Best of the Week
Most Popular
1.SNP Offers Labour Deadly Death Embrace Alliance, Holding England to Ransom, Destroy UK From Within - Nadeem_Walayat
2.Gold And Silver – Most Widely Used Currency In Western World? Stupidity - Michael_Noonan
3.Election Forecast 2015 - Coalition Economic Recovery vs Labour Collapse - Nadeem_Walayat
4.Election Forecast 2015 - Debates Boost Labour Into Opinion Polls Seats Lead - Nadeem_Walayat
5.Why are Interest Rates So Low? Ben Bernanke, Confused as Ever, Starts His Own Blog to Prove It - Mike_Shedlock
6.Leaders Debate Election 2015 - Natalie Bennett Green Party Convincing Anti-Austerity More Debt Argument - Nadeem_Walayat
7.Labour Economic Collapse vs Coalition Recovery - UK Election Forecast 2015 - Video - Nadeem_Walayat
8.China’s Stock Market Mania; How High can Red-chips Fly? - Gary_Dorsch
9.Gold and Misery, Strange Bedfellows - 31st Mar 15 - Dan_Norcini
10.Ed Miliband Debate Election 2015 Analysis - Labour Spending, Debt and Economic Collapse - Nadeem_Walayat
Last 5 days
Sheffield School Places Election Crisis - Affluent Schools Demand Increase in Funding - 27th Apr 15
Labour Bribes Voters With Housing Market Stamp Duty Cut and Rent Controls - 27th Apr 15
Stock Market SPX Index at Resistance - 27th Apr 15
Society's Leaders Have Been Digging a Bottomless Economic Pit - 27th Apr 15
Impending Stock Market Top - Trend Forecast Summer 2015 - 26th Apr 15
Desperate Stock Market Bubble Thinking Takes Hold on Wall Street - 26th Apr 15
Stock Market Back into The Bear Suits - 26th Apr 15
One Stock Market Where You Haven't Missed the Bull Market Boom Yet - 26th Apr 15
Migrant Crisis - Europe Has Completely Lost It - 26th Apr 15
What Obama's First-Ever Energy Review Missed - 26th Apr 15
Sheffield Hallam Election Battle 2015, School Places Crisis, Can Nick Clegg Win? - 26th Apr 15
Stocks Bull Market Looks to Resume - 25th Apr 15
Gold And Silver - The U.S. Is A Corporation. Precious Metals Stand In The Way - 25th Apr 15
When the Nuclear Money Option Fails - 25th Apr 15
The War on Cash Special Report - 25th Apr 15
China Economic Slowdown Story - Why “Didi Dache” Is a Phrase You Need to Know - 25th Apr 15
The Trans-Pacific Partnership and the Death of the Republic - 25th Apr 15
Stock Splitting Caused the Stock Market Crash - 25th Apr 15
China Stock Market Parabolic Mania’s Global Risk - 24th Apr 15
What Will Happen to You When the U.S. Dollar Collapses? - 24th Apr 15
Why 2 of U.S. Dollar's Recent Bottoms Have 1 Thing In Common - 24th Apr 15
UK Economy Debt Timebomb Will Explode After Election - 24th Apr 15
Are Gold Stocks the Cheapest Ever? - 24th Apr 15
God, the Stock Market and Pascal's Wager - 24th Apr 15
Greedy Insurers Are in for a Nasty Surprise – Positioning You for Big Profits - 24th Apr 15
Four Things Missing From Obama’s First-Ever Energy Review - 24th Apr 15
How to Grow a Regenerative Medicine Industry - 23rd Apr 15
Stocks and Bonds Seven Year of Negative Returns; Fraudulent Promises - 23rd Apr 15
The Existential Danger To The Euro Is Elections - 23rd Apr 15
