The Looming Bear Market: What You Can do That Washington Can't and Wall Street Won't

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I just finished a battery of media appearances on Fox Business, Bloomberg, BNN and CNBC Asia, and without exception I was asked about two things: President Barack Obama's jobs bill and the U.S. Federal Reserve's "QE3."

The first thing investors and analysts alike want to know is whether or not the president's jobs bill will work. The answer to that question is "no" – not as it stands, anyway.

The second question is whether or not Fed Chairman Ben S. Bernanke will further extend the central bank to help the economy. Well, I do think the Fed will intervene, but I don't believe for a second that the central bank's intervention will help the U.S. economy.

As a result, we're likely to see stocks enter into a bear market and retest their March 2009 lows.

I know that's a terrifying thought. But to be perfectly honest, there's nothing President Obama or Bernanke can do at this point. If companies don't want to spend the $2 trillion worth of cash they're hoarding, there's very little the government can do to encourage them to loosen their purse-strings.

That said, I want to give you five specific steps to take to protect yourself from the looming bear market, preserve your sanity – and even profit.

But before I get to that, you need to understand the dangers that are fast approaching.

A Roadblock to Recovery

President Obama and Chairman Bernanke can toss all the money they want at the economy. But no amount of spending can change the fact that we need the following three things to get our market moving again. They are:

  1. Sustained demand.
  2. A solution to the European sovereign debt crisis.
  3. And a bottom in housing prices.

As it currently stands, the U.S. economy will be lucky to log 1% growth this year, which is even lower than the anemic 1.5% I predicted in my annual forecast in January.

That's pathetic for a nation that spent more than $1.4 trillion of borrowed money on "stimulus." This lackluster growth is also evidence that the Obama administration's $800 billion stimulus plan – and the Fed's two rounds of quantitative easing – did absolutely nothing to salvage our economy.

Citizens are scared silly. Businesses are uncertain. They're uncertain of regulatory changes, uncertain of taxes, and uncertain about their overall economic environment. So they're doing what rational people do when confronted with the unknown: They're hunkering down.

And with good reason.

The typical U.S. family got poorer during the past 10 years due to a decade-long income decline. Median household income fell to $49,995 last year, and is now 7% below where it was in 2000. The number of people living in poverty has risen to 15.1%, the highest level since the U.S. Census began tracking this information in 1959.

It should also be noted that a large portion of that decline is directly attributable to inflation, which the Fed continues to assert is "transitory."

Out of the Fire…

You may be holding out hope that the president's jobs plan will help turn things around – but it won't.

Jobs exist because they create value. You can't just assume businesses will hire for the sake of hiring, which is essentially what the Obama administration's plan does. There has to be demand. All the employees in the world won't do any good if business owners can't grow their customer base and their revenue.

This is true for infrastructure as well. Infrastructure should be built as a means of increasing productivity – not just to put bodies in motion. That's something the "bridges and tunnels" crowd doesn't seem to understand.

That's why we have to consider the president's plan for what it is – yet another government-sponsored diversion of capital and resources.

As such, there are the usual questions about how President Obama wants to pay for this. And that's assuming the plan even manages to get through Congress, which I don't believe it will.

I think the jobs bill is dead in the water, and that the fight over some of its elements will create more uncertainty than jobs. That will be bad for the economy and even worse for the stock market, which will react negatively to the bickering and yet more indecisiveness.

Enter the Fed.

A Five-Step Plan for Dealing with the Looming Bear Market

When the president's jobs bill fails – just as his previous attempts to jumpstart the economy with deficit spending failed – and unemployment rises a year from now if not sooner, Bernanke will undoubtedly step in with QE3.

Of course, it may not be called QE3. It will likely be called "Operation Twist," or some derivation thereof.

But here's the real rub. Quantitative easing, no matter what it's called, is a euphemism for printing money. It is an attempt to bring down longer-term rates and twist the interest rate curve in such a way that companies have no choice but to spend money, and investors have no choice but to take on more risk.

But how low can you go when rates on the short end of the curve are already near zero? Not very.

