Eric Roseman's Eruptions: Stocks, Global Markets and Commodities BLOG

Emerging Markets Outpace Major Markets in Bear Market Massacre; Is the Worst Over?

Are emerging markets the new relative safe haven for stock investors?

Despite a regional market collapse across Eastern and Central Europe this year the MSCI Emerging Markets Index is down just 7% versus a 17% loss for the S&P 500 Index and a decline of 18.8% for the MSCI World Index of mature markets.

While the ongoing rally in world markets is probably occurring within the confines of a bear market, emerging market bourses are generally faring much better; several developing economy markets, including Chile, Brazil, China, Taiwan and South Korea are now in positive territory in 2009 while other advanced economy indexes remain deep in the red despite big rallies lately.



From its low on October 27, 2008, the benchmark MSCI Emerging Markets Index has gained a cumulative 18.9% versus a 12.5% loss for the S&P 500 Index and -7.9% for the MSCI World Index.

Major Break in Correlation

Historically, most emerging markets have risen or declined in sympathy with Wall Street. Indeed, emerging markets got slammed in 2008 along with all bourses and, in most cases, declined more than some major markets. Last year, emerging markets as a group plunged 45%.

The largest emerging market, China, for example, collapsed more than 70% in 2008 while Russian equities – ranked at 5.4% of the MSCI Emerging Markets universe – tanked 75%.

Yet over the last several months a clear break in correlation trends appears to have occurred. Emerging markets might be evolving into a relative safe-haven for equity investors following a deluge of dumping last year; the big sellers are now largely long gone.

What’s even more impressive is that this rally is happening even as East and Central European markets bleed profusely under the weight of a regional debt and currency crisis.

This marks the first time since the advent of the MSCI Emerging Markets Index that this asset class have clearly outpaced the major markets in the midst of a bear market.

East Europe Aside, Banking Crisis a Western Phenomenon

Part of this performance anomaly between major and emerging markets since October might be explained by a growing realization among investors that this time the crisis in confidence is largely a mature market phenomenon, not an emerging markets crisis.

For the most part, the crisis in banking is largely tied to the boom in credit derivatives and mortgage-backed securities issuance in the United States and Western Europe. Most banks in the emerging markets are not exposed to subprime and are largely not affected by ongoing credit-related losses. Banks in Brazil, Chile, China and other stronger emerging markets have not recorded big losses tied to Wall Street’s folly.

There’s no doubt that a dozen or more emerging markets, mainly in Eastern Europe and Russia, rank as the worst-performing bourses since late 2007. Aside from Russia, reeling from a collapse in energy prices and a plunging rouble, regional neighbors in Eastern Europe are indeed in the throes of a full-blown funding crisis as reserves dwindle and, in some cases, require International Monetary Fund (IMF) assistance. But that’s not the case with other emerging markets in South America and the Pacific.

Lessons of 1997-1998

Many emerging markets experienced a serious economic contraction or outright depression starting in 1997 as Thailand triggered the developing markets crisis. Asia has emerged much stronger from that period of deflation and did not over-leverage bank balance sheets to the same degree as Western banks over the last ten years; importantly, Asia has largely avoided mortgage-backed securities and has suffered only small write-downs or losses.

Some emerging markets remain healthy following years of fat trade surpluses. These include China, Brazil, Taiwan and Chile. Brazil, for example, is probably the best managed emerging market economy along with Chile. Both countries have positive trade balances, strong currencies and benefited enormously from the recent boom in raw materials. And, as regional currencies in Europe have declined or crashed recently (except the Norwegian krone), the Chilean peso has climbed 6% against the U.S. dollar this year while the Brazilian real is up 0.5%.

It’s still too early to claim a full victory for emerging markets.

Not Clear Sailing -- Yet

The global financial system is still reeling from bank insolvency across major markets in the United States and Europe; until this crisis finally passes investors will remain vulnerable investing in common stocks, including the emerging markets.

It’s also possible that a distressed emerging market sovereign borrower in Eastern Europe might default on its foreign debt. Credit spreads in the region are at all-time highs with Ukraine and Hungary the most vulnerable – even after receiving IMF assistance.

