold, I prefer one-ounce gold coins held in your possession in your bank vault. I prefer the actual possession of gold to a piece of paper stating that you own a certain number of ounces of gold. I do not expect the US government (as per 1933) to call in all privately-held gold, but it would not surprise me to see the US government halt all trading in gold.

Why would the government do that? Gold is the enemy of fiat paper, and the Fed is going to print one hell of a lot of Federal Reserve Notes. The coming deficits will be staggering, and ultimately our overseas creditors may insist on partaking of our gold hoard (as did DeGaulle) rather than accepting an endless amount of fiat paper, which can be created "out of thin air" by the Federal Reserve. I see a coming battle of fiat paper vs. gold in the future, and gold (real Constitutional money) will be the winner.

I can tell you that it's going to take a series of trillion-dollar budget deficits plus enormous government spending programs as the Fed attempts to turn the contracting US economy around. Mr. Bernanke fears potential deflation like the plague -- the Fed can halt inflation in its tracks (remember Volcker?), but once deflation takes over, deflation is extremely difficult to reverse. Russell suggestion -- We must start a huge rebuilding program (as per the Depression) to repair the crumbling infrastructure of the US -- highways, bridges, buildings, city streets, with a strict overseeing board to rout out corruption.

Currently, the US government attacks its citizens via two phenomena -- taxes and inflation. We must get rid of the Fed, the engine of inflation.

You doubt that deflation has crept into the US economy? Then please study the chart below -- this is the CRB Commodity Index, and it's currently plunging.


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