I saw this firsthand in Japan. The Japanese government took rates all the way down to zero – and nobody wanted the money! Japanese companies wouldn't spend their cash then any more than U.S. companies will spend the $2 trillion they're sitting on now.

Instead, the government will be "forced" to spend even more.

So while Bernanke and President Obama are trying to dig their way out of this mess, they're really only digging our economy into a deeper hole.

That's why stocks are destined to retest the market lows of 2009. I don't know exactly when but I intend to help investors safeguard their assets and profit by preparing for it now – before it actually happens.

Here's five steps to get you started:

  1. Sell Strategically: Sell into strength and capture profits using trailing stops that are gradually ratcheted up as the bounce begins. This will help you raise cash (that can be used to buy into the rebound when it eventually happens)
  2. Hedge Your Bets: Use specialized inverse funds to hedge downside risk that will accompany the rollover to the downside and rack up significant gains at the same time.
  3. Consider Alternatives: Buy commodities – most notably gold and oil – on pullbacks. These alternative assets will help preserve the value of your portfolio as the markets roll over. Their value will accelerate dramatically when the world economy recovers – as it eventually will.
  4. Think Globally: Put new money to work in so-called "glocal" stocks with fortress-like balance sheets, diversified revenue and experienced management. Not only will they help hedge the value of your portfolio, but by concentrating your focus on them you are building in upside potential even if we haven't hit a bottom. Those offering big dividends are best because that will help you keep pace with the inflation the government debt will ultimately induce.
  5. Stay in the game: I know it's tempting to bail out given my prognosis for more downside, but attempting to time the markets is a fool's errand – and never works. You just wind up getting skinned twice – once on the way down and again because you were standing on the sidelines and got left behind when the markets ultimately reverse – which they will.

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About the Author

Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs The Geiger Index, a reliable, emotion-free guide to making big money and avoiding losses, and Strike Force, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.

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  1. Indira K Betina | September 19, 2011

    "Median household income fell to $49,995 last year, and is now 7% below where it was in 2000."

    This sentence is from your article- Looming Bear market.

    The stock market started falling since March of 2000. So can you tell me what was the fall since 1999? If we want to measure a long term fall, we have to start at the absolute height. It has already started the tremendous in 2000 and it took 2 years or more to bottom. The Nasdaq is still wha tit was in March of 2000.

  2. fallingman | September 19, 2011

    Exactly. Well said.

  3. Jim | September 19, 2011

    An overly simplistic response to the most recent jobs bill; if businesses have plenty of money (particularly banks) why is credit so tight for solvent individuals and small businesses with good credit history? Uncertainty about the future should not stop those loans. The writer noted the decade long decline in income for wage earners but offers no reason for that or any solution. Inflation had little to do with this decline. Obviously, that decline predates the current recession but is related to tax policy and sustained corporate profits at the expense of wage earners. The income for CEO's has not seen a similar decline in that period; indeed, the disparity between the wages of workers and corporate has increased dramatically; why? Businesses paid workers less because they could. Justifying jobs only if they produce value is great, if you are not unemployed. And, who will build roads and bridges which do have a role in enhancing productivity, if not government? The question about who will pay for the jobs bill clearly comes down to taxes; we presently have the lowest individual rates at the federal level since the 1950's, particularly for wealthy individuals. If lower taxes are supposed to stimulate spending and growth, then the Bush tax cuts appear to have failed.

    • Agata Valentina | September 19, 2011

      The rich keep making more. After they spend whatever they can on their "basics," they have billions, if not trillions, left over. where does that money go? Overseas, chasing the highest returns.

      If taxed fairly, that is, to benefit the nation and not just themselves, that tax money stays here. It can go to infrastructure jobs, tech training, education, environmental improvement, etc.

      This is not about class warfare. This is about mathematics and improving our great country. The imbalance in wealth is leading us down a dangerous path.

