by Addison Wiggin & Ian Mathias
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20th anniversary of “Black Monday”… warning signs of another 22% crash
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The dollar’s new low… and the official report predicting even lower lows
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Gold at $768… the chart that points to $900
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Oil breaks through $90… why nobody cares
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Plus… “The real problem with Social Security” and other reader thoughts below
On Oct. 19, 1987 — “Black Monday” — the Dow shed 22% in a single session:
Could it happen today? Dr. Mark Skousen points to several obvious potential financial crises that could cause the market to crash in this morning’s Rude Awakening
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“A dollar collapse, like the one Paul Volcker suggested would happen in the next few years.” (The dollar index hit a new all-time low this morning)
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“A nondollar currency crisis in Asia, Europe or Latin America”
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“A housing crash and foreclosure crisis” (We’re in the midst of one now)
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“A major terrorist attack on a financial center, such as New York, London or Tokyo”
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“A sharp unexpected rise in inflation” (Food or energy, anyone?)
We heard a NYSE trader interviewed on NPR this morning maintain vociferously that a crash couldn’t happen now because we’re smarter, more informed and connected today than we were 20 years ago. What do you think? Post your comments here.
The 1987 crash happened nine weeks after Alan Greenspan assumed the chairmanship of the Federal Reserve. Mr. Greenspan was quick to respond to the crash by injecting liquidity into the markets. By the end of the year, the Dow had recovered to positive territory. Greenspan established a pattern for responding to every market panic that has happened since.
During his 18-year tenure, Alan Greenspan presided over the “printing” of more U.S. dollars than all the previous Fed Chairmen combined.
Today, Chairman Bernanke carries on the tradition. He “had his first test this past summer with the mortgage credit crunch,” writes Dr. Skousen. “The world’s markets were on the verge of collapse on Aug. 18 when the Fed intervened… by injecting liquidity.”
As if to honor “Black Monday,” the N.Y. dollar index hit 77.4 yesterday — an all-time low.
The index was created in 1973 to measure the dollar’s effectiveness in a post-Bretton Woods world… where all the major currencies of the world were floating freely, backed by nothing more than the confidence in the governments that sponsor them. The dollar has never been as low as it is today.
On Jan. 26, 2007, the same index stood at 85… the high for the year. In 2002, when Ben Bernanke made his infamous “helicopter speech,” the index was at 120. It has fallen over than 40% in five years.
The high point for the dollar was reached back in 1985, when the index topped 160.
Despite today’s all-time low on the index… some think there’s more room for the buck to fall. “In the IMF staff’s view,” said a memorandum from the fund on Wednesday, “the dollar remains overvalued relative to medium-term fundamentals.” Oh, ho…
“Recent turbulent conditions could continue for some time and generate a deeper ‘credit crunch,’ with considerably greater macroeconomic impact.” That can’t be good…
“A further period of growth below potential is the most likely scenario,” continued the report, as the IMF forecasted a dismal 1.9% 2008 growth forecast for the U.S. Suffice to say, this was the sort of report that gets dollar bears fully lathered.
The greenback closed yesterday in the U.S. at $1.42 versus the euro, but has since moved even lower, into the $1.43 territory in this morning’s early European trade. Year to date, the dollar is down nearly 8% against the euro.
Oh, how the world turns. German marks made good kindling in 1923.
The dollar fell to $2.05 overnight against the pound too, about a penny short of its 26-year low of $2.06 set in July. The pound has since retreated, sitting in the high $2.04 range. The yen hopped on the dollar bandwagon as well, rising to 115 for the first time in weeks.
Adding to dollar woes, the Labor Department was kind enough to bequeath yet another bleak jobs assessment. Weekly jobless claims rose from 28,000 to 337,000 last week, the highest level since heads were rolling at the end of August.
Similarly, the four-week average moved from 6,000 to 316,500.
Gold, nature’s dollar antidote, rose overnight and is now steady at $768.
Barring any tragic corrections today and tonight, this will mark the eighth of the past nine weeks in which gold’s price has risen. Like any asset skyrocketing in price, the first question that comes to our mind is, “when will it come back down?”