The good news is that Eastern and Central European markets represent just 8.6% of the MSCI Emerging Markets Index. Though not an insignificant weighting, other constituents of the index can offset this vulnerable regional allocation assuming they continue to advance – namely China, Brazil and South Korea. These three emerging markets should be monitored closely since they represent a hefty 41.3% of the MSCI Emerging Markets Index.

For the first time in their history, most emerging markets might be evolving into a safe-haven at a time when advanced economies are still reeling from a brutal credit deflation, bank insolvency and a crisis in investor confidence.

Swiss Franc Devaluation Triggers New Currency Wars in 2009

Nobody wants a strong currency. That’s the central theme over the last 20 years and especially since the emergence of the credit crisis and the ensuing global economic recession – the deepest since 1982.

The Swiss franc is now the latest victim of this year’s currency wars and the Japanese yen will follow shortly as the global exchange rate mechanism comes undone in spectacular fashion. On Thursday, the Swiss National Bank (SNB) stated that it sought “quantitative easing” in order to depress the franc and keep deflation from accelerating. The franc thereafter tumbled 3% against the dollar.

In their quest to remain export competitive, global currencies continuously devalue against each other, causing all sorts of trade imbalances, currency volatility and, ultimately, inflationary consequences. That’s the history of foreign exchange markets since Nixon broke the gold window in August 1971.

With painful regularity, currencies have devalued violently vis-à-vis the dollar since July 2008 when the buck emerged as a false “safe haven” among global investors as global de-leveraging blew wide open. The dollar, of course, is not a “safe haven” but instead the recipient of massive inflows by institutional investors seeking to raise liquidity and meet almost unprecedented investor redemptions. This entire process, a phenomenon in currency markets, has indeed pushed the dollar to multi-year highs against a range of currencies everywhere – except Japan.

Last week, I mused about being disenchanted with paper currencies because they all seemed to be celebrating like a bunch of drunks – devaluing against each other and reducing our long-term inflation-adjusted purchasing power. The whole currency system is a joke with units everywhere down 10% or more over the last few months and in many cases, off more than 20% since last July. That’s not a prescription for global exchange rate stability. It’s a prescription for inflation.

I’m disappointed the Swiss relented to deflation. I also think the SNB was pressured heavily by the European Union (EU) to let some air out of the Swiss franc because regional economies in neighboring Eastern Europe are getting pounded – largely because of leveraged loans tied to the Swiss franc to fund domestic mortgages.

Now the Swiss join a parade of other currencies devaluing in order to stem deadly deflation. My argument last week for heading into the franc to protect my purchasing power has now been thrown out the window. No currency is worth its salt.

Over the last several years I’ve continuously recommended gold for long-term investors. It’s the only currency outside of the credit system that’s nobody else’s liability. It’s portable, liquid and, like the old adage goes, “an ounce still buys a man a good suit.”

Eventually, the Japanese will join the Swiss and depress the yen. Central banks haven’t been active in foreign exchange markets since 2004 before last week yet I suppose it’s only a matter of time before the Japanese begin a new round of intervention. The high yen is killing the Japanese economy.

In the end, the dollar will also join the bar and get slammed with other currencies. For me, gold remains at the forefront of monetary responsibility, inflation protection and, above all, truth in a world duped by fiat paper.

Japanese Yen and U.S. Dollar in Bubble Territory

Since the emergence of this credit crisis more than 19 months ago, the Japanese yen and the U.S. dollar have charged ahead vis-à-vis all foreign currencies. And over the last 12 months, both currencies are even higher against gold. Recently, the dollar began to rally versus the yen.

Both currencies are also among the most overvalued units in the world, offering almost no yield while intoxicated by high debt levels. In my book, both currencies are short-sale candidates as this credit crisis draws to a conclusion over the next 6-12 months. Once risk aversion returns, the dollar and yen will fall very rapidly.

The death of the carry-trade – borrowing in cheap and low-yielding yen and reinvesting those proceeds into higher yielding currencies – resulted in a wave of yen buying until recently as traders scrambled to reduce risk.