      • steveross2851 | September 20, 2011

        Faith in the benefits of higher taxes is the rank and file liberal's "trickle down economics." It's the fantasy that higher taxes on investors and employers will somehow put more money in their pockets. The truth is that Obama and his ilk NEVER intended to help the middle class, in spite of their empty promises. All that new spending Obama wants will go to government contracts and other sweet heart deals for the big shots who contribute heavily to his campaign. His rank and file supporters only get crumbs. It's time to stop believing in Santa Claus.

        But don't worry, the GOP doesn't really intend to cut spending and taxes either except under extreme duress, in spite of what they tell their rank and file voters. No professional politician wants to cut spending or taxes any more than a general wants to order a retreat. Why should they make real cuts when spending and taxing are their only way to grease the powerful interests that support their campaigns financially and politically. Why should they let the tax payer take a breath when these same big shot financial backers will employ them once they leave office!

        The trillions of dollars a year government spends at tax payer expense is the biggest robbery and swindle of all time because even the part of it that is legitimate costs far more than it is worth and steals from our work and retirement prospects. Until we are willing to elect people who will not only promise to cut taxes and spending but also mean it, things will only get worse. Unfortunately so far the only candidates genuinely willing to do that seem to be the libertarian crack pots who think the only danger Americans face is from it's own politicians and that we don't need a military any more powerful than Canada. God help us!

  4. Peter | September 19, 2011

    If they hoarding so much cash then they will rise with inflation

  5. Cynthia Stimpson | September 19, 2011

    While your diagnosis is essentially correct, I get very tired of your failure to give credi where credit
    is due. Specifically, you should attribute most of our current economic woes to the Bush administration.
    And the Fed Reserve of those 8 years. And the two wars in the Middle East that were questionable
    at best.
    And, why not admit that no matter who is in office, these problems would be the same, and, no matter who is elected next, they will not solve them with the snap of a finger. Obama may not have a magic wand, but No One would, given the current global circumstances.

    It is a cheap shot to imply that Obama is the cause of all this mess, and, frankly Keith, I think
    you are a better man. You could man-up and be objective.

  6. Agata Valentina | September 19, 2011

    It's only commonsensical that gold will rise. The fundamentals are strongly supported by technical analysis. Strikes me that gold is not a good answer, but perhaps the ONLY answer right now.

    I am trusting The GoldForecast for technical viewpoint. http://alturl.com/wocs8

    Try their free trial sub. They don't bug you and it shows what they're made of. Company's name is the Gold Forecast.

  7. Sam | September 19, 2011

    I think the author's ideology is tinging his analysis. He says that we need demand for goods, which is undoubtedly true, but where will the demand come from if companies are unwilling to hire and consumers are unable to spend? This is a negative feedback cycle that has the economy spiraling downward and won't be corrected by doing nothing. The $800B stimulus program was not large enough to kick the economy out of the deep hole that the financial meltdown put us in. The reason it was not larger is because because the GOP would have obstructed anything larger.

    The author may well be correct about the trend, but not correct about the cause and corrective action required.

  8. JEROME RICKERT | September 19, 2011

    Sustained demand.
    And a bottom in housing prices.

    Two items from your report.

    When the poverty level is going up, wages are going down ( the new workers at GM get 12/hr or $24,000/yr or minimum wage elsewhere) Where do you see the demand coming from. How many houses can be bought with a $24,000/yr income..

  9. Rohit khera | September 19, 2011

    What about our trade deficit of $500 billion per year? At a worker output of $100,000 this translates to a loss of 5 million jobs.
    We need a fresh look at Imbalanced free trade and replace it with a balanced free trade.

  10. Phil B. | September 20, 2011

    Sorry, but Obama is directly responsible for the situation we find ourselves in. The continuation of blaming a previous administration is getting tiresome. Obama has added trillions and trillions to our deficit. We are teetering on the brink of insolvency. When the world decides that the dollar is no longer deemed the reserve currency, the crash you'll hear is our economy completely collapsing. If bernanke understood finance at any level, he would stop printing money that currently has a real value of .18 cents.
    Time will tell, and not too much longer I'm sad to say.

  11. steveross2851 | September 20, 2011

    The only short coming in Keith Fitz-Gerald's article is the last sentence where the writer says the markets will eventually reverse and go up "which they will." To be sure, even the most terrifying bear markets stage brisk rallies. In fact during the first three months of 1930, the stock market regained more than half the ground it lost between September 1929 and the end of that year.

