The Bear Market Blog

By Ken Knight, MBA

I hope at least some of you were able to obtain "The Sale of a Lifetime"  by Harry Dent.   It is now available for sale on Amazon.

Last time I talked about the debt bubble and how it will be resolved.  Like all financial bubbles, it will resolve at least to its starting point!  Let's talk about bubbles.  The first major bubble that has been documented in history is the Tulip Mania (Wiki).  Back in 1634, there was a craze for tulip bulbs in Holland (of all places!)  People were investing their life savings in them and at the end most were left penniless.

Then there was the South Sea Bubble starting in 1719 where the British government tried to raise money to pay off the national debt:

Since then there have been many financial bubbles too many to list.
More recently, we have gold topping in January of 2012:

and crude oil topping in July of 2008.  You remember when gas was $4.00 a gallon!

Notice they all end up at least at the start of the bubble (if not lower!).

Now here's the stock market's Dow.  What's wrong with this picture?

I sincerely believe that this is the left side of a huge bubble!  The stock market has tripled in 7 years!
So whether it happens tomorrow or, as I'm expecting, in the next year, the market will fall to where it started (6000) or further!  Gold will finish its plunge to 600 and crude oil (and ultimately gasoline), after this bounce, will continue to fall to within 10 dollars a barrel.

The idea of oil prices going to 10 dollars a barrel sounds great to most but think of what it will do to the oil companies!  Most will go out of business.  It will bankrupt countries like Saudi Arabia, Russia, and Venezuela.  As we are now the biggest producer of fossil fuels, this will decimate the economy. With the fall of commodity prices like gold, this will continue to shove us into a DEflationary economy.

And the ultimate bubble to break is the U.S. stock market, currently in nose-bleed territory, which, until now was being held up by the government pumping in billions of dollars to spur the economy and people in other countries looking for a place to invest their shrinking investment funds.  The stimulation effort has stopped and we are seeing a topping process in the stock market.  So look out below!
I have tried to remain neutral in this current election but one thing I do agree with Donald Trump on, is that the stock market will take a bath. As in other stock market plunges, when this happens, the economy will be in a shambles.  Although poor Hillary will take the blame (thus my previous prediction of a one term president), it will NOT be her fault.  She just happens to be without the chair when the music stops.

The damage not only has been done but has been aggravated by extending the bubble by bailing out the banks and the car companies during the Great Recession (Investopedia).  Bailing out these companies without any real changes to how they do business extended the inevitable.  We've been calling it "kicking the can down the road".  Eventually, it will all catch up to us and "when the bough breaks...."
This whole unraveling has been going on for a long, long time, since year 2000, when the stock market first topped (and the gold Dow ratio topped).  As far as I'm concerned, we have never recovered from the Great Recession, with a anemic growth of GDP at 1%. Yes the government's unemployment rate is 5.5%.  But what kind of jobs are being filled compared to what people have been doing before.  The real unemployment rate is much higher especially among minorities and young people who have this great education, huge educational loans and no good jobs.

So by staying on the sidelines until this whole thing finishes unraveling, we can use our saved cash (remember cash will be KING!) and buy whatever we want, 10 cents on the dollar!  Thus the name of the book "The Sale of a Lifetime"!  Although, as amateur investors, we probably won't be interested, but stock in great companies that survive all this will be on sale! How many of us will "buy at the bottom"? 

So as an old saying goes:  "Keep your Powder Dry" (Be prepared and save your resources until they are needed.)