Stock Market No Clear Direction As Investors React To Quarterly Earnings Releases - 23rd Apr 15
Is China The Next United States? - 23rd Apr 15
U.S. Oil Glut: How High Can It Go? - 23rd Apr 15
Distorted Financial System Expect Deflation, Inflation And Hyperinflation - 23rd Apr 15
What McDonald’s Corporate Earnings Report Is Really Telling You - 23rd Apr 15
Gold Price Forecast to Become Priceless - 23rd Apr 15
FDIC Plots a Bank Heist Involving YOUR Accounts - 23rd Apr 15
$GOLD Price Year 2007 Again - 23rd Apr 15
Stocks Bubble - The Spread between Stock Prices and GDP is Blowing Out - 23rd Apr 15
Ukraine War - When Did We All Become Murderers? - 23rd Apr 15
Libya Crisis - EU Leaders Are Indicted for Nazi-Style Crimes against Humanity - 22nd Apr 15
Why Alternative Energy Isn’t Taking It on the Chin Despite Low Oil Prices - 22nd Apr 15
Bill Gross - German 10-Year Bunds Short of a Life Time - 22nd Apr 15
How to Profit from the Drop in the Oil Price - 22nd Apr 15
The U.S. Dollar's Move Is More Dangerous than You Think - 22nd Apr 15
Apple Watch Means Apple Will Become Worlds First $1 Trillion Stock - 22nd Apr 15
Half a Stocks Bubble Off Dead Center - 22nd Apr 15
They Said Go to College - Learning to become Debt Slaves - 22nd Apr 15
Best Cash ISA 2015/16, Instant and Fixed Savings Interest Rates, New Flexible Withdrawal / Deposit Rule - 22nd Apr 15
Unsound Banking: Why Most of the World's Banks Are Headed for Collapse - 21st Apr 15
Bitcoin Recent Low Price Volatility Might Be Deceptive - 21st Apr 15
Currency Wars Back As Russia Buys Gold - One Million Ounces in March Alone - 21st Apr 15
The Greece 'Grexit' Issue and the Problem of Free Trade - 21st Apr 15
Why Europe Lets People Drown - 21st Apr 15
Wealth Destruction for the 99.9 Percent - 21st Apr 15
SNP Publish England's Suicide Note as Pollsters Still Forecast Labour-SNP Election Disaster - 21st Apr 15
Characteristics of Extremely Over-Indebted Economies - 21st Apr 15
Trader Education Week -- a Free Event to Help You Learn to Spot Trading Opportunities - 21st Apr 15
Gold & Silver Alert: Silver Stocks’ Signal - 20th Apr 15
Now is the Time to Buy Resource Stocks, Especially Gold Equities - 20th Apr 15
DJ Transportation & Utility Averages Suggest Stocks Bull Market Is Over - 20th Apr 15
Crude Oil Price Bull Market Hope - 20th Apr 15
Stock Market Bears Get Slaughtered Despite Greece Counting Down to Grexit Financial Armageddon - 20th Apr 15
The Rise of the Paper Machines - 20th Apr 15
Gold and Silver Inflection Point - 20th Apr 15
SP500: A Butcher's Stock Market (Chop Chop Chop) - 20th Apr 15
Are Stock Market Bears Slowly Gaining Control? - 20th Apr 15
Sugar Commodity Price Bear Rally - 19th Apr 15
Avoid the Spread of the Stock Market "China Syndrome" - 19th Apr 15
Stock Market Going Nowhere Fast - 19th Apr 15
An Easy Way to Profit From the Two Biggest Trends in the Stock Market - 19th Apr 15
No Scripture Is Divine, Authentic and Beyond the Creation of the Human Brain - 19th Apr 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The War on Cash!