    But the real question is this: Is there any hope that the economy will ever get on a sound footing for long term growth again before economic devastation wipes out most of the rank and file's life savings? Sadly, for political reasons the answer is NO.

    The reason there can be no long term growth without historic economic devastation first is simple. Almost everyone (no matter what some say publicly) is resigned to higher taxes "to pay down the debt." That's some proposition! First politicians spend us trillions of dollars into the hole and then they use that as an excuse for still more taxes and spending.

    Faith in the benefits of higher taxes is the rank and file liberal's "trickle down economics." It's the fantasy that higher taxes on investors and employers will somehow put more money in their pockets. The truth is that Obama and his ilk NEVER intended to help the middle class, in spite of their empty promises. All that new spending Obama wants is intended for government contracts and other sweet heart deals for the big shots who contribute heavily to his campaign. His rank and file supporters will only get crumbs. It's time to stop believing in Santa Claus.

    But don't worry, the GOP doesn't really intend to cut spending and taxes either except under extreme duress, in spite of what they tell their rank and file voters. NO professional politician wants to cut spending or taxes any more than a general wants to order a retreat. Why should they make real cuts when spending and taxing are their only way to grease the powerful interests that support their campaigns financially and politically. Why should politicians let the tax payer draw a breath when these same big shot financial backers the eventual tax increases will really be for will employ them once they leave office!

    The trillions of dollars a year government spends at tax payer expense is the biggest robbery and swindle of all time because even the part of it that is legitimate costs far more than it is worth and steals from our hopes for more work and a decent retirement.

    Until we are willing to elect people who will not only promise to cut taxes and spending but also mean it, things will only get worse. Unfortunately so far the only candidates GENUINELY willing to do that seem to be the libertarian crack pots. These are people seem to think that terrorism is a greatly exagerated menace and that we don't need a military any more powerful or expensive than Canada's military. God help us!

  12. Jim m | September 20, 2011

    All I can say to all of you is,if you have children or anybody you love. You better start putting food and ammo back,yea laugh… Your gonna need it,don't think it can't happen to the us of a,cause let me tell ya all. It already is… If you can't see it,you must believe Obama is going to deliver your families meals himself.. You haven't seen anything like the meat prices your fixing to see, I own a restaurant,and I'm here to tell ya,the cheapest cuts of meat have gone up 42 percent since numb nuts has been in office,potatoesmhave gone up double by the case, catfish,is up from 31 a case to 74 dollars a case,Thanx to vietnam and china imports. You peoplemaremjust like pelosi,you don't know shit about whats going on around you! Get ready!!!!

  13. Jim | September 21, 2011

    The deficit and the unemployment/recession issues are separable. We have had deficits since, essentially, Reagen's administration when the upper brackets were collapsed. I found myself, making well below $100,000, and in the same tax bracket as Bill Gates, making over $1,000,000,000. Essentially, we took a lot of the progressivity out of the progressive income tax system. So, the deficits mounted as tax revenues declined; a problem briefly alleviated during the Clinton administration when taxes and spending were brought into balance. The Bush administration sent into motion events which still largely affect the deficit problem: two rounds of tax cuts and mounting two wars, dealt with as off budget matters. Did the tax cuts lower rates for the top? Absolutely; did the revenues decrease? Absolutely. Effective federal tax rates are now the lowest since the 1950's. Now, the 2008 housing mortgage/bank derivatives-driven recession brought us to the brink of financial ruin. Did that crisis have anything to do with the 20-years of deficits? No. Do we need to address the deficit problem? Clearly, we do. But to suggest that the deficit has brought about the economic difficulties in this country is misplaced. Bush added billions to the deficit and no one complained; Obama did so in trying to stimulate the economy and create jobs, and we hear all the arguments against deficit spending. Anybody remember Grahm-Rudman-Hollins? This is a scenario that the Republicans loved to resurrect whenever it's politically advantageous to do so.

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