As a child, there were times when your mama served you up something for dinner that you weren’t so fond of.  It sort of gave you an ill feeling just looking at it – even if you knew it was healthy.  The last thing you wanted to do was sit there and dig in.

Something like what we’re going through these days with the stock market: the nausea, the dizziness, the desire to feed it to the dog and just go up to your bedroom to sleep.

If not for your father’s booming, “You’ll eat everything on that plate, and you’ll like it!” you would have checked out a long while ago.

So bad?  Not so bad…

It’s time to take a quick look at the plate again, because the meal you’re being served may not be what you had dreamt of, nor look or smell so appetizing, but the good old fashioned health of the thing should be sufficient to get you clawing in with both hands.

Let’s start with our colleague, Nick Jones’s comments of last week in a free Oxbury Charts of the Week article.  Nick wrote thus:

“In other words, I expect the massive inflation to inflate equities markets (my emphasis).  If we divide the stock market by money supply in order to obtain the real value (inflation adjusted), we have not reached an absolute real bottom, even though we’ve probably reached a nominal bottom. Essentially, from this point on, growth in domestic equities will not keep pace with inflation.”

Thank you, Nick.  Bang on.  We are due for an inflationary explosion in stock prices that will take the DOW to (nominal) new highs and, in my opinion, reward investors with the best hedge against inflation available anywhere outside of real guns, gold, gas and grub (see the latest Residual Income Report for more on G-Force Investing).
 
My reason for the forecast is quite simple.  We stand at the doorway to a blowoff top to this bull market the likes of which have never been seen or heard in history – a topout that will create (paper) wealth and a giddiness and greed and arrogance also the likes of which have never been seen.  And because of this, markets will overshoot to such extremes that no one will be able to look at the newspaper or internet ever again without breaking down into tears imagining how rich he’s become.

The fall will come, yes – and it will be devastating for everyone – most profoundly America.  But the runup will so far exceed anyone’s wildest imaginings that the DOW will trump any considerations of money supply divisors.  The stock market at the height of its “death throes” will offer the best ever inflation hedge imaginable – for those who cash out and put their money quickly into something tangible.

The beginning of this final “third wave” blowoff is about to begin.

Consider:

1. Housing, the bogeyman behind the entire investment mess we’re currently wading through last week showed its first signs of real rebound:

In what appears to be fledgling signs of interest in buying, existing home sales broke out of a year long trading range.

2. Mutual Funds average cash positions are at a whopping 30%.

3. Over the very long term the stock market is not overvalued.  The opposite, as recent research from Wharton School Professor Jeremy Siegel shows:

Clearly, 200 years of stock trading shown on log scale puts the current market neatly in line with past growth.

Or does it?  See the next chart:

According to Siegel’s work we are currently a dramatic 38% below the market’s long term uptrend line.  That’s not to say it can’t fall further.  Only that historically we are virtually as low as we have ever been.  Can anyone say “reversion to the mean”?

4. The U.S. Dollar is on a tear – which means nothing more or less than a vote of confidence in America.  Don’t believe the crap being spewed about hedge funds unwinding highly leveraged trades forcing the dollar higher.  The opposite would be the case.  The “Yen Carry” trade is being unwound.  That means dollars (and other currencies) are being sold to pay back JPY loans.  That’s what has the IMF and G7 going crazy: the Yen is on a ballistic course straight upward, and the danger of currency destabilization has everyone scrambling to adjust.  If you thought the USD was a moonshot – it pales against Japan’s currency.

Here’s the dollar chart.  The trend is in tact.  It may retreat somewhat, but the

dollar is decidedly bullish going forward.

5. Finally, China.  The engine that has driven much of the world’s growth for the last decade, particularly in commodities, is slowing.  Poor souls: instead of last quarter’s 10.1% growth, the world’s most populous (and capitalistic?) nation clocked in this quarter at a measly 9%.

And talk about depressing stats: September industrial production expanded (I repeat: expanded) 11.4%, as opposed to August’s 12.9%.

Folks, wake up!  The Chinese machine is humming at white hot speed.  There was no absolute contraction of business activity in that country in the last 12 months – there’s no recession, nothing even approaching it.  There was a mere slowing in the rate of growth!  China is the only economy on the planet that has steadily grown its share of world GDP for the last 20 years (see chart below – right). 

Ignore the “No savior” melodramatics.  China is a force and the commodities bull is still in tact.  The shares of beaten down energy and copper and coal miners will shortly rebound, while and the hedge funds that are currently liquidating these same holdings will be filing for bankruptcy.

The meal we’ve been served up these last few months has been anything but appetizing in appearance, but I say it’s been healthy.  It cleaned a lot of waste out of the system.

So if you’re smart you’ll heed your old man’s advice and lick that plate clean. 

You may even grow up to be strong.  And rich.

Cheers,

Matt McAbby
Analyst, Oxbury Research