Prelude to Meltdown: An interview with Bert Dohmen

Stock-Markets / Credit Crisis 2008 Aug 31, 2010 - 11:17 AM GMT

By: Clif_Droke

Stock-Markets When Bert Dohmen talks, smart investors listen.

In 2007 when most investment analysts and economists were downplaying the developing credit market troubles, Bert warned investors that the probability was very high that the troubles would escalate into full-blown crisis and would produce a crash of historic proportions. He chronicled the developing credit crisis in the pages of his newsletter and also published a book in early 2008, Prelude to Meltdown, which provided his insightful views on the emerging crisis in depth. The book will surely go down as a landmark written by a financial visionary who was several steps ahead of his peers.


Dohmen writes the widely read Wellington Letter investment advisory, which has provided top-notch forecast and analysis of U.S. and global financial and economic trends since January 1977. His newsletter has received many #1 ratings by the top ratings services and has forecasted every bear market using sophisticated technical analysis. Bert also frequently appears as a guest on financial television, including CNN’s Moneyline, CNBC and FOX News. Over the last 30 years he has been a favorite speaker at the largest investment conferences.

On August 27, I spoke with Bert concerning his forecast of the credit crisis, the likelihood of another financial crisis, the bond market “bubble” and the outlook for gold. His answers were as always refreshing and full of insight. Following is a transcript of that interview.


Q: Could you tell us what first attracted you to the financial markets and how you got your start in it?

Dohmen: I started trading when I was in graduate school and I was quite interested in the financial markets. Technical analysis wasn’t widely in use at the time. I started with $400 and using advice from a major brokerage firm that quickly imploded. They got me into a stock with a 10 percent yield – I though the broker was a genius to find me such a stock. But the problem was they had only one copper mine and it was later nationalized. So that’s when I decided that if I was going to be successful in the markets I would have to do it myself. So I spent a lot of time reading and studying and decided for myself that fundamental analysis wasn’t in accordance with my philosophy because it only shows you what happened in the past. And I wanted to know what the big money was doing now. And the big money means the well informed money and that you can only find out with price and volume analysis and the charts.

Q: What prompted you to write the book, Prelude to Meltdown?

Dohmen: I wrote in the book in 2007 and it was published in early 2008 and it predicted the global near meltdown. I wanted to get it out because I said that people in 50 years will still be talking about it and wondering why no one forecast it.

Q: You were one of the very few analysts who correctly foresaw the approaching danger of the credit storm and you wrote extensively about it in Prelude to Meltdown.

Dohmen: It wasn’t all that difficult throughout 2007 to figure out what was coming. At the end of the book I stated that the only question is whether the central bankers would be able to stop the meltdown altogether or if would be five minutes before twelve before they do. And now we know even in the words of the top guys at the Federal Reserve and the Treasury that we did get up to five minutes till twelve.

Q: Do you find it amazing that so few financial experts were focusing on the problems that were building up in the early stages of the credit crisis?

Dohmen: For me it was really very strange that so few people were looking at that. It really wasn’t that difficult. Throughout 2007 in our Wellington Letter I had been writing about all the proverbial canaries. I had a section in the newsletter describing “more canaries in the mine.” The April 2007 issue was headlined, “The perfect financial storm,” and it listed all the reasons why. The thing is that sub-prime mortgages were starting to go sour. I knew that the sub-prime mortgages had been packaged up by Wall Street firms as CDOs and then sold around the world. And through basically buying the ratings of the major bond ratings agencies they were able to take this junk and take tranches of that and get AAA ratings from the agencies, which was just amazing when you consider that there are only four U.S. corporations which are strong enough to get a AAA rating on their bond in the United States. It was just absolutely amazing. Then I found out that the models that these ratings agencies were using were mathematical models that justified the AAA ratings and they had no provision in that mathematical formula for a decline in housing prices. This was an absolute shock and surprise to me as to how they could look at the huge absolute speculative frenzy in the real estate market and not think we were going to have a crisis. And at the time I was saying that real estate prices would go back down to the 2002 levels. In other words the entire speculative bubble created by excess credit would be wiped out and we’d be going back to basics.

For example, here in Nevada you had 32 percent gains in housing prices and the next year it was a 33 percent gain. And people started believing that it was normal and sustainable. Well it’s not. Over the years you’re happy if housing goes up 5 percent a year if even that.

Q: It indeed appeared that the monetary authorities waited until the proverbial last minute before acting. Is there anything the Fed and the Treasury could have done to mitigate the credit crisis in 2007 and 2008?

Dohmen: The regulators were in collusion with Wall Street. This wasn’t a failure of capitalism, this was a failure of regulatory agencies and in my opinion some of it was criminal. The Wall Street firms, the big ones, were limited to 12-to-1 margin based on their capital until 2004. Then the head of the SEC, who was a former founder of a very large Wall Street firm, and he had been able to field these Wall Street guys and after that they decided to increase the permitted leverage I believe to 34-to-1. That was absolutely incredible. I remember whey that happened I said, “If these firms only have a 3 percent decline in their speculative investment it wipes out all of the equity.” I wondered how could this be allowed. These guys were just asking for failure. The reason it was allowed because the higher the leverage the higher the potential profits. And I guess the theory was if something goes wrong the taxpayer would pay the losses. They get the profits, the taxpayer gets the losses. And that’s exactly what happened.

