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Scenario for a Stock Market Plummet   (January 28, 2006)


If there was any sure way to predict the rise and fall of the world's stock markets, we'd all be millionaires. Alas, there is no such reliable crystal ball, but there is one truism we can follow: eventually, reality trumps market euphoria and hype.

Thus we can look at the accompanying chart and safely predict that the Federal Reserve will not stop raising interest rates on January 31, as the stock market has been widely anticipating. Why? Because inflation has only begun its slow, inexorable rise. The 40% rise in oil and transportation costs, the 20% rise in medical costs, the 20% rise in college tuition--the list of huge price jumps across all categories of goods and services goes on and on.

As noted here and elsewhere, the Feds have tried every trick in the book to cook the books on inflation to make it appear low, but as mentioned above, reality has a way of trumping even the most cleverly cooked books. And so the Fed has no choice but to keep raising short-term interest rates, just as the Chinese have no choice but to keep buying U.S. bonds to keep the dollar artificially low.

So here's how the scenario will play out in the next four months. The Fed will "shock the market" by raising rates again in February or March, and signal they may do it again in May. The stock market plummets on this "bad news," as does gold, which now looks less attractive than higher-interest Treasury bonds. By May, the markets and gold will both be bottoming, setting up one more rise before catastrophe strikes in September and October, and the market drops like a stone even as gold skyrockets.

Remember, you read it here first.

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copyright © 2006 Charles Hugh Smith. All rights reserved in all media.

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