Machine Guns?

The S&P500 slipped 1.2% last week, the last week before Labor Day.  VIX (the fear index) continued to march higher, up 2% for the week.  Volume was strong on the three days when prices fell and weak on the two days when prices rose.  The S&P500, according to Standard & Poor’s data, closed the month of August priced at a 191 P/E ratio, using as-reported, trailing four quarter’s earnings, or a 27 P/E ratio, using as-reported, projected earnings for 2010.

Economic data were mixed.  On the positive side, Chicago PMI and ISM Manufacturing came in better than expected, but both benefited from recent inventory restocking orders that my not be sustainable in terms of final consumer demand.  On the negative side, auto sales disappointed–despite a $3 billion federal Cash for Clunkers giveaway designed to boost auto sales.  Factory orders were up less than projected. Initial claims came in at 570,000 and continuing claims rose to 6.23 million, even as more unemployed people lost their benefits.  The unemployment rate spiked to 9.7%.  Non-farm payrolls fell by 216,000.  And the broader unemployment rate (including involuntary part-time workers and discouraged seekers) rose to a new high (since record keeping began) of 16.8%.

The technicals point to a topping and and possible breakdown in the daily charts.  The weekly charts are still in an uptrend, and last week can be viewed as a pullback.  The long-term bear market is still in effect.

Barron’s conducts a semi-annual round-table discussion with about a dozen leading money managers and strategists from across the globe.  As elite investment managers responsible for hundreds of billions of dollars, these folks are highly respected and closely followed. 

One manager, Marc Faber, conducted an interview on Australian television last week.  In it, he was asked to comment on the health of the major equities markets, the major national economies, and the so-called recovery.

His conclusions were startling.

In the short-term, the U.S. government’s fiscal and monetary stimuli will stabilize the economy.  The economy will technically recover (ie. GDP will show positive numbers) and equity markets will probably rise.

In the long-term, he quite confidently concludes that the U.S. government will go bankrupt.  And the entire system will collapse–in about five years.

Faber quite logically concludes that our government will not have the political will to curtail its stimulus programs.  So the U.S. will continue to spend and print dollars until the rest of the world (its creditors) forces it to stop.

When that happens, the U.S. will suffer from the mother of all busts–a total economic meltdown, with political and social consequences.

What to do?  Become self-sufficient, warns Faber.  Buy a farm and a gun.  Better yet, buy a machine gun.

Is Faber a quack?  He’s a long-term thinker, strategist and investor who predicted last year’s financial crisis with uncanny accuracy.  He can’t (and doesn’t pretend to be able to) predict the precise timing of this next crisis. 

But it doesn’t take a genius IQ, an PhD in economics, or 40 years of market experience to justifiably worry about the sustainability of Washington’s fiscal and monetary programs.  There IS a limit to national borrowing and there IS a limit to the amount of additional money that can be printed–even with the benefit of having the world’s premier reserve currency.

Unless these programs and policies change, the question is not IF, but simply WHEN, the U.S. will fall into the abyss.

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