The Japanese economy has slowed sharply over the last six months with double-digit losses recorded in exports, manufacturing, industrial production and Q4 GDP – the worst batch of statistics since the early 1970s. Why would I buy the yen?



Yet unlike the overvalued yen, Japanese stocks are incredibly cheap. Stocks in Tokyo have been cheap for years and keep getting cheaper every day, ravaged by this bear market. Stocks traded on the Topix sell at roughly a 20% discount to book-value and yield almost 3.5%. No other major market offers better value.

But the yen should be avoided. Along with the dollar, both currencies are now in bubble-land, mired by poor economic fundamentals and high debt levels.

The U.S. dollar is the beneficiary of an accounting phenomenon tied to a desperate flight to cash and redemptions by institutional investors. There is no such thing as the dollar being a “safe-haven” currency. Rather, the dollar is at the epicenter of this financial disaster and, I suspect, it will crash once this crisis finally ebbs.

The beginning of the end of American financial hegemony has commenced as the United States emerges as a much weaker economic power since 2008. Gargantuan Treasury issuance, more Obama New Deals, the reluctance to let bad banks fail and poor economic growth for the next several years are a recipe for an eventual dollar crisis.

Since most investment accounts and funds are denominated in dollars worldwide, the crash in global capital markets since late 2007 has accelerated the flight to liquidity; it has nothing to do with a new bull market for the dollar. Historically, bull markets for the dollar or most currencies, for that matter, don’t begin with interest rates at 0%. I can’t think of any other currency in the world that offers such bad economic fundamentals other than the Zimbabwe dollar.

As the dollar eventually heads lower again once this seemingly never-ending global panic concludes, I plan on hedging my dollar-based portfolio into Canadian dollars or Swiss francs. I’m already holding 10% in gold and will increase that position to 15% should it break below $850 on this correction. I have little faith in most currencies, central banks or governments. Indeed, central banks have lost control of the financial system and investors should protect themselves accordingly.

If Stock Market Rally Unfolds, Diversify Risk

The wrong way to invest in a secular bear market is to lunge after stocks even at these multi-year lows. We’re still mired in a severe credit-inflicted recession that will probably keep a lid on growth for the next few years until leverage in the financial system is finally exhausted.

However, concerted global government spending – unprecedented in the post WW II era – implies at least a few quarters of positive GDP growth in the United States and overseas in 2010. That’s exactly what transpired in the mid-1930s following FDR’s first New Deal.

The right way to reduce risk is to build an equity position gradually over the next several months while also adding inflation-based assets, which should also rally along with the stock market as inflation concerns rise. Treasury bonds should be avoided, or sold short while investment grade debt (non-financials) and TIPs should be purchased.

An extended or multi-month stock market rally – long overdue even in the context of a bear market – should be accompanied by a lower dollar and rising Treasury bond yields as risk-averse investors dump safe assets in return for greater risk. This supposes that distressed hard assets like commodities, including oil, should rally in conjunction with equities as the dollar declines in any marked advance for stocks. This scenario also favors gold as investor expectations of renewed inflation drives investors out of the dollar.

I’ve started to buy stocks again for the first time since the advent of the credit crisis 19 months ago. My strategy is to scale-in very gradually or dollar-cost-average into global markets while also buying commodities, gold and TIPS or Treasury Inflation-Protected Securities. To reduce my equity risk in an environment of intense volatility, I’ve also purchased non-financial convertible bonds, which yield about 7%.

Foreign currencies, which have largely crashed against the dollar since last July, also look like strong speculations in this bear market rally. Resource currencies like the Australian, New Zealand and Canadian dollar are attractive while in Europe I like the Norwegian krone – heavily tied to the oil cycle. The Brazilian real, which has declined much less than other global currencies recently, is also poised to recover sharply.

The United States is desperate to grow her exports again. While other countries are now benefiting from cheap currencies after crashing versus the dollar since last summer, the greenback is next in line to decline once risk returns to the market. The Fed is so busy flooding the financial system with credit that it’s almost a given the dollar will resume its bear market, which began in 2001.

