Market Report - Is the Stock Market About to Drop?

In previous letters I’ve explained how this stock market and real estate market have created bubbles.  Much of it can be explained by the excess cash being put into the financial markets by governments printing excess paper currency.  When will it all end?  One supply of excess cash comes from the Bank of Japan.  Then ask yourself, “When will this silliness end and our markets have a severe drop?”  Is it time for you to have some of your money safer?

The Yen Carry Trade
From the Financial Intelligence Report, March 21, 2007

One of the most important, unintentional providers of this international liquidity has been the Bank of Japan. Japan’s economy, the second largest in the world, went into a prolonged slump starting in the late 1990’s. In order to stimulate domestic demand and help the economy climb out of its’ nosedive, the Bank of Japan reduced its interest rates to zero percent. This was 3 percent below the cost of credit in other major currencies at the time. It caused the value of the yen to fall.

As I’ve stated before, I believe our stock market is overvalued. Then you ask why for the most part does it continue to grow except for the minor corrections??? The answer is liquidity. Liquidity is the creating of paper money to excess. A year ago at a meeting I had with the chief analyst for the Federal Reserve Atlanta, he said that they continue to put money into the system as some of it is absorbed and disappears. I saw an example of that a number of years ago on a trip to South America. South Americans would love to get US dollar bills as a way to save. They would hide them in their mattress and let their countries excess inflation rate make that dollar bill grow by double or in some cases triple digit growth. Much more than they could ever get from a bank.

Printing a little excess dollar bills fills this absorption but printing a lot creates bubbles such as real estate, the stock market, etc. That is what is happening not only here in the US but internationally. Printing excess paper eventually shows up as inflation and the devaluing of that countries paper money. Anyone who has traveled outside the US knows first hand how much the value of the dollar has dropped. Is there more to come? Here is an excerpt from and article by Dan Amoss. If you want the complete article let me know.

You know it's bad when...

You know it’s bad when David Walker the head of the Government Accounting Office is running around the country telling people to encourage their elected officials to make serious changes in Social Security, Medicare, and Medicaid. Before last week David was in Florida telling people that we are in serious danger with the current and projected federal government deficits and if no changes are made that life as we know it will end here for us, our kids and grandkids. He was accompanied by a member of the Concord Coalition a non-partisan group dedicated to fiscal responsibility, the Brookings Institution, and the Heritage Foundation. To see more about this subject see www.concordcoalition.org

David is telling people what I’ve been saying for 11 years. Get the budget and deficits in line or be told what to do by foreign governments who “graciously” invest in low rate US government debt and help keep our country moving. Because of the deficits, both budget and trade, we are selling sway our country one piece of real estate and company at a time. (Many US companies are already owned by foreigners including Allianz Life Insurance Company, AXA Life, and Daimler Chrysler, to name a few. Also many foreign owned companies sell their products here and take the dollars of profit home including Lexus, Toyota, Mercedes, and BMW.)

SEC loosens up margin trading

Securities and Exchange Commission staff has given the green light to the New York Stock Exchange's new type of "portfolio margining," signaling the relaxation of regulations that have been in place since the Wall Street crash of 1929, according to published reports.  Does anyone else see the irony in that?  Why are we getting rid of controls that helped prevent another 1929 crash and subsequent depression?

 In my analysis of the stock market over the years showed me that the more the stock market changes the more it’s still the same.  Every so often some “smart” Wall Street types tell us it’s different this time.  Or the latest one is that the government debt of $8.7 trillion doesn’t matter as it is still small in relation to our GDP.  (GDP is all the total goods and services we produce each year)  I don’t know about you but I was always taught the borrower is slave to the lender.  So at some point our creditors (Japan and China being the largest) are going to have the ability to tell us what to or not to do.  I don’t like that idea, do you?