Best regards,
Ken Knight

By Ken Knight, MBA


In my last blog, I mentioned I was reading a new book, hot off the press, and I STRONGLY recommend that you READ IT!  It is called "The Sale of a Lifetime: How the Great Bubble Burst of 2017 Can Make You Rich" (It is currently sold out at Amazon because of its popularity but keep trying) by Harry S. Dent, Jr.  Harry, a Harvard graduate, has written many books on the economy and his main theme is demographics.  Demographics, the statistical data of a population, especially those showing average age, income, education, purchases, etc.  He explains that there are cycles in human history such as I have discussed in a previous blog, such as the Kondratieff Cycle.  The biggest impact of recent demographics is well known: the Baby Boomers!  These are the people born between 1946 and 1964 who have had a huge impact on the economy and society.  A book written in 1998 describes it well: "The Pig and the Python: How to Prosper from the Aging Baby Boom" (Amazon), by David Cork.  The economy (the python) had to absorb a huge number of people (the pig) into the workplace in a very timely and predictable way.
Harry goes on to describe the impact of Baby Boomer aging on the economy.  Back in the day, on average, we (I'm a classic Baby Boomer!) first rented apartments during our 20's, bought starter homes at a mean age of 31, utilized child care at the age of 33, traded up to a better home at age 41, paid for kids' college tuition at age 51, and bought a nicer car or second car at 54.  Once we got rid of the kids, we started to purchase our vacation or retirement homes at age 65 and are taking cruises at age 70. 

(Chart from The Sale of a Lifetime)

As we age our major costs will be prescription drugs at age 77 and finally nursing home costs at age 84. Something to look forward to?   I can't wait!
Our peak in spending occurred at the age of 46 and it's been downhill ever since.  We would expect the next generations to pick up the slack; the Gen. X'ers, and especially the Millenniums.  But this hasn't happened. Although the number of Millenniums have equaled the Baby Boomers, they were "created" at a much slower pace and spread out over time, creating less of an impact than the Baby Boomers.  Also, because of the massive amount of debt Millenniums have on their shoulders especially college debt, the timing of their purchase power has been spread out further.  This causes a SNAFU in the handing over of assets to the next generation.  There are fewer to purchase the homes (and furniture) owned by the Baby Boomers.  There are not enough skilled workers to take over the workload of the Boomers (but I think this will be somewhat mitigated by the Boomers having to keep their jobs longer after the Crash!) Thus the strangled economy that progresses slowly and weakly.
Harry goes into much more detail but that is the gist of his theory.
The other fact that he is quite adamant about (that I have said before) is the amount debt we have on the books including governmental, corporate, and personal. This is occurring on a global scale.  It is so out of proportion to our Gross Domestic Product (GDP or the amount of national production of goods and services), that when interest rates go up, so much of GDP will have to go towards just paying the interest on all this debt!  So we have TOO MUCH DEBT!
But Harry describes that soon all this debt owed will be resolved one way or another (thus the bursting of the bubble).  The debt will be: paid back, reduced to pennies on the dollar, or defaulted (as in home foreclosures).  Most will be defaulted or not paid back.  Nature has a way of "resetting" or putting everything back to zero to start again.  In the following chart, we see U.S. debt to GDP ratio soar during the "Roaring 20's" only to drop precipitously off a cliff during the Great Depression.  Look at our debt levels now!  

(Chart from The Sale of a Lifetime)

The rule is that any bubble (and this REALLY is a bubble) tends to return to the start of itself.  You can see it in the chart.  

So when the bough breaks (and it will soon), regretfully, both sides lose.  The debtors, the ones who owe the debt, might end up losing their homes, their cars, whatever they used for collateral.  The creditors, the ones who hold the mortgage or car loan, lose the money that they loaned.  What bank wants a used home or car that they know they will never get their money back from?  We got a taste of what's to come in "the Great Recession" of 2008!  The correction to come was waylaid by the government by bailing out the banks and car companies.  The amount of debt correction that needs to occur will NOT be bailed out the next time.  There's too much of it!

The lesson here for us is that we need to look at our means of income and how secure it will be in a severe downturn, the amount of debt we owe, and the ability to ride out the storm.  Each individual is in a different place but having sound finances (money put away for a rainy day, as they say) and forgoing putting oneself further in debt makes sense.  Remember, the title of the book?  The "Sale of a Lifetime"?  By waiting to purchase that next house, car or other luxury item, you will be paying 10 cents on the dollar.  I will expound on this in blogs to come!

Harry goes on to talk about bubbles....  Stay tuned! (and BUY THE BOOK!)
Best regards,
Ken Knight