The Lost Decade: Widespread and Furious

Last Friday morning before the US stocks markets opened, the American financial system was staring into the abyss – again. Complete liquidation had occurred throughout the night in Asia and Europe, and now it was our turn. The US was given a death row reprieve, at least for now.

Virtually every measurement for wealth, even if casually examined since the year 2000, shows a decline in value or no change. The S & P 500, the DJIA, and NASDAQ, closed on December 29, 2000, at the levels of 1,320.28, at 10,786.85, and 2,341.70, respectively. Friday, October 24th, their respective levels were 876.77, 8,378.95, and 1,202.27.

Also on December 29, 2000, the Wilshire 5000 Composite Index closed at 12,175.88 versus 8,806.20, October 24th; the 10-year Treasury note at 5.12 per cent versus 3.69 per cent, October 24th; and Value Line – Geometric closed at 393.47 versus 226.82 last Friday.

REITs, open and closed end mutual funds, individual stocks, and all classes of equity assets have been savagely beaten up by the Great Bear market of 2008, with the same ferocity as it counterpart, the Great Bull Market of 1982-2005, rose. Leverage and deregulation ushered in 30 years of miraculous wealth and prosperity. Now, the tide has reversed. Asset values, first real estate, ultimately all assets, in the short term, have nowhere to go but down.

The federal government is using all of its power to soften the landing, but historically, expansionary monetary policy will only debase our currency and opens the door for massive inflation once we exit the impending recession.

This summer I wrote about the inevitable pain deleveraging would inflict on the economy and why it had to occur. I think we are far from the end of this cycle. Municipal Market Advisors reported municipal bonds staged one of their biggest one day rallies in history on October 22 and the 30-year Treasury bond traded at an unbelievable 3.96 yield Friday. The cash price for gold is currently being pushed lower through forced liquidation.

Baby Boomers, still traumatized by their 3rd quarter retirement account and September brokerage account statements, are having a collective epiphany about their upcoming retirement years. Their careful planning and hard work to secure a comfortable 'golden years' lifestyle has been robbed.

What's next for the economy? Just as all other assets are unwinding, in time, so will the bond markets and the US dollar. By then, TIPS, gold, and non-credit dependent stocks should be your first line of investing defense.