Phil Anthropy

Headed For a Normal 20-30% Correction

It is interesting to watch the ebb and flow of billions of dollars as just the froth on the rolling waves of international finance. In my view, a credit crunch is just the nomenclature banks use in order to raise interest rates on mortgages without stating their true agenda: greed. Dow up or down 300 points? It makes no difference, because that action is just the market movers casting wide nets to take out the riff raff trying to make a quick buck on the short-term trends. Who are the actual losers in the hedge funds? Probably anonymous foreign interests, private investors looking for the gravy train, and a few unfortunate college endowment managers who overreached their market knowledge. There are no losers among the very rich; that is the important lesson to take away from this.

When banks actually start to lose money, the Fed or other central banks inject liquidity rapidly, because after all, the Fed is a private business, not part of the government. If a slowing economy is desirable to thwart inflation, it is not that inflation is dangerous, but rather that the rich want to drive down the price of real estate so that they can buy it up cheap from the little guys in order to begin the next thrust of development and ownership.

The concept of laissez-faire capitalism is a smokescreen for market manipulaton on the grandest scale in history. I grant that sometimes the big players are at cross purposes and do not act in unison, which leads to counterexamples, but this anomalous model has a certain simplicity that other explanations lack.

So let's make some predictions, based on the theory of manipulation, and see if they come to pass.

. More hedge funds will fold, but their clients will be relatively small investors. The hedge fund managers and financial institutions will come through unscatheed, as will the cynical rating companies that led the public to believe their leveraged investments were safe.

. Residential real estate prices will drop another 20%, at which point they will stabilize as mammoth holdings are accumulated by REITS controlled by foreign interests. Interest rates will then mysteriously fall, inventories will vanish, and construction will resume -- with illegal immigrant tradesmen ironically forming the customer base for the very residential real estate they are building.

. The dollar will remain relatively steady against foreign currencies, not because it should, but because it's kept there. As someone recently said on Kudlow (to Kudlow's consternation), we have financed our war with foreign money. Now that the Chinese have us on a short leash through their complete control of long-term interest rates (their recycled dollars buying our treasuries), we must dance to their tune economically. The Chinese currency is linked to the dollar, so they don't care much how strong or weak the dollar is. They will continue to increase exports to us, and since we have become totally dependent on their cheap goods, already priced into our consumption budgets, we would put our economy into free fall if we tried to curb imports, which would reduce consumption.

. The stock market will end at Cramer's predicted 14,000 plus, not because of any rational valuation, but because that is the level where the amount of market cap increase will float enough new money in the economy to make up for the drains elsewhere, as foreign interest buy up this country (and other countries, too; we're not unique).

. There will be no big stock market correction. Normally, it would take asset deflation to bring down interest rates and thereby increase the spread on interest rates between savings accounts and loans, which helps the banks. But in the current Looking Glass economy, the rates are controlled by the Chinese (and perhaps by Fed open market operations), so no deflation is necessary. What we can predict with relative certainty is that there will be no significant inflation, because that might actually benefit borrowers, as they pay back their debt with inflated dollars. In today's world, we love individual debtors, because they pay the vigorish, but they can't be allowed to actually benefit from their loans in constant dollar terms.

. Stocks with global exposure will rally, because they are independent of our economy, and the rest of the world is doing far better than we are. I favor big tech, agricultural genetics, overseas pharmas (not limited by our regulations), jewelers (the rich get richer, and need jewels), food producers (we are breeding more people), luxury hotels -- you get the drift.

. Gold will rally precipitously, but not until the vultures are poised to pick our infrastructure carcass clean. This picking will not happen in the well moated financial world, but rather in the world of natural resources and large scale undeveloped real estate holdings. The Chinese will inexplicably begin to sell treasuries at a discount on the international secondary market, gradually divesting themselves of their core dollar holdings and accumulating Euros and commodities futures. The dollar will suddenly weaken as the Chinese dump dollars and treasuries directly and relentlessly on the primary market. Interest rates will spike, and the Fed will come to the rescue with inflated dollars to buy the waterfall of unwanted treasuries. As the dollar weakens, the Chinese will buy dollars with their gold and Euros, and immediately use those dollars to buy up our industrial and agricultural base. The resulting demand-driven price inflation will spearhead a rally in real estate and a rise in interest rates, which will strengthen the dollar somewhat, but not enough to offset gold's rising store of value. When the music stops, everyone has a chair except the American taxpayer.

Anyway, it's easy to make predictions. The hard part is to make accurate predictions. We'll see what happens.