Currency chaos remains a central theme in this environment and a lower dollar would be bullish for U.S. capital markets provided the decline was orderly. It would also spark the much awaited close above $1,033 for gold. The above scenario is likely to emerge sometime in 2009.

The major caveat in this bear market rally remains credit, which is still largely fractured and recently started breaking down again in February as credit spreads widen accompanied by higher LIBOR rates since January.

Despite my concerns in the credit market, stock and commodity values have crashed by more than 50% and at these bombed-out levels should now be gradually accumulated over the next 6-12 months.

Time to Unload Market Shorts

The massive reversal in stock prices yesterday was not the beginning of a new bull market. We’re nowhere close to even starting a new multi-year secular rally. The economy is in shambles, the financial system is still a mess and corporate earnings don’t look especially appealing amid a severe consumer recession.

Worse, credit markets have started seizing again since February and that spells more trouble for the economy.

Yet I think it’s time to unload or sell any reverse-index exchange-traded funds.



The S&P 500 Index (see above chart) was extremely oversold heading into Tuesday’s trade with eight out of the last ten trading sessions sharply lower.

Investors Intelligence readings on market sentiment hit a record low last week with more than 70% of advisors polled predicting even lower stock prices.

Equity fund assets in the United States are worth less than money-market funds and investors have been net sellers of stock funds over the last 12 months. Also, mutual fund investors have been aggressively buying bond funds at exactly the worst time following a massive rally since mid-2007 and ahead of record Treasury issuance of paper over the next 18-24 months to finance monster fiscal spending plans and bailouts.

In short, the stock market, down more than 50% from its October 2007 highs, was looking increasingly attractive following a crash since September. Since September 1 the S&P 500 Index has crashed a cumulative 43%, including yesterday’s 6% gain. This is the second worst bear market in history.

Values at these levels do indeed look compelling and I think it’s time to gradually dollar-cost-average your way back into the stock market over the next 12 months. If you can sit tight in this market and don’t need the money, then stocks should appreciate over the next five years. This is a good entry point to start dollar-cost-averaging.

The first such installment should be made now – both domestically and overseas. Indexing will do the job nicely because all sectors have been slammed. No need to buy hedge funds or mutual funds.

I know we’ve got a laundry list of concerns in 2009, ranging from outrageous government spending, credit woes, bankruptcies, soaring unemployment, etc. The list goes on and on. Yet it’s important to remember that even amid total market mayhem in the 1930s the S&P 500 Index bottomed in mid-1932 and rallied more than threefold until 1937. Again in 1975, the broader market surged after crashing in 1973-1974. Stocks can rally after a series of relentless declines.

History doesn’t necessarily repeat itself. But history has clearly shown investors that the best time to buy or at least nibble at distressed equity values is exactly when stock prices are in the basement and investor sentiment is brutally negative. And that’s exactly the case right now.

Stock Values Hit 1966 Levels Adjusted for Inflation

An incredible market development occurred recently as the Dow Jones Industrials (Dow) broke below 6,700 – its lowest level since 1997.

Stocks are now at the same level adjusted for inflation since 1966. Stocks have done absolutely nothing for your portfolio over the last 43 years and have badly lagged bonds and even T-bills.

Should stocks crash another 50% from current levels – an unlikely event – that will put the Dow at the same inflation-adjusted level as 1929.



Amazingly, common stocks have gone nowhere since 1966 after including the consumer price index in the total return equation. The last time equities were in similar dire straits was back in 1982 when the same matrix saw stocks return a loss adjusted for inflation from 1966 to 1982.

No Reagan in 2009

Yet in 1982 the United States was at the cusp of the Reagan Revolution, the nadir of the Volcker high interest rate era and the commencement of the biggest bull market in history. That’s certainly not the case today as tax rates increase, deficits skyrocket to the moon and the banking system continues to deflate.

Spectacular Loss of Wealth

U.S. stocks have now lost $11 trillion dollars in market value since their 2007 peak, based on the Wilshire 5000 Index, which includes large-cap, mid-cap and small-cap stocks. Global stocks have seen more than $25 trillion dollars wiped-out over the last 17 months.