“Nothing goes straight up,” our gold adviser Ed Bugos reminds us. “The overbought signs are beginning to emerge again in the short term, and I’d personally prefer it if gold could shake its positive correlation with Wall Street and the other commodities to become the countercyclical asset it’s supposed to be.
“But gold $800 sure looks good at the time of writing. Heck, gold $2,000 looks good here. Even the gold shares have consistently been the best performing U.S. equity sector for well over a month.
“Gold prices and gold shares just broke out of a 16-month trading formation last month that technically implies a pretty substantial move. I love this gold chart, and I also love that it is being confirmed by platinum, as well as the major gold stock averages.
“My short-term target is the $770-780 level, maybe $800, followed by a correction to the $725-750 level (which will probably happen when stock prices and oil correct) before the climactic journey towards the $1,000 mark that’ll no doubt prompt pictures of the golden bull on the front page of even Barron’s.”
U.S. markets didn’t do much of anything yesterday… both the S&P and the Dow lost a few hundredths of a percent.
Options markets, on the other hand, are busier than ever. The Chicago Board Options Exchange announced yesterday that third-quarter profits more than doubled as options trading rose to record levels.
The CBOE says it handled a whopping 4.1 million contracts during the quarter… every day. That’s up 62% from the same period last year.
By the way, if you’re interested in giving options a shot, we’re currently offering the first six months of Options Hotline for free. Ironically, OHL was launched in 1987 too, making it one of the oldest and most respected options recommendation services in the biz… read the following to learn about your free trial offer.
Oil prices broke the $90 mark for the first time last night. Light sweet crude for November delivery crested as high as $90.02 in after-hours trading before edging back to $89 in Asia.
“The oil price keeps climbing and nobody cares,” writes Dan Denning down under. “Why is that?”
Week after week of record highs have done little more than give your faithful editors a few more seconds in our daily forecast. Average Joe, as far as we can tell, could care less… gasoline is still cheap, and it’s not cold enough to start heating homes in most of the U.S.
Fact is “The dollar’s decline has made oil look more expensive than it really is.”
“We’re not saying oil isn’t pricey,” Denning comments. “It is. But when will the price begin to discourage consumption? The chart above would suggest we haven’t reached that point yet. Maybe we will when oil reaches $100. Or maybe it will take $150.
“Either way, we’ll probably find out in 2008.”
“Social Security is the biggest Ponzi scheme in the history of mankind,” comments a reader. “What a racket!”
The “first boomer” filing for benefits on Monday seems to have really struck a chord.
“I should be in this business,” the reader continues. “Send me your money and I will spend it now, put IOUs in the kitty, backed by future forced contributions of ignorant saps, with an interest rate that guarantees that the value of those IOUs will rise at perhaps half the real rate of inflation (if you’re lucky), and eventually when you do start collecting your retirement benefits, I guarantee that I will pay you back considerably less than you contributed with worthless paper dollars (probably worthless yuan by that time).
“Oh, crap! My attorney just told me I could go to jail for that. But ‘no worries,’ as our Aussie friends would say. It’s all good. Our politicians are living large and Hillary is going to protect us all.
“I would like to say we are getting what we deserve for putting the political hacks in office that created this mess, but unfortunately, the burden will fall on future generations. They will vilify our generation for allowing this to happen.”
“The real problem with Social Security is that everyone qualifies for benefits,” responds another, “instead of just those poor slobs who can’t take care of themselves. We should all get back what has been taken out of our checks — plus a nominal rate of return — for loaning it to the government. The part our employers paid to match should go to take care of unfortunates and nitwits in a minimal way.
“And Medicare should cover catastrophic illness for all — but you’ll have to pay for your own hip replacements!! I guarantee you that ‘means testing’ is on its way — but only after the ‘greatest generation’ has had its way with Social Security — as it has had with everything else.”
Have a nice weekend,
Addison Wiggin
The 5 Min. Forecast
ADDITIONAL RESOURCES:
IMF lowers growth forecasts as Western economies weaken
Oil prices break $90 for first time
Dollar slumps to record low against the euro
US weekly jobless claims up 28,000 to 337,000, highest since late August