Video – Forecasting Stock Market Drop – Retro Series Part 4

With the S&P500 near 1200 and the Dow Jones Industrial Average near 11,000 in 2005, FX portfolio manager Michael Mansfield predicted a drop in US stocks and in the US Dollar in this video clip (part 4 of a 2005 live, market webinar). He provides convincing analyses to support his case, based on cycles, US debt, demographics, and correlation to Japanese stocks.

Even though he was 2 years early in forecasting the drop in the market, US stocks eventually started plummeting in 2007 until they hit significantly lower lows in 2009, less than 700 on the S&P500 and less than 7,000 points on the DJIA index.

As both of these US stock indexes are again moving up in price and not too far off their 2007 highs due to artificial factors, such as the continuous printing of money (Qualitative Easing by Ben Bernanke, Chairman of the Federal Reserve), it is important to note that some of the dangers highlighted by Mansfield in 2005 are still present today. Consequently, going back in time and watching this video might help investors and traders re-assess their outlook on US equities.

Notes and Summary on the Video (April 5th, 2005)

During the video, Michael Mansfield specifies that the US stock market could go all the way down to possibly "…1,000, 900, 650, and possibly going all the way to 450, or the 1987 low of 350, which we'd be in a major depression at that point." He also reiterated, "…we’re due for a major correction," based on the findings of his powerful studies of historical cycles.

Even though the S&P didn't make it to the 350-450 level (at least not YET), it did clock a low of  666.79 (in 2009) from a high of 1576.09 in 2007, a retracement or maximum drawdown of about 58%, demonstrating the inherently high risk of stocks that the financial media and traditional investment community don't like to discuss in great detail.

Mansfield also reiterated an important concept that inexperienced traders frequently overlook because of their inability to control fear and greed: that no market, whether currencies or stocks, ever goes up or down forever. Corrections are inevitable:

"Whatever it is in life, when there’s a big, big run-up, there’s a big, big pullback. Corrections are always a percentage of the run-up."

Analyzing the fundamentals as to why US stocks could drop in price significantly, Mansfield brought to light the historically high Debt-to-GDP level of the United States.

"Why is this a real dangerous time in United States history and the global history is the gigantic debt load we have. Here’s a chart from Gabelli Associates. Our total debt to GDP right now is over 300%, and it’s currently at 6.25 or 6.4 total GDP, which is a place when other currencies have crashed…"

It is interesting to note that total credit market debt in the US as a percentage of U.S. GDP is even higher today than it was during 2005 when Mansfield gave his presentation.
 
To strengthen his position favoring weakness in US equities, Mansfield also discussed demographic factors, such as Baby Boomers being forced to tap into their retirement plans and take mandatory retirement benefits, having to dump their stocks in the process.
 
Finally, Michael Mansfield discussed the fact that the US and Japanese stock markets were running at a 90% correlation and that the US stock market would eventually need to drop based on that, causing US investors to look back 20 years later and see a failure of the market reaching a new high and potentially lower prices than in 2005.
 
In addition to his powerful forecasts, Mansfield provides an important solution in his presentation: the need for investors to diversify into sectors that could weather a stock market storm. He states, "…having a currency portfolio managed by someone with tremendous experience will help you weather the storm."
 
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