Incredibly, nearly half of all U.S. stocks in the Wilshire 5000 Index are now trading at less than $5 and 37% are under $3 a share. In the 18 years in this business I have never witnessed such a depression of values, which, under normal bear market circumstances, would warrant a second and third mortgage to buy depressed stocks. History does strongly suggest this is an incredible buying opportunity.

Don’t Underestimate Deflation

The problem with adopting a bullish stance now in the midst of the first credit deflation in 75 years is the unusual nature of this bear market; deflation, unlike inflation, is an investors’ worst nightmare as asset values plummet and the cost of debt financing grows stifling. History doesn’t recall any precedent for such a sharp economic contraction – both in the United States and overseas – combined with a breakdown of financial intermediation. Indeed, we’re in a deep financial hole and, thus far, we’ve been unable to break the shackles of deflation.

Since late 2007, the Federal Reserve and other major central banks have attempted to counter falling asset prices but only with limited success. The only solution at this point after 19 months of creative monetary stimulus and unprecedented bank bailouts is to inflate the national debt. It’s literally “inflate or die” for the world’s central banks.

Gold as a Store of Value

Meanwhile, investors have a limited choice of assets to protect their purchasing power. My favorite remains gold, even though it was not freely traded in the last two economic depressions (1930s & 1890s).

From its closing price on July 31, 2007, just ahead of the subprime explosion in August, gold prices have rallied from $666.90 an ounce to $935 now – a cumulative 40% return. This compares to almost 36% for benchmark 10-year Treasury bonds, which recently saw yields collapse to their lowest levels since the 1950s in December.

The only assets to “officially” appreciate in the 1930s deflation were government bonds and the dollar – the same duo leading the performance brigade since late 2007. Gold, of course, is also in the spot-light since 2007 as it continues to trade freely; I have serious doubts gold will remain a publicly-traded asset for much longer because the way the United States is expanding credit and printing money is alarming. At some point I do believe gold nationalization is inevitable and not just in the United States.

Will the Dow and Gold Cross Paths?

The upcoming buying opportunity of a generation lies upon us as common stocks eventually hit a floor in this dangerous economic cycle.

It is possible that both stocks and gold can rally together as the dollar is compromised to finance renewed risk in equities. Also, any significant bear market rally for stocks should support gold prices because of the perception that inflation is making a comeback, which is consistent with accelerated corporate earnings and rising pricing power.

There’s also the possibility the Dow and gold will cross paths like they did ahead of the last bear market low in 1982. If that happens, I’ll liquidate almost every asset I own, possibly even selling some gold to finance my purchase of stocks.

History doesn’t necessarily repeat itself but it comes darn close.

Is England a Buy?

The first European country to suffer from the ongoing credit crisis might also be the first nation to emerge from the crash. Though this won’t happen any time soon, investors should start scouring over the rubble following a total collapse of domestic assets, including the British pound.

The United Kingdom is suffering from its worst bout of credit deflation and bank insolvency since the 1930s.



Most banks are already insolvent as the British government continues to raise its stake in Royal Bank of Scotland and Lloyds – both ill-supported by negative equity and massive liabilities. Shares prices of both banks are down more than 80%.

The British pound has crashed a cumulative 33% since peaking against the dollar and might have another 15% or 20% to fall from current levels. Among the major currencies, sterling is the worst performer by far.

According to The Bank of England’s currency grid, the pound is the second cheapest major currency in the world after the Swedish krona. The British central banks’ currency index pegs the pound at 77.8 or down 22% against a basket of major currencies since 2005.

British equities as defined by the London FTSE-100 Index now trades at just 7 times trailing earnings accompanied by a 5.6% dividend yield – almost twice the yield generated by gilts or British government bonds.

Like other bombed-out markets around the world since 2008, the British stock market is perhaps one of the most attractive on a relative scale because of the currency’s collapse. The last British currency crisis in 1992 – when the pound devalued and exited the European Exchange Rate Mechanism – resulted in a big buying opportunity for stock market investors.

