Questions and Answers
From week to week I receive many comments and questions from readers of my articles here. While I appreciate all the feedback I receive (particularly positive feedback and constructive criticism), I feel compelled to answer some of these excellent questions on a much larger stage rather than as just an individual response. These are questions that I feel are of interest to a general audience at the current time. In May/June, you the reader asked me about real estate, the job market, the economy in general, and of course the stock/gold markets. Here are some of the questions that represent the ones most commonly asked with my response.
Question: Clif, I have been reading with interest your latest writings that seem to be very positive. I have a question regarding the latest article. If I follow you, you expect that inflation will be held down because of world capacity. The question is this, what can a person who is retired on a fixed income look forward to during this period? With the number of retirees increasing dramatically from the period 2004 forward, the number of people who are adversely affected by high inflation "local expenses," i.e., property taxes, utilities, insurance, medicine and medical services, food, energy, etc., are going to be extensive. So while there may be plenty of products at China Mart, the expenses that count are increasing at over a double digit rate. If you are right about the positive markets, then we can expect that interest rates will be held low and that the only possibility of making ends meet will be to invest in the stock market (higher risk) or to keep working if you can, to participate in higher wage increases. Thoughts?
Answer: Yes, I believe inflation will be held low over the next 3-5 years, especially with the falling K-wave "winter" season we are now in. World capacity is just one of many influences that will conspire to keep price inflation at low levels. What can a retired person on a fixed income look forward to? Actually, it probably won't be as bad as the picture many pundits are now painting. There will be opportunities for income through annuities since interest rates will gradually be on the rise (while not rising to levels high enough to choke off general economic growth). The stock market, including the tech sector, should perform quite well and I believe there are even longer-term investment opportunities (and not just trading opportunities) in the 3-5 years ahead (see my previous article entitled "Prospering in the Coming Years"). Real estate in general should continue to perform well. I surmise there will be a return to a semi-deflationary environment, a la' the late 1990s, in the coming years in retail prices across the board will decline from present levels, thereby making goods less costly to those living on a fixed income. Energy and food costs will be contained in the 3-5 years ahead.
Question: What will be the effect on the dollar of continued Fed pumping? Do you expect the dollar to increase or decrease in value in coming years?
Answer: The dollar has never been more politically-controlled than today and it's hard to predict exactly what the dollar will do in coming years. As for offering my best "guestimate," I believe the dollar will be influenced by the careful manipulation and control of the economy the Fed has planned for the 2003-2009 recovery bull market period. This suggests a "supported" dollar, i.e., one that isn't allowed to collapse or decline much below the 80 area (basis U.S. dollar index), a major long-term benchmark. I wouldn't be surprised to see the dollar follow the "rule of alternation" from year-to-year, that is, a year sideways-to-up followed by a sideways-to-down year, from now until around 2009 when I expect the recovery bull market to have ended.
Question: Why do you believe the stock market recovery will last until 2009? What is so special about this year?
Answer: Of course, in the business of forecasting long-term stock market and economic trends, nobody knows for certain what the future may hold. So I can't promise anyone the recovery will last until exactly the year 2009. But there are several very good reasons for believing that not only will there be an overall "up" market between 2005-2009, but that 2009 will witness a major long-term peak in this recovery bull market. First, as some noted market researchers have already pointed out (viz., Yale Hirsch, Edgar Lawrence Smith, Larry Williams, Samuel J. Kress, et al), the ninth year of every decade typically witnesses a major high, especially if a bull market has been underway up until then (and that has nearly always been the case in the last 100 years). "Nine" years are major peak years. In fact, as Larry Williams revealed in his book "Prospering in the Coming Good Years," if you decided to buy stocks (belatedly) in the ninth year of a decade, more than likely it would take you at least 5-6 years to recoup your initial investment with a profit based on the historical pattern. Another reason for the importance of 2009 is that this particular year has Fibonacci significance as it will mark the 233rd year of America's independence. Also, 2009 is about when the falling effects of the 120-year cycle and K-wave should begin to be felt in a severe manner until around 2014.
Question: Regarding your recent article on real estate, I agree that there are many who are wishing for economic collapse in order to profit thereby. This is an unfortunate way to go through life...hoping that others will suffer so that one may profit. Regardless, I feel a Japanese style decline is upon us. It has been underway for a while and will continue until the excesses have been wrung out. Realty is in a bubble and will overshoot as all bubbles do. My mother's house has gone from a purchase price of $285,000 in 1986 to a sale price last week of $650,000. That is a bubble. Finally, I don't see much luck in the real estate market for the following reason: credit expansion. Without credit expansion there is no expansion. I put forth we are fully 'expanded' already and will need to contract before we expand again.
Answer: I doubt very serious a Japanese style decline is upon us and so I must respectfully disagree with your assessment of the U.S. real estate market. You acknowledge that real estate is in a bubble and will overshoot as all bubbles inevitably do. So why, then, do you not believe we will witness the overshooting phase over the next 3-5 years in the face of the recovery bull market? Who or what is to say we have already overshot? I submit that the real runaway advance in real estate prices and home building hasn't even started yet. To quote, "you ain't seen nothing yet!" The very fact that all the major financial media are talking in terms of a real estate "bubble" and are questioning how much steam realty has left proves that we haven't yet reached the fatal point along the price curve, the "critical angle" as airplane pilots would say. If this were the final topping part of the bull market then virtually no one would be questioning it, least of all the mainstream press. History adequately bears this out. As for your comment re: credit expansion, I again respectfully disagree. Credit is expanding across the board, including in the real estate market. Based on my indicators, the rate of change in credit expansion is only just starting to pick up momentum to the upside. I predict that 2005 will witness a further expansion in credit growth in certain sectors, including real estate.