	Generational Dynamics
	Forecasting America's Destiny ... and the World's

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Generational Dynamics Web Log for 27-Mar-2010
27-Mar-10 News - Further advice on how to protect your money

Web Log - March, 2010

27-Mar-10 News - Further advice on how to protect your money

Military flashpoints in Gaza and near North Korea threaten wider conflict

Elliott Wave theorist Robert Prechter expects a 'rollover'

Robert Prechter has been very successful in using Elliott Wave theory to predict specific wave patterns in the financial markets.

At its core, Generational Dynamics forecasts are "long-term forecasts," meaning that they predict long term trends spanning decades. Elliott Wave theory provides "short-term forecasts," predicting the ups and downs of the markets in the immediate future. I believe it should be possible to combine Generational Dynamics forecasting with Elliott Wave forecasting to produce extremely accurate short and long term predictions, but as far as I know, no one has yet tried that.

Robert Prechter appeared on Bloomberg tv on Friday, and said that his Elliott Wave analysis is now predicting the end of the stock market rally within the next few weeks. Here's what he said (my transcription):

"This is the third best selling opportunity in ten years. The first was in 2000, the next was in October 2007, and the third one is somewhere between now and a few weeks from now.

Robert Prechter, Elliott Wave International <font face=Arial size=-2>(Source: Bloomberg TV)</font>

Robert Prechter, Elliott Wave International (Source: Bloomberg TV)

So I am very negative again, and just to set the record straight, a year ago I was very, very bullish on the market, looking for 10,000 on the dow. So we got there, we have exceeded it. and there are all kinds of reasons why I think this is a selling opportunity.

I have been bearish for a couple of months. People did not like the market back when the S&P was selling at 667, just 12 months ago. It is now selling at 1167, up 500 points in just 12 months. The market is overvalued, overbought, it's losing upside momentum. There are too many optimists in the market by several measures. This is the complete opposite of the environment a year ago.

[Today,] you can short just about everything. Somewhere between now and May, we're going to have a real rollover. Think about this progression:

In October, the bond market topped out; in November, the dollar bottomed; in December gold and silver, and the utilities average -- go figure that one -- topped out; and in January, the CRB index of commodities topped out.

The stock market is the last domino holding up. The best trade on the board, the one I have been bullish on for the past 6 months, has been the US dollar. It has had a great move. It is a safe place to be. There is no reason to take any risk in these other markets right now. They're giving all kinds of signals of topping out.

I think the dollar has turned on a long-term basis for quite a long time. but it is not because everything is bullish. We are heading into another deflationary bout, just as we as we had in 2008. And when that happened, the dollar rallied very strongly, because a lot of the ious in dollar denominated terms were disappearing and losing value.

That's going to happen in 2010 and 2011 and probably for a couple more years. So during that period, you want to be a safe as possible, then investing in dollars and cash equivalents in the safest possible institutions."

Prechter's analysis is consistent with the Generational Dynamics predictions that have been discussed on this web log.

As I've said many times, from the point of view of Generational Dynamics, the situation hasn't changed. The stock market has been historically overpriced by substantial amounts since 1995, and by the Law of Mean Reversion, will have to fall sharply and stay down there for a comparable length of time (15 years). This is a mathematical certainty. (See "How to compute the 'real value' of the stock market.")

Where should you keep your money?

This is a question that I get asked all the time for years. My answer has generally been (for Americans, anyway) to keep your money in FDIC-insured bank accounts or in short-term (6-12 month) Treasury bills, which can be obtained online with no fee from http://treasurydirect.gov .

This question was discussed on Friday in the Financial Topics thread of the Generational Dynamics forum. For anyone wondering how to protect your money, it's still worthwhile to spend an hour or two reading this entire thread from beginning to end.

Forum participant Higgenbotham is a leading expert in investment strategies, and has provided the following advice for keeping as much of your money during the coming financial crisis:

"As a practical matter, my opinion really hasn't changed since the Fall of 2008. If people are looking for maximum safety, depending on how much money is involved, they should spread it out between cash (Federal Reserve Notes) and gold (maybe silver too), then step to a Treasury Direct account (and if they don't want T-bills, they can let them mature into C of I and that is immediately available cash if the banks are still open). Finally, there's the option of buying currency issued by responsible governments who have clean balance sheeets like Singapore. It's impossible for me to give percentages because it all depends on how deep the crisis is. It's my suspicion that the viability of the US government is going to come into question during this crisis, unlike that of the 1930's. That did happen in the 1860's and anyone living in the Confederacy who hid those cash notes in the basement lost everything they had. One thing to keep in mind is that if there's an upcoming war with China, they may attack our computer systems and it is my belief that from that standpoint holding paper cash is good advice."

I continue to discourage people from owning gold, unless they have enough money to keep gold in addition to cash. Gold is in a bubble, and should be priced around $500/oz. Any spike in gold prices might be short-lived, even in an emergency.

Gold in the form of gold-equivalent securities seems highly dangerous to me. In the case of emergency, there's no guarantee that the securities would be redeemed in a financial crisis, and you'd lose everything.

Thus, I've always said that if you're going to own gold, then you should take possession of the actual gold coins or bars. However, here you have to be careful because scams in the form of fake gold coins and bars are becoming more widespread.