We had other things like that in other areas of the housing market. Fannie Mae and Freddie Mac were basically coerced into giving mortgages who had no jobs, no income and no net worth. Yet they got mortgages because the Congressmen said that’s what we have to do. You know the names of these Congressmen. So it was really excess of government, excess of speculation and there was no rationale behind it. Even right now when you consider that the FHA is making mortgage loans with only 3 percent down – 3 percent down! Nothing has been learned in this last episode. And that’s why this crisis is not over. We are just in the middle of it. There’s another 50 percent to go.

Q: What were some of the signs you saw as being potentially ominous in the months leading up to the 2008 bear market?

Dohmen: For one thing, the 5-year bull market top was in October 2007. When it became clear that mark-to-market [accounting rules] was going to come in early November 2007, all the big boys got out in October ’07. So the bear market started with the mark-to-market rule. The bear market ended in March of 2009. The mark-to-market rule was changed in April of that year but in March 2009 the U.S. Congress told the FASB, which makes the rules, “You’d better change that rule or we’re going to do it for you.” That was known in March [2009] and that produced the bottom of the bear market at that time. Wall Street is really a game and if you know how to play it you can make some money on it, just as they do.

Q: Do you think the abolition of the uptick rule in July 2007 played a part in the stock market crash of 2008?

Dohmen: Yes, I really do. In fact when that was done I said something is being prepared to enable some of the very big trading operations to sell short without having to wait for an uptick. I don’t think anything happens in the financial markets by coincidence, so I really think that was part of it. Why would they suddenly eliminate the uptick rule which had been in effect since 1933 and did a good job?

Q: The SEC never did reinstitute the uptick rule, did they?

Dohmen: No, they never have reinstituted it and that is why we’re going to have another crash.

Q: If worse comes to worst, can the government afford another bank bailout?

Dohmen: Oh sure, the government can always create money and they don’t even have to print it now like they used to. Back in 1980, Congressman Ron Paul gave us a tour of the Bureau of Printing and Engraving and they were so proud because they had the latest printing presses, Heidelberg presses from Germany. Of course we all laughed because Germany had lots of experience printing money during the hyperinflation of the 1920s. But it’s created electronically today. Now all they have to do is add a few zeroes to make billions turn into trillions.

Q: One thing I’ve always admired about your work is your ability to predict the direction of the economy much better than most professional economists. What are the main indicators you look at to analyze the U.S. economy?

Dohmen: Credit availability is the main thing I look at to forecast the economy. Money supply M3 was going down at an 8% annual rate. You only see that in depressions. Money velocity is also declining. You don’t see such things in a good economy. It all ends up with credit. It’s also important to look at commercial and industrial loans, credit card credit and consumer loans. This is extremely important.

Q: What are some other indicators investors should be watching?

Dohmen: When analyzing the economy they should also look at things like credit growth. I consider credit growth, or the lack thereof, to be the most important indicator. Everything else merely follows. Job growth is also an important economic factor dependent on credit growth. If there is no credit growth then there won’t be any real job growth. Consumer spending is the third most important thing to analyze for stock investors. If there is no job growth then spending will depend on consumers who have jobs feeling more optimistic and spending more. We have seen this over the past 16 months. Consumer spending is a coincident indicator and it helped us identify the 2007 market top. When spending starts declining, so will the stock market.

In terms of the stock market, technical analysis is also very important. You have to look at things like price and volume and their relationship to each other to get the big picture in the stock market. Fundamental analysis is of no value in today’s market. If you try to use fundamental analysis to predict the stock market you will come out on the losing end.

Q: Let’s talk about China for a minute. If the U.S. enters another financial crisis, do you believe China is self-sufficient enough to withstand the lack of demand for its products from the U.S. or will China’s economy suffer?

Dohmen: I think there’s a good chance the next crisis will start in China. Everyone right now is saying, “Look at the gains made by China’s housing and financial markets over the last few years. You have to look at what is happening in the last 2-3 months, though, not just the year-to-year trend. An incredible $1 trillion in loans were issued to Chinese borrowers last year. Also earlier last year, China’s regulatory officials tightened lending standards in an attempt at curbing speculation but it’s just another case of governments believing they can solve problems in the financial markets when it has never been proven that they can. They’ve seen a tremendous decline in home sales. Home sales are up 8% for the year so far but what the media isn’t telling you is that home sales were up an 60% percent or so before the real estate crisis hit. The Chinese economy is coming to a screeching halt.

