It's the Fundamentals Stupid

It's the Fundamentals Stupid By Peter Schiff       Aug 3 2007 3:04PM www.themarkettraders.com Amidthe recent stock market weakness, the pundits are virtually unanimousin their claims that good underlying economic fundamentals are beingtrumped by irrational fear. However, if investors understood just howbad the fundamentals for the U.S. economy really are, they would dumpstocks even faster. So, contrary to the rhetoric, it is not thatinvestors are being too fearful, but that they are being toocomplacent.  During the recentstock market rally investors ignored some very disturbing underlyingeconomic fundamentals. Therefore, the current weakness in the market isnot in conflict with the fundamentals, but completely consistent withthem. Unfortunately for the overall economy, the re-assertion offundamentals is not exclusive to the stock market.  Here is a look atwhat will likely happen to other asset classes and our economy shouldinvestors refuse to blindly follow the Pied Pipers of Wall Street: Gold and gold stocks Ratherthan trading in tandem with other assets (as they recently have), goldand gold stocks will diverge, registering their largest gains on dayswhen general stock prices fall. Currently, liquidity is driving allmarkets simultaneously. However, when those seeking liquidity realizethat gold is its ultimate form, they will embrace it and shun paperalternatives. When that happens, gold stocks should shine even brighterthan the metal itself. The dollar Onceforeign and domestic holders of greenbacks understand the severity ofthe risks facing the U.S. economy, they will dump dollarshand-over-fist. As the value of the dollar falls, interest rates andconsumer prices will rise. This will compound the problems in thehousing and mortgage markets, as well as for the overall U.S. economy,engendering even more dollar selling. Bonds Fornow, U.S. Treasury bonds have benefited from the so-called "flight toquality". Once investors realize that Treasuries can not protect themagainst the falling dollar, safe haven money will flee Treasuries aswell. As interest rates rise, the problems for our economy will onlyintensify. If the Fed reduces short-term rates to cushion theblow, Treasuries will come under even greater selling pressure. So ineffect, any attempt by the Fed to reduce interest rates tobolster housing will backfire, as rising long-term yields will only putadditional nails in the housing coffin. Real Estate Whenreality sets in, housing prices will collapse. Today’s announcementthat Wells Fargo is raising rates on prime jumbo mortgages (asignificant percentage of California homes fall into that category) to8% from 6 7/8%, will help accelerate this process. As potential homebuyers will once again be required to fully document their incomes,provide 20% down payments, and pay 8% annually on fully amortizedmortgages, home affordability will be out of the question unless pricesfall sharply. The U.S. economy Whenreal estate prices collapse, trillions of dollars of home equity willbe wiped out, with disastrous repercussions for an American economyaddicted to consumer spending. Though many consumers will see theirhome equity vanish, their mortgage debt, much of which will become moreburdensome once adjustable rates reset much higher, will remain. Flatbroke and facing rising mortgage payments, as well as higher gas andfood prices, consumers will severely pull back on discretionaryspending. As millions lose their jobs as a result of this retrenchment,the recession will kick into high gear, causing even greater damage tothe real estate market, the dollar, bonds, and the economy, resultingin even more safe haven flows moving into gold. Fora more in depth analysis of the tenuous position of the Americanaeconomy and U.S. dollar denominated investments, read my new book“Crash Proof: How to Profit from the Coming Economic Collapse.”  Click here to order a copy today. Moreimportantly, don’t wait for reality to set in. Protect your wealth andpreserve your purchasing power before it’s too late. Download my freeresearch report on the powerful case for investing in foreign equitiesavailable at www.researchreportone.com , and subscribe to my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp     ****   President Euro Pacific Capital, Inc. 10 Corbin Drive, Suite B Darien, Ct. 06820 phone [phone] toll free 888-377-3722 email [e-mail] web www.europac.net