* A week ago I was with a friend who had followed my advice and sold off all stock and equity investments. He mentioned to me that every time the stock market went down, he and his wife would hi-five each other. I can appreciate that they would be happy that their move is working out, but the larger issue and concern is what the world will look like if I am correct on my dire forecast for the global economy, and more specifically, the US. I remember October of 1987, when the stock market fell 22% in one day. I was not invested in the market at the time to any real extent, but can tell you how upset everyone was. And think back to what it felt like in February and March of 2009, when all the Kings Horses and all the Kings Men, couldn't fix the broken economy, and the stock market which determined the wealth of many. So let me ask you: if the S&P were to drop 70% or more over the next 5 years, how bad do you think things are going to be? (Let me also suggest that I am referring to a real, inflation adjusted drop of 70%, not a nominal drop). Nonetheless, psychology and mood are going to be pretty bad by the time the stock market drops by that much.

Over the weekend, Bob Prechter, who founded Elliott Wave International, the technical market timing service based on the Elliott Wave Principal, was written up in the New York Times, calling for a dramatic market sell-off (90+% from here) over the course of the next 5 or 6 years. As readers of this blog know, I follow Prechter, and his prognostications. While I do not always believe everything he writes about and suggests, I incorporate various techniques which he advocates in my own view of the world. I bring Prechter up today, because I was watching Joe Kiernan on CNBC talk about what the world will be like if Prechter is correct. His short comment was:"run for the hills and get a gun". Kiernan also quoted another technician as saying that the world would end if the Dow Jones ever dropped as much as Prechter was calling for. The conversation quickly switched to what it would be like if the power grid ever went down, as Joe mentioned that in northern NJ where he lives, that they lost power for 6 hours over the weekend when temperatures were pushing 100 degrees. Becky Quick chimed in that in the olden days, before electricity and air conditioning, that folks stayed out of the heat, but were far less productive when it got real hot. This reminds me of Sevilla, Spain, where it customarily gets to 115 degrees in the summer, and the town shuts down from 10 or 11 to 4 or 5, and dinner does not get served until 9 or 10 PM. In other words, the world manages to get by under adverse conditions. Clearly, however, the world is far less productive without electricity and other anemities of modern society. 

Is this what Prechter is envisioning, a world without electrical power? Just because the stock market declines dramatically does not mean an end to the world. What it does mean is that the way in which we measure wealth will change, since such a large part of our current world revolves around money and wealth.

In the past, when I have written about the very real possibility that the US will default on our debt, complete with a collapse of our monetary system, and advocacy of gold, readers wrote in that if what I envision occurs, then I will not need gold, but guns and lead. Is this what I want? I will answer with a resounding "NO". But I am also pragmatic enough to understand that just because I want one thing or another, does not mean that I will have my wishes answered. This blog started as a vehicle to explore what was going on in the world outside of bonds, and to better understand those factors influencing the bond market. Since then, the blog has since morphed into a means for me to use my knowledge of the financial world to determine what will happen in the future. The answers are in front of us, as they always are. It is our job to connect the dots together to ascertain how things will play itself out in the future. To that end, I do not see a happy ending, as the past two years of my writings will attest to.

So, what does a bearish person like me wish for? I wish I am wrong. In the meantime, I am acting as if I will be right. And if I am wrong and the gold, yen and cash portfolio which I am advocating puts in a negative return, then let me suggest that the world will be a better place, and there will be plenty of good employment opportunities for me to pursue. In other words, the cost for being defensive is only the opportunity cost of being wrong, while if my scenarios are right, then my defensive actions will be the difference between being wiped out and doing OK. To my friend who is happy when the market drops, my advice is to hope we are all wrong. When some of your friends lose their savings and cannot afford to stay in their homes, the reality of being right will not feel so good. It is with this sort of trepidation with which I approach the future.

* A stimulus plan I can endorse: Late last week, before leaving for his holiday, Obama announced a multi-billion plan to put high speed internet in rural locations throughout the US. Not only will this plan employ thousands of construction personnel, it will also bring high speed internet and all those benefits to thousands of schools, and many people. This is the type of things the Obama administration should be advocating. Obama's stimulus plan was announced 16 months ago, and it has taken him this long to put implement this plan. Maybe these sorts of plans take this long to sort out; I will give him the benefit of the doubt. I sure hope he has many more such plans in the wings, because the failing economy will need as many of these types of plans as it can get.

* Trading points:

* Gold - late last week, Gold broke down, and has since taken out some decent support levels in the 1220 area. For a while there, I thought gold was gearing up to bust out above 1265. Given my continued bearish thoughts on stocks, I think there is a decent chance that gold could get dragged lower with a failing equity market. For the time being, I will hold the gold I have, and recommend new participants to wait to see how things shake out. Good support is in the upper 1000s, about $100 lower.

* Stocks - This weekend gave me a chance to catch up on the market letters I receive at the beginning of each month, including some technical market analysis. What is notable, is how over-sold most technicians think the market is, but observe that despite this apparently bullish phenomenon, stocks cannot seem to get off the mat. To them, this is an ominous sign. In fact, it looks as if today's rally is failing, and if we close lower today, that will add fuel to the fire.

For my two cents, I have noted that the rocket scientists out there were focusing on 1025 to 1050 to buy stocks. What will these folks do when stocks take out this support, and proceed lower, below 1000? It's gonna be the mother of all buzz-kills. I am still looking for at least a 13% drop in 8 trading hours. This is not something to be happy about, but I think its coming.