Q: Do you still consider U.S. Treasuries to be safe long-term investments? Is there a chance the government may someday default on its debt obligations?

Dohmen: Define “someday.”

Q: Say in the next 3-5 years.

Dohmen: No, the government won’t default on its debt in the next 3-5 years. I’ve always believed that when it comes to the financial markets, what everyone knows is not worth knowing. Applying that now, everyone knows that bonds are in a bubble and that the stock market will offer a much better return than bonds, and that you should not buy bonds as a result. I take that as a signal that bond prices may go much higher as long-term interest rates decline. If a 4 percent yield declines to 2 percent, then the price of the bond may double.

Another reason why Treasury bonds are being purchased right now by investors all over the world is that Treasuries are a safe haven. I believe the rally in the bond price reflects a global flight to safety. Gold is the only real money, as it can’t be produced at will with the printing press or the computer. Therefore, it’s a store of value. U.S. Treasuries are also a safe haven for the big money. Not only is there no default risk, but as the globe goes into a decade-long period of deflation, yields will drop and bond prices will rise.

I think the real question is whether the bubble is in the bond market or in the fact that everyone is calling it a bubble. The consensus that bonds are in a bubble seems to be the real bubble.



Q: You correctly predicted the top of the last major gold bull market back in 1980 as well as the bottom in 2001. Do you still see gold as a worthwhile investment for the long term?

Dohmen: In 1981 we had ridden that entire gold bull market in the ‘70s and then gave a sell signal when gold broke $694/oz. on the downside. We sold and then we sold short and rode it all the way down to $400, which was really a nice trade. At that time my work showed that gold would then go into a 20 year down market based on cycles. But the after that we forecast a 30 year bull market. Now look at what happened. Twenty years after 1981 was 2001, which was the start of the latest gold market. Cycles don’t always work out that accurately; as you know they can sometimes bottom a few years to the right or left. But this cycle worked out perfectly. If the second part of that prediction comes true gold should be in a 30 year bull market.

At that time back in 1981 we wondered what could possibly cause a 30 year bull market in gold. Well now we know the answer. Unprecedented deficits are the rationale behind the 30-year gold bull market. And there really isn’t enough gold in the world, especially when you consider how much paper money there is.

To answer your question about investing in gold for the long term, if you have great trust in the government then you can buy gold coins or the gold ETFs. You’ll ignore the fact that in 1933 the government confiscated all gold owned by U.S. citizens. You’ll also ignore the fact that the exchanges and regulators will change the rules in midstream when there is a crisis, such as a parabolic rise in the gold price. In other words, you’ll have to have blind faith in very corrupt people not being corrupt.

Gold coins stored abroad seem to be a good alternative. Mining stocks will eventually do well but will suffer greatly when fears of deflation soar.

Q: Is economic collapse inevitable in your view or is there anything that can be done to forestall it or avoid it altogether?

Dohmen: Only if there’s a regime change in Washington. Short of this I don’t see how it can be averted. People just have to get involved. Unfortunately, history tells us they probably won’t.

Q: What steps can an individual investor take to protect himself from financial and economic calamities in the future?

Dohmen: People have to read, read, read. I can’t emphasize this enough. There are some excellent independent news outlets out there today that weren’t an option many years ago before the Internet. I advise investors to read all that they can about the markets and technical analysis through books and other publications. You can go to Amazon.com and see all the reader reviews of the books that tell you whether or not the books available might be for you. There are just so many opportunities for investors to educate themselves and everyone should be taking advantage of them. You have to take it upon yourself to be informed. You can’t be informed of what’s really happening out there by just watching the mainstream news on TV.

[For ordering information on Bert Dohmen’s book, Prelude to Meltdown, visit his web site at www.DohmenCapital.com]

By Clif Droke
www.clifdroke.com

Clif Droke is the editor of the daily Gold & Silver Stock Report. Published daily since 2002, the report provides forecasts and analysis of the leading gold, silver, uranium and energy stocks from a short-term technical standpoint. He is also the author of numerous books, including 'How to Read Chart Patterns for Greater Profits.' For more information visit www.clifdroke.com

Clif Droke Archive

© 2005-2015 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014