What to expect

Corporations and businesses are having to deleverage and are doing so with the help of the government; individuals balance sheets are still a mess and the process of reliquifyng and deleveraging will take a long time - years. The increase in federal and state taxes, the increase in fees for state services (CA DMV doubled the tax), fees for country services, increase in mandate cost for accepting federal assistance, increase in medical cost, pet project of our leaders; coupled with paying down individual debt and increased saving will require a substantial period of time or a substantial increase in wages. More than likely a combination of both, if the average earner's fixed expenses increase $600 per month a 5 dollar an hour raise would be required over the net five years to keep with inflation.

The economic cycle is still not ripe for stock pickers. Price earning multiples are still very high, earnings growth is low, money flows are out of equities and back into banks; the opposite of the disinter mediation (banks to equities) which occurred in the 80's through early 2000's. Historically stocks have been undervalued at 10 times earnings and a 6% dividend. The dividend looks high but is now under attach with a barrage of cuts from large institutions. Equivalent to a value trap with low price earnings multiples. These levels will not be achieved until the net time interest rates peek. Inflation is the next cycle. A 1% move on a 30 year government bond changes the price by 20% not including interest. The repricing of debt will force a repricing of the equity markets and drive price earnings to the ultimate cycle lows and dividends to their highs.

All this will play out regardless of what the government does, all the government can do is slow down or speed up the process. How long If one is optimistic and a democrat that would be 2 or 3 years, so the tax increases can take effect, if a republican 3 or 4, so they can take back the majority.

While my prophetic abilities are not keen, my ability to predict the markets far in advance is acute. Some crzy event could circumvent the market finishing the cycle it's completed so many times before such as: a long term agreement in the mid east, a break through in a new technology, a true Congressional effort to change government to be more effective, an energy alternative. Most of these are long shots

Now the so what:

A long term cycle market low would be 50% below current levels

There will be a substantial rally from a deeply over sold level soon were are at 695 on the s&ps now. Rate will rise while this happens because it looks like growth but turns into inflation and the process will compete itself. Assets of corporations will be inflated by the inflation, debt will be diminished by the inflation, balance sheets pristine, p/es will be low and dividends high, individual saving will have increased, debt reduced, and we will again consume when the next demographic trend drives the necessity.

10 year government Interest rates could rise to 4 or 5 per cent and 30's in the 5 to 6 range

A free and clear home might be more important than funding a pension account

preserve capital
yield will be a large determinate of total return - ladder maturities
be able or willing to hedge if you have a large exposure to equities
Trade the large swings which will happen
buy little increments of those companies who will lead the next market cycle up

How this might or might not play in a biblical sense I am unsure, but must assume the largest cost to the world right now is the 10/40 window. The unused assets in Africa (ie natural resources, cheep labor, cheep real estate), the cost of the unrest in North Africa, the battle on terror around the world, the instability in the price of oil. My guess is money has historically gravitated to the highest return. Arabs financed Spain, Spain Financed England, England, France and Spain the US, The US financed Japan, Japan and the US funded China, My guess is China funds Africa.

The 2012 date would be good timing for a return to a more stable economy, but one that may be very different than the one we have known. Our parents wealth will have been transferred to us, we are at our peek earnings years, our grandchildren will no longer be small children, the demographics of society will change, we had much fewer children than our parents, there will be 1 person working for every 4 on social security unless we continue the unabated migration from the south and incorporate them into FICA.



Robin Hood