Tick, tick, tick . . .

In my opinion, our current situation is a time bomb ticking away. The Fed's -totally expected - announcement today on the minimal relief they will provide was simply an inept attempt to diffuse the bomb, and it did not work (it only muffled the ticking sound). Yet the clock continues to tick. Mind you, it is a clock of undetermined length and the explosion when it stops ticking will likely be more like one of those snake fireworks that you light and they burn and grow for a long time, but the clock will eventually get there. So why the snake analogy? Well, I do not see the market or the economy falling off a cliff when reality sits in. Folks will figure out that we are in for a long period of a stagnant economy and things will get to a sustained long downward direction. The direction will be down for a long sustained period and, while it will have a lot of violent bounces, will over time (a long time) trend downwards.

It may be like Japan but I suspect it will not last as long. Japan is working on over two decades of stagnation and no relief is in sight. The U.S. has problems but the U.S. bubbles were not that extreme. I remember at one point, at the height of the Japan real estate bubble, an article proclaimed that the many acres of, I believe it is called, the Royal Palace in Japan, was alone worth more than all the real estate in the U.S. Now I never saw any verification of this, but it is clear that RE in Japan set a new standard in insanity. Now Japan has set a new insanity in terms of the poster child of what can go wrong. And this, my friends, is what we have to fear.

The FOMC results today were totally expected. I think the Fed is out of any big bullets and reality is about to set in. The next 12 months will not be a happy time - and you can quote me on that or shove it in my face a year from now to tell me how wrong I am. I have been for some months predicting a problematic third and fourth quarter. More specifically I have been expecting a very trying September and October and have not changed my opinion. I thought briefly in June that the market had reacted negatively before I expected but a nice 10% or so bounce over the past month and a half have given me the expectation my timing was right.

Many months ago I noted some option mortgage issues peaking this fall and now you have many banks, Fannie Mae and Freddie Mac accelerating foreclosures on what happened earlier this year and last. REOs are shooting through the roof, employment sucks wind, saving rates are going up, companies are cutting back and, well, it is time to get out of the pool. Good luck if you decide to stay in for a while. I am on the side-lines and have been mostly for two and a half years. Being on the side-lines helped me miss the big drop and the big run-up since March of 2009. But I sleep at night. And I am still going to sleep well the rest of this year as I sit on the side-lines waiting to see if I am right or wrong. I rest much better knowing that the market has had an incredible run the past year and a half that was not at all based on fundamentals. So I ask myself, is there more upside potential or downside potential? Good question to ask yourself at the moment. And remember, while you are pondering that question, the clock continues to tick.

Update 8/11/10 at 9:35: Then again, given the market dive this morning, it looks like we may not make it to September.
Disclosures: None