Enzio's Clock

Background

1. Where we are and how much more to go

We some time ago suggested that America's Economic Time is worsening, and that there is no psychological de-coupling of markets.

Indeed, we have been calling "stagflation" in America sine May, 2006. This lends credence to the old adage that if you keep forecasting something long enough, it will happen...

We more recently then looked at how The Economic Time™ fared in Japan and Germany when their banks had to clean up their own balance sheets. As a KISS rule of thumb, we penned the phrase "4 years and 40%":

• four years during with The Economic Time worsens, resulting in a
  
• 40% market decline.

Having slept through yet another Japanese presentation yesterday, we never would compare the brilliant and tough flexibility of the US economy to the arteriosclerosis that has gripped Japan since I left there in October, 1989. Nor would we compare the molly-coddled German economy, festooned with corporate "deals" and paunchy unions, to the rugged individualism of U.S. economy.

So, we'll take punt and suggest that

• The Economic Clock™ will worsening in America for the next two years. This is when it hits bottom: the excess demand for money has created a very pronounced excess supply of goods, but in two years, the end of this winter starts looming, and
• the stock market will fall by about 40%. Currently the S&P500 has fallen by 15.6%, from its peak of 1,565 on 9th October 2007, to 1,321 yesterday in New York. If it falls the whole 40%, then it will reach 940. Ouch. We suggested three triggers that will cause this funeral.

Back in January w suggested that we have to brace for total losses of US$ 1 trillion: $325 billion of sub-prime junk + $325 billion of credit card junk + $250 billion of credit default swap defaults. Round it up to $ 1 trillion and you see why Bush's $140 billion "booster" is a drop on a hot stone. We were delighted to read in this week's Economist, page 82, that Wall Street's finest (paid) economists have tagged mortgage-credit losses at $400 billion, a figure that is close to our neighborhood.

In said article, these good economists (no joke!) also suggest that "the reason that the macroeconomic consequences are likely to be much bigger is that many of these losses will be borne by banks and other leveraged financial institutions that hold approximately half of all outstanding mortgage debt in America."  The economists reckon that this $400 billion loss will  reduce lending to households and businesses by $910 billion - call this "false precision" $ 1 trillion - and that this plunge in lending would chop 1.3 percentage points off GDP, or about one third to one half of growth... Crucially, their study addresses only the sub-prime mess; ours also included credit cards and credit default swaps.

Combine that huge loss that has to be digested with stagflation and there is no way that "the recovery is around the corner". The firing party has just begun...gulp.

2. How to Make Money Off This Idea

1. Always contact your financial consultant first.
2. We are long of Australian dollars and Euro, in the form of bonds.
3. Next to our recent currency advice, one bright subscriber has added this timely bit of advice: "...and the NYSE - ETFs are: FXY - Yen, FXA - Aussie and FXE - Euro and the nice thing about these ETFs is you can buy call options. If Dr. Enzio is right with his ~10% dollar drop prediction by June relative to these currencies, then the FXAJune95 calls currently selling for $1.90 will net a very nice profit! .......and if you buy the shares outright you also get a nice dividend yield.
4. We still have the short ETF on the US market, the SDS:US
5. We remain long of the platinum ETF, PHPT:LN