How to Protect Yourself from a Resumption of Trouble

Institutional Advisors Bob Hoye has made Brilliant Calls; At the MoneyTalks Conference in Nov. 2007, Bob warned that a contraction of credit would reap havoc with all financial assets. Bob Hoye warned again at the Money Talks World Outlook Conference on Feb. 2008 when he said, "We are experiencing the beginning of the greatest train wreck in the history of credit."

Later at the World Outlook Conference in February 2009 he said we are close to a recovery and sure enough we got a recovery a less than a month later on march 9th. Obviously Brilliant Calls.

Michael Campbell: Bob, what are your thoughts generally on the markets right now from a historical perspective?

Bob Hoye: First of all on the rebound out of the crash, which was a 1929 type of crash indexes rallied with great enthusiasm and made about a 40% retracement. Well it continued on and the retracement is now something like 64%. It just reflects the great stimulus that was put into the market place to fix things that needing fixing which of course went into the banks to find its way into Wall Street driving stock prices further. Nevertheless we should look at where we stand in history and that boom that concluded in 2007 had all the features of a great financial mania and it was number six on the list with the South Sea Bubble of 1720 being the first 1929 the fifth. One of the things that’s happened is that the moment the stock market rollsed over the business cycle did as well. As you know the stock market’s a leading indicator and when it heads down business continues up for a year afterward. So the economy started to slow in December ’07 the stock market high was April 2 that’s very close.

Despite the vigor of the rebound we maintain we are still in a post bubble contraction. And in that world you become a trader since there’s no such thing as a long term position in stocks, bonds or in commodities. You've got to be a trader. So this is where we stand, and at the moment Mike there’s a terrific opportunity here because we have a proprietary indicator called the peak momentum forecaster. And this has over the last 30 years called the big events like the high for commodities in ’73 and the high for gold and precious metals in 1980. When this gets up and gives a signal you’re within one to two months of the high and since his indicator is now at 127 when being above 121 is danger zone. So our advice to our subscribers now is to watch for concluding action in the stock markets. A you know, we call it the all one market and if the street’s going to bid up stocks, corporate bonds and commodities the US dollar will go down. On the other hand if we get some liquidation going on in overly speculated stocks, bonds and commodities then the dollar will go up. As it happens we now are in an up trend for the dollar which is not going to be too friendly to a lot of highly leveraged speculators out there.

Michael: What’s difficult is for individuals is as you say it is one Global Market and the movement has been so prominent. Can you go into a couple of those markets and get some comments on them from you. For example you have been recommending keeping a core position in gold since 2001/2002. Is it time for gold to take a little rest do you think?

Bob: There has been some very, very outstanding action in gold and silver will always outperform gold. One of the indicators when that play is getting ready to turn is that silver begins to tire first. That scenario was reached a few weeks ago when we called a consolidation zone for gold and a correction zone for silver that could continue continue into January. So that’s a warning on the sector, though on the long term we remain very bullish on the gold sector because on all previous post bubble contraptions the gold sector has done very well. As for the stock market, outside of our peak indicator we’ve got two models that are suggesting that we are in a trading range for the stock market into January. Then the probability is that it then take a serious downturn.

Michael: I guess the worry is you said the 1929 crash. Are we going to repeat that kind of price action in terms of the markets?

Bob: Yes. You know during the rebound out of the 1929 crash Barrons wrote that the urge to speculate was just as speculative as it ever was. Further that it would be very difficult to check the enthusiasms now that was the top of the rebound in 1930. Now we are at the top of a terrific rebound and the daily sentiment figures are at the really high end of enthusiasm. Indicators at the most extreme levels since 1965 and 1958 so we are off the map as far as sentiment goes.

Michael: Where do you see it all ending? What does this look like 10 years out or 20 years out?