As a rule, it pays for investors to buy domestic stocks following a currency crash.

Most recently this worked brilliantly following the Scandinavian banking crisis in 1989-1991, the U.S. dollar bear market from 1989 to 1995, Britain’s humiliating exit from ERM in late 1992 and the Asian and Russian economic depressions in 1997-1998. Investors subsequently earned big profits buying local shares after these respective currencies collapsed or were sharply devalued.

Another country in deep economic depression is Iceland where the stock market and currency have crashed more than 90% from their highs. At some point, Icelandic assets, whatever their true value, will also rank as the speculation of a lifetime.

A deeply oversold currency is one of the prime ingredients for a big stock market rally – especially in a country like Britain which relies heavily on U.S. and inter-European exports.

A sharply weaker pound makes British goods much cheaper compared to its competitors. The problem with England today, however, is that her exports as a percentage of GDP has shrunk, relying far more on financial services revenue. And that sector of the economy has imploded.

Nobody knows when the bottom will hit global markets. We’ve been in a nonstop freefall since last summer with seemingly no end in sight. But as this historical crisis finally bottoms, those markets with the cheapest currencies are poised to recover the most, including the United Kingdom.

Threat to Wage Growth Delays Recovery in Consumption

One of the more widely used slogans to address this dismal market environment over the last 19 months is the “lost decade.” Japan suffered its “lost decade” in the 1990s as deflation and sub-par growth strangled the Japanese economy from 1990 until 1998.

Now it’s America’s turn along with the United Kingdom and many other international economies and they follow the United States into the economic abyss. Deflation is alive with a vengeance and, after 19 months of aggressive global policy response, remains a nemesis.

Perhaps nowhere is deflation more pronounced than in households.

As household balance sheets in the United States continue to hemorrhage amid a protracted decline in real estate and stock market values, another threat lurks to add insult to injury.

Employee compensation as defined by wage growth has been on a downward trajectory since peaking in 2000. From a high of almost 4.5% year-over-year growth nine years ago, U.S. wage growth has plummeted to 2.4% through December year-over-year. That’s the lowest annualized wage growth this decade and, adjusted for inflation, is barely positive at all. Basically, American employees are barely getting ahead adjusted for inflation this decade.

Unfortunately, wage growth has slowed sharply over the past year as falling prices for consumers imply declining revenues for products and, eventually, layoffs. If wage growth turns negative over the next several months then deflation will have officially attacked employee compensation.

Judging by the latest string of unemployment reports the economy is losing millions of jobs since last fall and, along with it, consumers. It’s very hard to make a bullish case for domestic consumption when primary assets, like residential real estate and financial assets, are still rapidly deflating; worse, rising job losses result in foreclosures, more stock liquidation and a continued downward spiral as it pertains to net savings.

The stock market, at some point, will hit a bottom. Whether it’s THE bottom in this crisis is open to argument. I would view the next bottom in the context of a series of intermittent lows since late 2007 and not a secular bottom. Until household balance sheets and employment trends stabilize, there’s just no reason to aggressively buy stocks – even at these levels.

Switzerland Struggles to Remain a Tax-Haven

Switzerland is now engaged in the battle of a lifetime as it pertains to the future of privacy and her gigantic private banking industry. If Swiss private banking, home to an estimated one-third of all offshore deposits, falters then it’s highly unlikely this great Alpine enclave will survive on two major drug companies (Roche and Novartis), Swatches and chocolate. Without private banking, Switzerland’s economy would be severely compromised.

The United States, which recently won a $780 million dollar settlement with UBS regarding a widely publicized tax fraud case, is now attempting to go for the jugular seeking the names of 52,000 Americans with accounts at the once venerable Swiss icon.



UBS, or Union Bank of Switzerland, has been a magnet for bad news across almost every facet of its business model since the outbreak of the credit crisis 19 months ago; lawsuits, huge investment banking losses, a partial bailout from the Swiss National Bank and significant investor account closures have damaged the bank’s global reputation. Last week, UBS appointed a new Chairman to boost its battered image.

