The “Silent Crash” is Getting Noisier

14 September 2011, 10:00

Sam Townsend

150X150 Sam TownsendFolks who know me know that I have been focused upon economic, geo-political events, and the financial markets for years. Consequently, I really shouldn’t have been surprised at the number of calls I began to receive from friends around the country when the Global Financial Crisis (“GFC”) became news a few years back. The steadily deteriorating economy only increased the volume of call I received, as well their urgency in seeking answers.  As a result, I have found it helpful, and much appreciated, by those who have requested help, to distribute “Bulletins to Clients and Friends” for several years now.

While my investment asset management focus since the mid-90’s has been on family assets, I had fortunately anticipated the sharply declining economy and values of investment assets, and so had many of my friends. Despite the biggest down year in stocks in a generation, I bet against stocks for an average gain in 2008 of 95.7%. Since then, however, my best performers have been precious metals investments, though I have taken profits on gold and silver as their run figured to be ending. I again am “short” stocks (betting they will decline sharply again) although my larger investments are being made in “sustainable living”.

My Current View on Markets and the Economy.

The topping of markets and widespread extremes of public optimism in the 1920s brought us the “crash of 1929” that actually lasted well into 1932. Values of all sorts of assets languished until the late 1940’s. That dramatic reversal in fortunes drove down prices for the Dow Industrials by 90% and ushered in the Great Depression.

Why am I telling you this now?

It’s because a topping of financial markets and public optimism, even greater than that of the 1920s, began more than a decade ago. Inflation has masked a “Silent Crash” in stock prices that began in late 1999. Just look at this chart of the persistent decline in stock prices when adjusted for inflation using gold. During this same period, prices rose persistently for gold, which for thousands of years has been “real money”. In other writings, I have explained how this relates to our endangered global financial system.

The decline in the “real value” of stock prices is almost as great when adjusted by commodity or producer prices. I’m giving you a “heads up” here and now that “The Silent Crash” is about to get noisier.No Rally in Gold Graph

Not only is the recent topping process of larger degree than the one that produced “The Crash of ‘29”, but it has taken longer to form. In other words, it is a “bigger top”, and the bigger they are the harder they fall.

The economic and social consequences of a substantial decline that has already begun could be more profound and troubling to many more people than to those living in the late 1920s. There are two fundamental reasons:

(1) Unprecedented debt levels for households, businesses, and governments are beyond what even a healthy economy could service, and we remain in the early stages of an economic decline that figures to be one for the ages.

(2) Modern society is far less stable and sustainable than it was eighty years ago.

It isn’t actually economic fundamentals that drive markets. It’s optimism and pessimism that cause markets to advance and decline. And right now, despite horrible economic and societal fundamentals, investor optimism is near record highs.

Investor optimism should actually be viewed as a warning being shouted from the roof tops. It’s what investment analysts call a “contrary indicator”. At market bottoms we have pessimism. 1948 saw the all-time low in the ratio of stock prices to company earnings. We see extreme optimism at market tops, especially after sustained advances in stock prices.

There is a herding instinct, even among professional investors, and when bullish optimism rises well above 90%, there’s almost no one left to buy. It means that people are as invested as they’re going to get. They’re “all in”.

Selling picked up after May 2nd. And my bets against rising stock prices – andfor “sustainable living investments” – are looking up. And one of the great things about sustainable living investments is that they offer value in bad times as well as in good times.

Learning from the Past

There is something important that most people don’t know about the “Crash of 29” – while it was “sudden” and dropped prices of the Dow “blue chip” stock index down 48% in a matter of weeks, that decline had been immediately preceded by a 58% retracement of the initial decline from the 1929 highs months earlier. And while stock prices then rallied for about a year, retracing 54% of their decline from the “Crash of 29”, a grinding decline in stock prices followed that lasted more than two years and brought the total value loss in “blue chip stocks” to 90%. Losses were even greater for lesser quality stocks.

It took 26 years – until the mid 1950s – before the Dow Stock Index recovered to its 1929 price level. It was also not until the late 1940s that theU.S.deflation that collapsed the money supply, prices, wages, and economic activity began again to advance growth and prices. The 20’s and 30’s offer clues to what we are now experiencing.

Let’s look at some key facts about recent market gyrations.

After a long-term bull market advance – the biggest in history and one that extended from the Dow stocks price low in 1974 – the biggest topping process in history began in the late 1990s. The final peak didn’t occur in the Dow Industrial stock prices (un-adjusted however for inflation fueled by frantic government and central bank liquidity creation), until October, 2007 – a total historic bull market advance of 33 years. That’s a whole generation of folks who have only known persistently rising prices and optimism, despite occasional setbacks. Most people are not ready for “the big one”.

Current Implications and Help Available

Why am I telling you this now?

Because the Dow lost 54% from October 2007 until March 2009 and the Global Financial Crisis (“GFC”) began. I say “began” because the GFC is far from over. What is over is the mythical “economic recovery” whose alleged “green shoots” were a combination of wishful thinking and massive government spending entirely from borrowed money and “money created from thin air” buy the banking system. The only real economic “evidence” of that recovery were several quarters of positive gains in GNP.

