Market Overview

A 20% Correction in U.S. Stock?

A 20% Correction in U.S. Stock?

Our old friend Marc Faber was on CNBC earlier this week. He said we should "prepare for a massive market meltdown."

I don't think markets are going down because of Greece, I don't think markets are going down because of the "fiscal cliff" - because there won't be a "fiscal cliff." The market is going down because corporate profits will begin to disappoint, the global economy will hardly grow next year or even contract, and that is the reason why stocks, from the highs of September of 1,470 on the S&P, will drop at least 20%, in my view.

Of course, Marc has been preparing for a major market meltdown for years. And so have we. So, when we repeat our predictions, we begin to sound foolish.

And the longer the market goes without melting down the more foolish we look... until the market actually does melt down. We gloom-and-doomers are always wrong -- and then, we're right.

The Dow gave up another 185 points yesterday...

Blowing Bubbles

In the 1990s, investors pooh-poohed our warnings about falling stock prices. Then the Nasdaq and the dot-coms led the stock market. Some of these stocks had gone up to crazy levels.

This can't go on," we said, stating the obvious. Still, many investors didn't want to hear it. They were counting on the stock market to make them rich. All they needed was "another Microsoft." Or "another Amazon."

The dot-com boom turned into a bubble. Then it blew up. Investors were downcast. Their hopes for easy money were dashed.

But the feds came to the rescue. After a slump in 2001, an aggressive combination of fiscal and monetary stimulus soon had the party going again.

This time, hopes for easy money were focused on housing. If you had a pulse, you could get a low-doc mortgage for more than 100% of the buying price.

Heck, you didn't even need a pulse! The robo-mortgage processors didn't care if you were living or dead. They wrote up the mortgage papers, gave you money and gave themselves a big bonus.

Then some slicer-and-dicer packaged your mortgage into a mortgage-backed security (MBS) and sold it to speculators. Those MBSs are what the Fed is buying now... to try to revive the housing market.

Housing had gone to dizzying levels by 2007. Again, we doom-and-gloomers worried that it was a bubble. And again, the dreamers and schemers sloughed off our warnings. But the housing market blew up in 2007... and has been losing air ever since. Bummer!

Once again the get-rich-quick crowd is deeply disappointed. Where will it turn for easy profits? Back to stocks!

The Next Big Thing

Following the crash of 2008, stocks went up 100%... retracing the entire move down. This caused investors to think the easy money was back on the table. Many thought they could just buy "stocks for the long run" (which they figured was about five years) and get rich.

If they were lucky, they caught the big run-up after March 2009. And now they're waiting for the next burst. Where's the "next Apple?" The "next Google?" The next big thing?

Darned if we know. But we know what happens to corporate earnings after they hit a major new high. They go down. And we know what happens to stock markets. They go down too. This is not a problem the feds can fix. It is just a fact of life. You don't fix it; you prepare for it.

Poor Prospects?

Faber is looking at major companies - Apple, Google, Intel, McDonald's. They seem to be headed down.

Why? Because earnings aren't as good as they once were. And prospects don't look so good either.

For the first time ever, for example, McDonald's reports lower same-store sales. And Apple? How much better could it get?

Smart investors are asking themselves questions...

Why pay 15 times earnings for stocks in an economy that is growing at only 2% per year?

How can the Fed continue to print money without eventually causing inflation rates to increase? How long can the federal government continue to borrow and spend without going broke?

For companies to make money they need people who can buy their products. But household incomes and household wealth have gone down in the U.S.

They're lower now than they were 20 years ago. Now the average starting salary is only $23,711. And nearly 40% of Americans make only half of their peak earnings. How are these people going to buy more products and services?

To make matters worse, the native-born U.S. population is now in decline. And a large part of it is getting old. More than 12,000 people turn 55 every day. At that age, their spending patterns change. They spend less.

As for the meltdown, Faber figures:

There will be pain and there will be very substantial pain. The question is do we take less pain now through austerity or risk a complete collapse of society in five to 10 years' time? I think the whole global financial system will have to be reset and it won't be reset by central bankers but by imploding markets - either the currency [markets, debt market or stock markets. It will happen - it will happen one day and then we'll be lucky if we still have 50% of the asset values that we have today.


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