True Contrarian's forecast back in January 2007:
DEFLATIONARY WAVES AND COUNTERWAVES (January 1, 2007): The mainstream financial media keep talking about "rising inflation", while Fed officials continue to make comments about "persistently high inflation". However, if one looks at a chart of gold mining shares, or a chart of U.S. Treasury yields, one quickly discovers the truth: on May 11, 2006, the worldwide financial markets began an important deflationary wave which will likely continue for the next several months or longer.
The first assets to be pressured lower by this deflationary wave were the prices of precious metals and their shares. Treasury yields then followed in the second week of July; copper, in the middle of October; U.S. equity indices, in late November and in December; other base metals such as nickel and zinc and tin, probably later this month. Over the next several months, equity indices worldwide will move noticeably lower, as will the prices of artwork, racehorses, and a vast array of overvalued assets. Real estate, the most uniformly overvalued asset of all, began the deflationary cycle in late 2005.
All waves have their corresponding counterwaves. Once the U.S. Federal Reserve and other central banks worldwide realize that this deflationary wave is having serious consequences such as rising unemployment and more rapidly declining real-estate prices than had been anticipated, these folks will begin to aggressively cut interest rates. This will engender a temporary pause to the deflationary impulse, and will create an environment of rebounding assets, especially for precious metals and their shares, as well as for other assets that had generally gone out of favor in the past several years, such as largecap growth shares. This rebound will likely begin around the summer of 2007, and will last perhaps for 1-1/2 years.
However, central bankers can only do so much. They cannot prevent an even more powerful deflationary wave from regaining control in 2009. This deflationary wave will be far more devastating than the current one. It will likely cause a huge worldwide pullback in equities, similar to what was experienced in 2000-2002. Real estate, both precious and base metals, artwork, and virtually all major asset classes will see a significant decline in their respective valuations. Unemployment will surge into double digits in many countries, even possibly in the U.S. The U.S. might experience year-over-year deflation for the first time since 1931.
Once this worldwide asset collapse ends, perhaps in 2011, it will be followed by one of the greatest reflationary periods in world history, as governments worldwide do whatever they can to stimulate the economy, without regard to inflation or rising interest rates. Interest rates will likely double in most countries within a few years, including the U.S. Precious metals and their shares will surge, with gold soaring well above the $1,000 per ounce level.
Baby boomers and other retirement investors are likely to get wiped out twice. As the deflationary waves cause equity indices to collapse, 401K participants will be far too late to move whatever money is left from their collapsed equities into the "safety" of bonds. Just as the maximum number of participants are in bonds, interest rates will then more than double, thus wiping out much of these bond holdings with a few years. After achieving a very deep nadir, equity indices will see their greatest percentage gains in many years, but few people will remain in these investments to benefit from them.
While all of this up-and-down excitement is going on, real-estate prices worldwide are likely to move in only one direction--lower--eventually surrendering all of their gains in nominal terms since 1999. Thus, these deflationary waves and counterwaves will cause a great decrease in global prosperity.
These are my cheerful thoughts for the New Year. Be sure to get out of the stock market in time, so that you will enjoy a prosperous 2007.
["They cannot prevent an even more powerful deflationary wave from regaining control in 2009."]
Jeremy Grantham has a similar forecast for the same period:
"I expect the market will fight against going down, and keep on fighting," said Grantham, who oversees the investment strategies of the Boston-based firm.
Grantham predicts the bears will gain the upper hand after next year's presidential election. "Corporate profits are up but margins are down," Grantham said. "If they continue to fall, the market can go down a lot."
How much? Grantham says the S&P 500 could lose 40% between late 2008 and the end of 2010. |
