The Storm Before the Storm

11/19/2012 9:15 am EST


Richard Young

Editor, Young's Intelligence Report

If you think you've seen the worst of what weather and the economy can do, you just wait, warns Richard Young of Intelligence Report.

Superstorm Sandy has provided a distressful warning of what can come. I have been writing to you that financial and personal security demand rigorous risk analysis, a fortress-like battle plan, and the ability to fight inertia.

In darkened Long Island neighborhoods, looters were widely feared. Everything had to be taken care of before dark. In the vertical city of New York, toilets remained unflushed, food quickly rotted, and medication like insulin was quickly at risk.

Initially, over 60 million residents were without power. Some of America's most densely populated cities and suburbs went dark instantly, changing life and threatening lives. ATM machines clicked offline, and the scramble for cash was on.

In these storm-ravaged areas, New Yorkers were forced to confront criminals and looters often marauding in deadly packs. Signs appeared: "looters will be shot by local vet." My family did not miss a beat.

A similar superstorm event is likely in the financial markets. It is only a matter of when.

As I write, the spending, borrowing, and printing excesses of the last eight years worsen. The end result will be a washout cleansing that will inflict enormous pain to investors worldwide. I am prepared, and want you to be prepared as well.

Profits as a Percentage of GDP Are Falling
Investors in an election year have taken their collective eye off the ball. Gibberish out of the White House regarding economic recovery, a torrent of moneyprinting at the Fed, and wave after wave of new borrowing and federal programs have convinced investors that all is well. And stocks have been bid up accordingly.

But dry rot has settled in, and stocks are set for collapse. My sensitive composite of five leading economic indicators recorded a cyclical peak last February. And in four of the seven months since, declines have been registered.

More Americans were employed when George Bush left office than are employed today. Recovery indeed! After-tax corporate profits as a percentage of GDP have now completed a major cyclical peak and are falling. See the chart below.

Click to Enlarge

The complete cyclical decline could well be the steepest in six decades. Consider that corporations today are paying almost nothing to borrow. Wait until interest rates are freed from artificial Fed control. Much higher interest rates will cut into corporate profits, ensuring a new and dangerous recession.

You need to recognize that you are now on enemy turf. Whenever corporate profits have peaked for the cycle, interest rates are at a cyclical low, and stock yields are well below the historical norm, you can be certain that a defensive stock-market position is warranted. The next major downdraft in stocks can be expected to produce a decline of at least 30%.

Furthermore, due to the rapid proliferation of programmed trading, the collapse could come fast and most likely without warning. I have written to you recently about the potential for a Black Swan event. I would re-read this material and set a course accordingly. You want to construct an armor-plated portfolio that allows you to make adequate headway in good times and shields you when the going gets tough.

Related Reading:

Housing's Comeback Looks Real

Why the Fiscal Cliff Is So Important

The Risks of QE Infinity

Related Articles on MARKETS