Wednesday, November 5, 2008

DOW 5000

If we get policy out of some of the rhetoric that we have heard in the last 24 hours we are going to see DOW 5000. I have been studying what is going on in China for quite some time and must admit that I have been wrong on their markets as I really believed that their markets would bounce back much faster. China is going through the normal market gyrations that you would expect to see with financial markets that are really still in the infant stage. Yes they are going to be susceptible to the U.S. markets---but what about the economy behind those markets? The economy over there is still going to grow. Now there government has huge surpluses and our goverment is running a huge defecit. Let me say this--DEFECITS IN AND OF THEMSELVES ARE NOT NECESSARILY BAD. No that was not a typo. A defecit that is financed with cheap money is not bad. The problem comes in when the cost of credit gets higher. So practically I see that our defecits to this point have not been all that bad, but if we get into a longer recession and possibly a depression---and the defecits widen during that time frame and they most certainly will under the Democrats. Do I have a point? Yes, if China doesn't continue to fund our debt at cheap levels, then our markets are in trouble. If we move toward Socialism then we can't continue to generate low interest rates that we currently enjoy on our debt.

So in summary after those ramblings, here is my thesis. We are going to see our cost of credit go up over the next 24 months. China is going to continue to consume goods and their financial markets are going to continue to develop and become better and safer investments. Less money pouring into the U.S. safe haven government bonds--even higher cost of credit for the U.S. government. Higher taxes slow down the small businesses and government needs more money to stimulate the economy. All the while China and India continue to consume. Inflation goes crazy. Gold will surpass $1100 per ounce by July 2009 and $2500 by January of 2011. The Dow will test 8400 again by the end of this year and will test 7700 during the first quarter of 2009. Deleveraging has given every one the false idea that inflation is totally at bay. Trust me this will be a short term phenonmenon and inflation will be back on the radar screen and will cause interest rate hikes before the end of 2009. The dollar will begin to weaken and the dreaded economy killer (Oil) will begin to ramp up again. I believe that we will see oil prices back to $125 by June of 2009. I believe that some time during 2010 we will see oil touch $200 per barrel and natural gas at $15/mcf. If this wheel begins to spin it will cause the DOW to go into a massive downward spiral like a slow moving cancer that just eats away at the core organs before you know what has hit you.

Tax and spend has never---and I challenge anyone to find proof that I am wrong---tax and spend has NEVER EVER made an economy more EFFICIENT. It hasn't, it won't, and it never will. Will a stimulus package help retail numbers for a period of time? Yes. Will it last? No. Families need to get more efficient with their personal spending and the government can't make families more efficient without creating jobs that last.

I will play the energy and gold plays and the heck with everything else.