Switzerland refuses to divulge any information relating to accounts held by U.S. citizens at UBS or any Swiss bank for that matter. That’s because Swiss private banking guarantees anonymity and privacy; unlike most other jurisdictions, the Swiss don’t consider tax evasion a crime. The odds are very low or almost impossible that the Swiss will co-operate with the U.S. Justice Department. Any co-operation with American authorities would be a violation of Swiss private banking laws and would immediately require the arraignment of UBS personnel.

If UBS does reveal the names of its American clients in Switzerland then that’ll mark the end of its private wealth management unit (the only profitable segment of its business) while probably destroying Swiss private banking in the process. Revealing names would mark the endgame for Switzerland.

The United States, of course, is not alone in its relentless pursuit of taxpayer information. The Germans, Switzerland’s largest trading partner, has been vocal over the last several years trying to pry its doors open to reveal German taxpayer information. The Germans have even threatened trade sanctions because Switzerland, though not an EU member, is part of the EEA or European Economic Area and enjoys certain trade privileges.

Yet, to be fair to Switzerland, the country already co-operates with the EU by imposing a withholding tax on non-declared EU deposit accounts. Still, that’s not enough for the world’s largest economies.

As far as Switzerland is concerned, foreign governments would not have to worry about tax evasion in the first place if they reduced income tax rates. That’s definitely true. Yet meanwhile Switzerland has very few allies in this environment as global governments continue to put the squeeze on this great country.

One nation, however, continues to benefit from Switzerland’s misery. Singapore, which also provides privacy and numbered accounts, has been a major beneficiary of an exodus of Swiss-based assets since 2002. Singapore is not particularly enthused about raising U.S. assets; instead, private banks in the city-state target affluent Chinese, Indian and Australian investors. In fact, most Singapore banks won’t even accept U.S. clients.

Singapore might be safe for now. But at some point the United States, Europe and the rest of the OECD will turn their sights on Singapore – inevitable as the world continues to attack safe havens and privacy since 9/11.

Stock Market Spiraling, Nearing Point of Maximum Pessimism

At this point it’s obviously impossible to predict where the stock market will find a bottom. Equities continue to break important support levels and Monday’s mini-crash is an extension of the recent October 2002 bear market low violation last week. We’re truly in no man’s land. The Dow can fall to 6,000, 5,000 or worse – who knows.



From its all-time high in October 2007, the MSCI World Index of major economies is now down almost 60% -- a record since the creation of the index in 1969. The Dow, which hit more than 14,000 nineteen months ago, is now down more than 50%.

Though it’s certainly too early to buy stocks amid a total freefall, we’re approaching the point of “maximum pessimism.” With two brutal bear markets this decade long-term stock market performance has been badly damaged with equities now showing losses since 1995. Adjusted for inflation, stocks have posted a loss since 1973. That’s not exactly the kind of news to inspire investors. Or is it?

Stocks can fall another 10% or more from these low levels; the case for earnings is poor with domestic consumption collapsing, unemployment soaring and consumer balance sheets now clearly in repair mode as the savings rate begins to rise. The historical correlation between a higher savings rate and earnings is brutally negative, meaning if consumers are saving, they’re not spending. Domestic consumption in the United States is almost 70% of GDP; without a spendthrift consumer it’s pretty hard to make the case for common stocks.

These statistics don’t augur well for equities. But is this not the point where prospective investors should be buying stocks when sentiment is downright bearish and stock mutual fund assets are now worth less than money market funds?

At some point in 2009 I think stocks will hit an historical low. At this rate, equities are plunging out of control with the Dow now down more than 45% since September alone and many foreign markets down in excess of 50%.

The upcoming market bottom will sow the seeds for spectacular short-term gains, not unlike what occurred between mid-1932 and 1936 – the last credit-inflicted bear market. Make sure you’re cashed-up and ready to go bargain-hunting once this bear market hits a low. I know it’s hard to believe that we’re anywhere near a bottom; but that’s exactly when gutsy investors should start buying. I imagine once a low approaches the economic news will still be outright bearish. I’ll do my best to guide you right here.