A Case For The Bears & A Cause For The Bulls

This is it. In 2007 I said it was going to happen soon. Again in early 2008 I reiterated it and I even mentioned a date – late 2011 to mid 2012. Then in 2009 and 2010 I reminded everyone about it. And now that we’re at the end of 2011, I’ll say it one more time – we’re due for a major Depression and that time has come.

My only surprise is that in 2007 and 2008, I never imagined that the Depressionary threat would come from Europe. Just imagine that the Great Depression was about a much smaller American economy going bust and pulling the whole world down with it for a long time (1929 to 1945). The only thing that saved it was the greatest bail out of all time – WWII.

Thus, the depth of this modern Depression, when it happens, will be unprecedented and there is no way to know how deep and long it will run. And make no mistake about it – this is way bigger and more implicative than 1929. It doesn’t help that the EU is insolvent and that nobody wants to buy their debts. It doesn’t help that Belgium just joined the list of sovereign debt threats like the contagion we expected it to be. It doesn’t help that rating agencies like Moodys downgrades Hungary who don’t pose as big a threat as its western neighbors. Most of all, it doesn’t help that Germany’s bonds are also unwanted now. The core and backbone of the EU is about to get into trouble themselves as they shoulder the burden of the entire Union.

It doesn’t help that commodity prices stay elevated and that inflation is still relatively high in most countries. It doesn’t help to fight those inflationary pressures when most countries are lowering their monetary policies to level the playing field against the American dollar. It further doesn’t help that weather cycles have been insane lately with rains and floods threatening and even wiping out most East Asian crops and staples. And it surely won’t help if China continues to sit on their hands and do nothing about anything whether it be their own domestics threats or the global threat to their continued economic conquests.

The cost of living everywhere in the world will go up as food shortages catch up with us next year. The shortages from last year’s drought plus this year’s floods are going to dawn on us very soon and inflation will be impossible. Already, inflation in Singapore is out of control. In a recent report, the official CPI number for Singapore hit 5.4%, higher than the expected 5.2% compared to a year ago, reflecting mainly higher costs of accommodation, private road transport and food. Excluding accommodation costs, the CPI was 0.2 per cent higher in Oct 2011. The Monetary Authority of Singapore (MAS) core inflation measure (which excludes the costs of accommodation and private road transport) was 0.3 per cent in Oct 2011 on a month-on-month basis.

Its getting pretty uncomfortable living on the Little Red Dot and its going to get worse. We didn’t need a CPI to tell us that. In the last two years, HDB prices have risen more than 25%, Condos have risen 35%, staples like bread are up more than 50% and cars are selling at 90% above what they were in 2009.

Lately however, attitudes amongst local consumers have shifted as they have become more conservative and have begun holding back on discretionary spending. In the last two years, salaries in general have not risen by more than 5% to 10%, banks continue to pay out 0.bs% on interest and stocks haven’t made any gains and all this is starting to take a toll on the residents on the Little Red Dot …

STI – November 2009 to November 2011

Around the world, manufacturing PMIs have fallen, in some countries for the second and even third consecutive month, into the red (below 50.0) signaling a major and continued contraction in businesses amongst the biggest economies in the world;

China’s and Germany’s drop were the most drastic with China losing 8.9 percentage points between September and October then contracting another 3 percentage points in November. Germany’s drop between September and October was 1.2 percentage points and it repeated the decline in November with another 1.2 percentage point drop to register consecutive months of contraction. The Eurozone, not surprisingly, has had more than three consecutive months of contraction. Anyone thinking that the contagion will be confined to Europe only had better think twice as this is a global event and no one will be spared.

In a global summary from news this week alone …

And if you didn’t think the markets weren’t that bad, then take a good look at the region’s top bourses over the last two years …

Not a Depression? I don’t know about that. If the EU goes down, the US is not going to stay up. This will bring most of the other nations down and China will not be spared especially when they don’t regulate their economy relative to its neighbors or anyone else for that matter. I fear the worse for the most selfish nation on the planet. If there were any doubts about China’s property, I am sure that everyone is now convinced that their 10 year bubble is deflating … and rapidly at that. I have been ranting about this possibility and reality on my blog since 2008. Now that some acknowledgement is being thrown into public view, let me now say that this is going to be much worse than some reports are making things out to be. Much much worse.

The U.S. was starting to look like they were finding their feet but as soon as things started looking optimistic, the confirmation of the Bear Rally took grip and now its looking exactly like Q1 and Q2 of 2008 all over again …

DJI – Q1/Q2 2008 vs Q3/Q4 2011

If this persists, we’re going to punch our way down to 10,500 before Christmas. If it comes to that, it wouldn’t be far fetched to see DOW get down to 9,500 by year’s end. Deja Vu? That’s because I’ve said it before and now I am saying it again. I was spot on the last time and I haven’t missed the mark since 2005. I don’t think I am going to start doubting myself now.

If this is Thanksgiving, I don’t want to know what Santa has in store for Christmas this year.

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