Anticipating a Second Market Collapse

July 13, 2010 by  
Filed under Investing

The doomsday investors and prognosticators are out in full force. They are predicting another collapse of the markets. I am concerned, of course, as I am in the retirement home stretch. There are plenty of theories for why we should expect more bad news.

Let’s start with this article which summarizes the thoughts of those who believe that the U.S. is on its last legs.

Next, there is the Elliot Wave Theory.  The technical analysts who follow it say that the markets are headed for real trouble and that we all should take cover.

There is also the recent pattern of extreme market correlation in which every class of equity investments rises and falls together. This is a big problem for the so-called stock picking geniuses, of which there are actually none.

So what should the more rational investor do in times like this? The market is now swinging upward, yet again. What if this is a last gasp rally before the negative predictions prove correct?  I’m going to ride it up but limit our downside with trailing stop loss orders on our major equity holdings.  Our new money will continue to flow into non-equity classes, reducing our exposure.

What about you?


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19 Responses to “Anticipating a Second Market Collapse”
  1. Rob Bennett says:

    I wish that we could stop referring to those who foresee another market collapse as “doom and gloom.” We borrowed $12 trillion from our future selves when we permitted stocks to be overvalued by that amount in the late 1990s. Yes, it is of course painful paying back the debt. But is it “doom and gloom” for someone who has taken on huge credit card debt to begin making payments? I sure don’t think so.

    I believe that we are on the threshold of our greatest economic advance in our history. We have learned amazing things about how to invest more effectively over the past 30 years. We have not been able to talk about these things because it upsets the Buy-and-Holders to hear the realities. The one thing that has opened things up a bit is the economic crisis. If it takes some more pain to get the door open all the way, that’s what it takes.

    My dad had open heart surgery at 65. It was scary. It was a hard operation to recover from. But that operation gave him 20 good years he wouldn’t have had had he not had the operation. Do I wish that we could abandon Buy-and-Hold without putting ourselves through another market collapse? I wish that with all my heart. But I sure see it as a better option to open things up the hard way than not to open things up at all and to see our free market economy go over a cliff as a result.

    Sometimes you have to live through some bad stuff to get to a better place. We will someday look back at all this and laugh about how dumb we all were for failing to “get it” for so long. Chins up! Courage!

    Rob

    • MasterPo says:

      I don’t see how the stock market run up was on “borrowed” money from the future. It’s not like the gov was borrowing $$$ from china to buy the market. That’s the real problem (one piece of it – see below).

  2. wrc1k says:

    95% cash and 5% long-term wwaaaaaay OTM SPY puts . . . no offense, but I am looking for those puts to go to the moon . . . I just turned 40 and have more income earning years ahead of me, so a little gamble (um, investment in “The Market”) could help cut the number of working years I need to really enjoy the rocking chair . . .

  3. MasterPo says:

    TML – You’re falling into a trap that I see many others falling into these days. That being: You’re looking for a simple 1-to-1 cause-effect relationship between some singular event that will cause an economic melt down.

    I don’t blame you. The human mind finds it easy to say “IF this THEN that”. It’s the AND’s, OR’s, and (as we say in programming) the nested/compound IF’s that the mind gets flubbed with.

    Trying not to put it in computer-eeze talk.

    The problem isn’t as simple as JUST any one of the following:

    - National debt of $13.1 Trillion
    - Nation budget deficit of $1.4 Trillion
    - Unemployment U3 figure of 9.5%, U6 figure of 16%, SGS figure over 20%
    - Trade deficit of $5.2 Billion (so much for doubling our exports as Obama said during the State of the Union! But I digress)
    - Wobbly stock market at best.
    - Individual state budget debts over $1 billion (e.g. CA, NY, IL)
    - Bush tax cuts (whether you like or not) expiring Jan 1, 2011.
    - Cap&Trade proposed taxes
    - VAT proposed taxes
    - “Financial Transaction Fee” proposed tax
    - Obamacare taxes starting 2011
    etc
    etc
    etc

    Any one of these things would be bad. Two would be awful. But all combined? That’s a knock out punch IMO.

    Are you familiar with the Biblical story of Joseph and the Pharaoh’s dream? 7 good years followed by 7 lean years.

    I don’t know if “7″ is going to be the correct figure, but IMO 2010 is the end of the good years.

    Hope I’m wrong. But…

    • Rick Beagle says:

      “Hope I’m wrong. But…”

      You are, but I digress. You forgot to add the two wars on your list, surely they should be listed before “proposed” anything….

      RB

      • MasterPo says:

        (*sigh*)

        There you go again…

        I’d love to debate you on that but I have to get some sleep for my $700 billion dollar stimulus funded shovel-ready job. You know, the $12/hr one making no-pork turtle tunnels under highways that replaced my 6-figure 25 year earned professional career.

        But hey, a job is a job right?

