Five Rally Killers and How to Survive Them

We could see stock market rallies in the near and long term. And I think the best thing to do is to sell those rallies, because the economy is going to serve up a big ol' heaping plate of white-hot doom at least through 2012.

Force #1 - The Banking Crisis Will Drag On

The International Monetary Fund keeps raising estimates on bank losses, but even its recent estimate of $2.2 trillion in losses is probably way behind the curve.

Force #2 - Real Estate Crisis is Nowhere Near a Bottom

Home prices follow income. Incomes are going down, and we are in a deflationary spiral now. I expect we'll see both incomes and home prices fall into 2012.

Force #3 - Americans Are Unwinding Their Debt

Consumer spending -- which accounts for 70% of total economic activity -- has fallen for two quarters in a row. We've seen periods where consumers reduce debts before. These "unwindings" last for about 10 quarters on average.

Force #4 - State Budgets Are Going Bust

At least 46 states from Maine to California faced or are facing shortfalls in their budgets for this and/or next year. Unlike the federal government, states cannot run deficits when the economy turns down; they must cut spending or raise taxes to balance their budgets. This adds another twist to the vicious downward spiral in consumer spending.

Force #5 - The Slump is Truly Global

The synchronized collapse of credit bubbles in Ireland, Spain, Greece and Portugal could lead to those countries defaulting. Eastern Europe looks even worse. Meanwhile, the economic engines of the world -- China, Japan, Germany and so on -- are misfiring badly. There is no growth engine at the present time to pull the U.S. or global economies out of their slumps.

In sum, the combination of a worsening banking crisis, real estate crisis, great unwinding of debt, state budgets imploding and a global slump means more downside.

I think the world is facing a crisis on a level unlike anything since the Panic of 1873, another period that saw a global real estate boom become a bubble and then burst hard.

The Panic of 1873 continued for more than four years in the United States and for nearly six years in Europe. And after a brief recovery, we slid into another depression. That's a real lost decade. And it's a darned good reason to sell any rally.

Stock doom and gold bloom.

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Cheery stuff, but wise not to get sucked into the "buy stocks now as they are so cheap" mentality. On the upside the writer suggests gold and silver, especially if banks start to buy them as reserves. Although the metal itself does not yield any interest a good fund of miners and refiners will also bear some dividends.

He also suggests dollar index funds but I'm more cautious of that. Interest rates do not have much further to fall so that bond prices cannot go much higher. So as soon as rates rise or the dollar value falls anyone holding Treasuries is looking at a pathetic yield and falling prices.