If you own gold, then it's doubtful that gold would be anywhere near as liquid as cash in an emergency. If you're desperate for money, then you may have to sell goal at a sharp discount to get cash.

Putting all this together, it's very hard for me to see any good reasons for most people to favor gold over cash. I expect the US dollar to remain strong, even in an emergency.

Let me experiment with a different approach. I'd like to rate various savings options based on the amount of savings you're liable to have left after a worldwide financial crisis. 100% means you'll have all your principal, 0% means you'll lose everything. A value greater than 100% is theoretically possible, and means asset appreciation.

Here are my ratings, with some modifications based on Higgenbotham's comments:

FDIC-insured bank account: 98-100%. (Taking into account interest rates versus chances of FDIC not paying out.)
T-bills: 97-100%. (Taking into account difficulty of redeeming them.)
10-year Treasury bonds: 70%.
30-year Treasury bonds: 50%.
Gold: 50%.
Stocks: 10-20%.

However, these recommendations won't apply to everyone. You have to evaluate your own personal situation to decide what's right for you.

It's also a very good idea for you to be prepared for you and your family to survive in your home for a couple of weeks. This means having canned foods, flashlights, and medicines available.

Explosion sinks South Korean naval ship near North Korean waters

Yellow Sea location where South Korea ship sinks because of explosion near North Korean waters <font size=-2>(Source: wsj.com)</font>

Yellow Sea location where South Korea ship sinks because of explosion near North Korean waters (Source: wsj.com)

South Korean officials are playing down the possibility that a North Korean torpedo was the cause of an explosion that sank a South Korean naval ship on Friday evening local time. By early Saturday, 58 sailors had been rescued, according to the WSJ, but the other 46 are missing and presumed dead.

Reuters quotes a South Korean government spokesman as saying, "It is premature at this stage to discuss the cause of the sinking. It has not been determined whether this incident is related to North Korea."

The defense ministry is quoted as saying, "An unidentified reason caused a hole in the ship, which led to its sinking. Currently 58 have been rescued out of the total 104 on board. Rescue efforts are under way. The ship fired a warning shot at an unidentified object, and the object was later suspected to have been a flock of birds. But we are checking."

At this writing, it's been some 36 hours since the explosion occurred, so the South Koreans must know more than they're saying. We can imagine two possibilities:

The explosion was an accident, and the South Korean military are embarassed to admit it.

The explosion was caused by a North Korean torpedo, but saying so would require the South Koreans to declare war on North Korea.

The military will be salvaging the sunken boat and investigating possible causes of the explosion, and this will take at least 20 days, according to South Korea's Yonhap News.

Israelis and Hamas clash in first escalation since Gaza war

Two soldiers in the Israeli Defense Force (IDF) were killed on Friday in what was apparently a Hamas ambush involving gunfire and explosive devices. Two other IDF soldiers were wounded, and at least four Palestinian militants were killed, according to the Jerusalem Post.

A Hamas spokesman has told Ynet News that the incident was a planned ambush. "The purpose of this act was to prove to the Israelis that the repeated violations of the borderline will not be tolerated. The Israelis wanted to send us a message, and we responded to them appropriately," he said.

This is worst clash since the brief Gaza war of early 2008. (See "Israel declares 'war to the bitter end' and 'all-out war' against Hamas in Gaza.") Gaza has been fairly peaceful since that war ended in a ceasefire, so this even is considered to be a major escalation of tensions between Hamas and the Israelis.

Israeli Defense Minister Ehud Barak warned Hamas that it would be held responsible for all actions perpetrated against Israel, according to Haaretz.

On the other side, Hamas lawmaker Mushir Al-Masri praised the battle to a celebration of hundreds of Hamas supporters. "Entering Gaza is not a picnic," he said. "The Zionists cannot come in anytime they wish and leave anytime and however they want. The Qassam Brigades [Hamas' armed wing] were ready and taught them a lesson and they should not repeat such a foolish act."

From the point of view of Generational Dynamics, nothing has changed since what I first wrote in 2003, when President Bush launched his major peace plan. (See "Mideast Roadmap - Will it bring peace?") Generational Dynamics predicts that there will be a major new Mideast war re-fighting the 1948-49 war between Jews and Arabs that followed the partitioning of Palestine, and the creation of the state of Israel. There will be no peace agreement.

Additional Links

How not to run an SEC investigation. The Bernie Madoff non-investigation was not the SEC's only debacle. NY Times

Prices in Japan fell 1.2% in February from a year earlier. Japan has been in deflation for 12 straight months now. BBC

One thing you can do to protect yourself online is to use strong passwords. Here's how to create a strong password. Web Worker Daily

An Arab summit being held this weekend in Libya is just "political theatre." Al-Jazeera

Bill Clinton, on Rahm Emanuel: "I found Rahm. I created him. I made him what he is today. I am so sorry." The Week

A study reveals that Koreans don't have big faces. Chosun

The father of French President Nicolas Sarkozy was quite a ladies man. At age 11 he had sex with his nanny. At age 17, he ran away with the widow of a Nazi SS officer in war-blitzed Germany. Times Online

(Comments: For reader comments, questions and discussion, see the 27-Mar-10 News - Further advice on how to protect your money thread of the Generational Dynamics forum. Comments may be posted anonymously.) (27-Mar-2010) Permanent Link
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