        • Rick Beagle says:

          Yep, didn’t you hear, you had one of those 8 million jobs that won’t be coming back. So, quit your whining and start shoveling. While you are shoveling dirt, please feel free to consider how you got there, and what the impact of a 2% drop in wages for 95% of Americans versus a 210% increase in wealth for the rest, really means to you and the rest of the middle class, err great unwashed masses to which you belong.

          Yep, the wealthiest jumped up 210%, and the rest of us went down. I think that calls for another tax break for the wealthy, and you dang taxpayers should fund the cleanup of the Gulf instead of poor abused BP!

          Maybe you can trade some of those turtles for health care under the barter system proposed by Las Vegas senate candidate?

          Go Palin in 2012! Nice interview she gave the other day… on Fox no less.

          Did you know Obama is keeping you from going to heaven?

          Don’t worry about the economy, or anything going on – it’s the illegals fault. That’s right, we should drop all efforts to right our country to go chasing after the poorest of the poor! Thank goodness some respectable soul in Utah released addresses for illegal aliens so they can be hunted down by well meaning white patriots in sheets.

          /snark

          The Republicans are made up of millionaires and wannabe lap dogs. Lap dogs to gullible to realize that they vote against their own self interests.

          Peace.
          Rick Beagle

          PS links send comments into moderation, so I generally don’t link you to the source… if you are interested just google the information presented. It is all true.

  4. Don’t try to predict when/if the market will collapse; let it tell you. That’s why each investment needs an exit strategy (in TML’s case, the trailing stops).

  5. MasterPo says:

    Ricky – don’t you know we all all “rich” now?

    Remember (quote): “No family making less than $250,000 a year will see any form of tax increase” – candidate Obama, September 12, 2008.

    • Rick Beagle says:

      excuse me, but um, where was that promise broken. in case you missed it, you got a tax break.

      • MasterPo says:

        Let us kill yet another Obama myth:

        $12 per paycheck (now $8, in 2011 to be $0) is NOT a “tax break”.

        Period.

        That said, this is a financial website. So when the Bush Tax cuts expire Jan 1 2011 and your dividend/interest/cap gains taxes go up and (Heaven for bid) a family members dies and – oh, sooooo sorry! – you have to pay up to 55% tax on what they left you please let me know how this is a tax break too.

        Just wait until Obama’s Debt Commission(!) comes back in December (how nice, just AFTER the election) with all sorts of tax increase recommendations. Then Obama has successfully CYA’d himself – “Wasn’t my fault, the commission *made* me raise taxes!

        ps- Riddle me this: What is the difference bewteen the gov taking $$$ from you by taxes vs. the gov taking $$$ from your employer or customers so they don’t have money to pay you?

        • Rick Beagle says:

          I’m not speculating on what may happen in the future, but honestly, without an increase in revenue, we are not going to make much headway on balancing the budget. Restoring the estate tax is a good step forward.

  6. MasterPo says:

    pps- Ricky, one of the first things Obama did was raise taxes on cigarettes.

    There are millions of people making well under $250K that smoke.

    Seems like “some kind of a tax increase” to me.

    But that’s smokes so who really cares, right?

  7. MasterPo says:

    How about an “honestly” *decrease* in government spending?

    Oh noooooooooooo. Can’t have any of that can we….

    • Rick Beagle says:

      Big fan of decreasing spending. I say we stop both wars, and end all of those “no bid” contracts that we seem to keep giving? And let’s tell those Republican dogs who keep insisting that tax payers should pay for the BP cleanup to shut their pie holes!

      Let’s start looking at those corn and oil subsidies – do we really need to give these corporations tax payer money?

      And the list goes on.

      You and I agree that spending should be cut, but you and your ilk want spending cuts on items meant to help our poor, our children, and our elderly.

      Peace.
      Rick Beagle

  8. Jack Clark says:

    “Oh noooooooooooo. Can’t have any of that can we….”

    You’re right we can’t because neither party, (hint, hint, your party too) refuses to stop the spending gravy train.

    Regan instituted the largest tax increase ever in 1982.
    And Bush II’s last three years in office were a spending boon doggle.

    As much as hate to say this but, The Beagle has a point that if you haven’t noticed almost all the oil and corn/ethanol subsidies go to states the are Red so it’s not like the GOP is trying to stop the pork/wasteful and useless spending either.

    Po, the thing you keep overlooking, on purpose I know, is that the Right has done little to nothing to stop spending when put in power and given a chance.

    Cheney’s cronies, Bill Frist and Tom Delay were like pigs in a trough of money the last time the GOP was in control and they rightfully got booted out.

    Why would GOP leadership be any different if it comes to pass in November or in 2012?

    We CANNOT just cut spending to get the country out of this economic malaise.
    Major spending cuts, that neither party will ever go along with, and tax increases are the only real combo that will work.

  9. Mervin Jarrett says:

    Yes……..great call. All those ‘doomsters’ who came out in July were WRONG.
    To da moon Alice. Bull markets forever.

    Did it ever cross your mind that the folks like Roubini might have something worthy of deeper thought other than a summary ‘ignore’ like the Fast Money Crowd. ..just passing by on my way to the Greek Cornucopia.

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