The Coming 5 Years of “Mainstream” Finance Hell

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So what can we expect to see in the U.S. over the next half-decade?

First off, get ready for a paradigm shift. Cycles take 70 years or so to run their course, so you really can’t blame anyone for believing that real estate values and stock market indices will “always go up in the long run.” Well, since 1932 (the beginning of this long-term cycle) they have, with occasional dips along the way. But when the 70-year cycle ends and investment bubbles mark the climax, a deflationary period ensues, knocking values back to levels we’ll all find almost impossible to fathom. Our generation will be the one to discover that not only can post-bubble-bubble-bubble values head the other way; they can decline by upwards of 90%. Printing money or not, it’ll be no different this time around.

Stocks will fall out of favor. Remaining rallies are nothing more than selling opportunities; any lasting reward is not worth the risk. The coming downside should be breathtaking. The good news is that if you keep what stock market value you have right now, you’ll come out the winner, as the buying power of that money will be factors greater come 2015-2016 when we start fishing around for a market bottom (below Dow 1500).

Another unforeseen, massive decline in the U.S. stock market (and worldwide) will devastate market psychology, and that will quickly affect pretty much everything economic — from consumer confidence to consumer spending to corporate earnings to employment, clear through to the housing market. Lenders will pull in their horns even further and few will be in the mood to borrow. Deflationary forces will be fully in play and those forces will continue to feed on each other as the value of virtually every asset class heads down yet again. Those not ready for this reversal will wonder how in heaven’s name we went from placid waters to perfect storm in such a short period of time.

Meanwhile, there’s substantially more pain to come in real estate. As the Realtors proclaim on their TV commercials, “Every market’s different,” which is their slimy way of saying, “Sure, prices are falling everywhere else; just not in your neighborhood!”

Oh, those wacky Realtors.

On the housing front — and despite the fact we’ve seen positive price activity in scattered markets in the U.S. in recent months — values are about to begin another descent as the global credit crisis/implosion enters its hair-raising stage, the stock market gets bludgeoned and another fifteen million foreclosures (including the existing, massive shadow inventory and what will become a growing wave of “strategic defaults”) are brought to market over the next few years. When home values are cut in half after a 75 year run, is it possible they can be cut in half again? With ever-greater numbers of foreclosures, an even more intense economic recession and what will no doubt be eroding demand feeding the deflationary monster, bank on that rate of decline and more.

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