Bob: Euro land is going to break up because the only answer to the differences between Greece and Germany is that you’re going to have to have. hardworking German citizens working until a retirement age of 70 so that Greeks can retire at age 55. That is not going to keep euro land together, so it’s going to blow up. Post bubble crashes do change things extraordinarily. It’s their nature. The fed made tremendous efforts to provide liquidity post 1929 crash but it was all swept under the table. The people intellectually running the fed have to say that it didn’t work in the 1930s because the head of the fed made errors. Now the application and creation of liquidity is so well publicized that when the next phase of the contraction comes in, which we think should be evident in the first quarter, it will say to policy makers that they are failing. That it did not work and you’re all a bunch of a BS'ers. You also have the Tea Party political movement in the United States that is attempting to take government back from these "experts". The biggest tool that the experts have to try and manage the economy is the ability to depreciate the dollar. So then the Tea Party will take government back into their hands. They will also take money into their hands and they will decide that convertibility is the only way you can constrain the idiots in policy making. So lots of exciting things to come.

Michael: What about interest rates here. Are we going to have hyper inflationary style interest rates?

Bob: We won't have Hyper inflationary interest rates. It’s going to be that nobody can service the debt so it might get marked down to zero, written off or fail. Again we are in the post bubble contraction and one of those features will be what we call the a bond revulsion. This then started in ’07 with the subprime mortgage bonds. Then in ’08 it was the crash in corporate bonds and more recently it’s the second crash in sovereign debt. Also the crash in municipal bonds in the last four months has been incredible. These changes to Muni Bonds are because tax revenues to cities have disappeared. They can’t service the debt. This is the kind of thing you get in the post bubble. We had our technical got the top of the bond market in late August and the line we used then was bye-bye bonds, you know goodbye bonds. Now the bonds have fallen from about 137 down to 118½ and we are over sold so…

Michael: How far this could go?

Bob: Rirst of all it’s not the central bankers that have dropped the short dated T-Bill rates down. These are features of post bubble contraction. Money, the real money that is around heads for the most liquid items. So it it bids interest rates down because US T-Bills are one of your most liquid items. It bids gold up too. So it’s not the policy of the central banks to have short dated rates this low. This just happens and they are trying to look as if it is policy. The main thing is that they have no control of the yield curve so when longer dated rates want to go up as they have been recently they have no control. No control on credit spreads so that when interest rates for lower grade credits such as mortgages and bonds go up they go up. And there’s nothing that these damn fool central bankers can do about it. It’s unfortunate that Canada has been in a bit of a cocoon here because they have this idea that because of resources and commodities they won't be affected. The only thing you can say for the Canadian banking system is it has not been designed by the US congress. So Canada is just as vulnerable. Also we haven’t had a real crash in Canadian residential housing prices yet.

So the idea that economies are national and can be managed by an inspired bank of Canada is nonsense. These global expansions have been universal. They afflict everything and when the party is on everybody think it’s great and they take on a whole lot of debt. The problem in the contraction is that the economy isn’t big enough to service the debt so then you have to go into the great bond revulsion whereby as I said they’ll get marked down and priced to exceptionally low numbers. Many issues will be will be in default, a feature of a post bubble contraction. The idea that the fed or the bank of Canada can provide a stimulus, all it is is throwing credit at a credit contraction and hoping that it will go away. I mean these guys are dealing without no empirical evidence whatsoever. They are dealing with theories that have been pulled out of somebody’s imagination.

Michael: As for those implications and the level of uncertainty, how can our listeners and readers protect themselves?

Bob: Well I think #1 is lock in low interest rates and mortgages now. The other is to save as much money as you can because once this rebound phase is over then money will go back to picking up purchasing power and you can save it. Don’t rely on governments to help as governments are broke. It comes back to the individual, look after your balance sheet as best you can, work as hard as you can and save as much as you can. Also protest your government’s greedy demand for taxes. The tide is shifting away from Government authoritarian initiatives. All the nonsense about stimulus has just been dream world stuff. It’s time that the public then starts to say look you guys are crazy experimenters at the central bank level so just stop experimenting with our future. We have this other very straight forward condition whereby many folks are tightening their belts at home then they look at the extravagance of cities. I saw a study the other day that points out that taxation at the city level is soaring for what reason? So the public is going to say to the cities you tighten your belt as well. Then they’ll look at the provinces and states and say you are not going to live the good life when I’m having to be thrifty. Finally to the federal level. This is very exciting times for the individual as they will discover that they can really run things.

Michael: Interesting as always Bob. I look forward to our chat at The World Outlook Conference and I appreciate all the time you make for us on Moneytalks.

Bob: Mike always good to be with you, all the best.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.