What our media or political leaders aren’t telling the public is that GNP, or “Gross National Product”, doesn’t measure wealth production at all. What it measures is spending in the economy, and that spending includes massive government spending with borrowed money. Now, even GNP is struggling here and around the world – even with frantic “stimulus” spending with unimaginable amounts of “money” that has been borrowed into existence by an insolvent global financial system.

The markets may have been fooled for awhile, but Main Street confidence is plunging to new lows along with job creation and underemployment of workers, real estate, and other assets and capital that is approaching all-time record levels – not just in theU.S.but around the world. Europe’s woes are in the news now, but Asia and faster growing economies aren’t far behind. This “Greater Bear Market” has a lot longer to run, and the Bear is starting to growl louder again.

Analyzing financial market and economic patterns, as I discuss in Harm’s Way Financial Planning and Asset Management and in my new book Time to Head for the Ark, evidence is strong that the corrective retracement in U.S. stock prices from the March 2009 lows ended May 2nd. Of even more urgent concern, be advised that we are again likely “in free fall territory” as we were in the Fall of 1929.

For many years, I have subscribed to analytical and forecasting services, including those of Robert Prechter’s Elliott Wave International (, the largest marketing forecasting organization in the world (who produced the above chart). If you like charts that illustrate in detail what I’m highlighting here – or if you’d like to trade the financial markets now to take advantage of their greatly increased volatility, you’ll need good information, discipline, and technique.

In a powerful Primary Wave 3 (Elliott Wave) decline, stocks could lose considerably more than the 54% in value they lost in the Primary Wave 1 decline into the March 2009 lows – and lose that value in less time. The “set-up” for these declines has lasted longer than in the 1920’s. The eventual lows of the “Greater Bear Market” may take longer to play out and be more severe. That suggests a prolonged period of economic and social decline greater than that experienced globally during the Great Depression.

Stock prices, by declining powerfully in the months immediately ahead, would signal a “point of recognition” where historically high levels of investor optimism would turn to panic and remain mainly negative until well past the eventual low in prices of stocks, real estate, and commodities. I say “mainly” because we should expect corrective rallies from time to time that could be powerful, though relatively brief. Eventual stock price lows could be more than 90% below their highs of the last few years. Expect values of most all conventional investment assets to deflate accordingly.

Though I had purchased most of the gold I owned in the late 1990s at about $300 per ounce and silver at about $5 per ounce, I did take most of my profits this year as gold was blowing off towards its recent high near $2,000 and just after silver reached $50 per ounce. Why would I do that when investors remain near historic highs of optimism for these metals, especially gold?

I was a bit early as the metals were topping, but I cashed nice profits and can redeploy my capital advantageously. In fundamental terms, I expect precious metals prices in dollars and other currencies to head much lower as other financial markets plunge and liquidity goes to “money heaven” and evaporates in thin air. All around us we see a scramble for liquidity that is driving interest rates lower on less risky debt. That’s what happens in deflation – “debt money” that was borrowed into existence becomes scarce. However, at the same time, prices of things, wages, and services plunge so that cash buys more. Lots more.

For awhile, cash should be king, though most won’t have it. Build your liquidity while avoiding debt. Use that liquidity to acquire assets that will be useful –especially necessities for abundant sustainable living – for you and others as the “Perfect Storm of Threats” brings hardship and scarcity that most people can hardly imagine now.

With a bit of thought, it becomes clear that not everyone could get out of the markets or their debts even if they chose to. The exits are way too narrow for that; and besides, who would be buying? Who would be lending? No, the best, and perhaps the only, way to get out is to sell before the bubbles pop and panicky investors and borrowers try frantically to find a safe exit .

My purpose here is:

(1) To warn my friends, and even strangers who I hope might become friends, that a re-acceleration of decline in the financial markets is likely near at hand,

 (2) To urge them to move forward wisely and with determination to get their assets out of harm’s way, if they have not already done so,

(3) To help your family, friends, neighbors, and your economic interests to live and work in sustainable, healthy, and economically viable ways where you live. My colleagues and I describe these strategies and solutions in my book Time to Head for the Ark and in other resources we describe there and on and related Web sites.

 Hopefully, you won’t go over a cliff with the herd, but, if you do, at least you may remember my warning here. Even better, I pray that you “Head for the Ark” so that you and yours might be “Prepared ALHWays”. A key part of that preparation is investing your resources in what we call “Abundant Sustainable Living” investments.

It is very important to “know the signs of the times” and to focus on realities – realities that are both eternal and for our time – so that we can confidently prepare. It is ignorance and denial of objective reality that has enticed much of our population to become so exposed to disaster and yet fail to heed prudent warnings.

Fortunately, there are ways we can prepare, as Prepared ALHWaysTM discusses and offers. More serious-minded preparation is necessary today, however, because the world is more dangerous and the foundations of modern society are built on sand and have already begun to crumble.

Please let us hear from you if you’d like more information or other assistance – or if you might be in a position to help others to be “Prepared ALHWaysTM”.  Please click on the CONTACT US page and let us know what is on your mind.

Many thanks for considering this.

Sam Townsend