U.S. Stock Prices are Down about 9% so far this Year

It's the Year of the Rat, dear reader. Cheer up.

"The Year of the Rat is supposed to be good for business...good for money...that's what I heard."

We were walking down the street in Paris' Chinatown. It was Friday, the second day of the Year of the Rat. Out in the street, a young girl in a gaudy costume hammered on a wooden drum. Beside her, two Chinese dragons undulated...stood up on their hind feet (the boy in front jumped up onto the bent legs of the boy behind him). Suddenly, firecrackers went off...a series of them...that lasted for about two or three minutes.

"This is the section of the town known as Belleville. Elle magazine calls it a 'babel town' because there are so many different nationalities speaking so many different tongues. We heard Chinese, of course...but also Arabic, along with dozens of other languages from Asia, Africa and India that we couldn't recognize.

"This is the area that Edith Piaf came from," a colleague explained. "It was a working-class French area. Then the Arabs came...and then the Africans...and now the Chinese."

A minute or two later, the two dragons came into the restaurant where we were having lunch.

"What are they doing?" we asked the Chinese waiter.

"They're probably hungry," he replied.

Against the good omen from the Rats is a bad one from the Giants. The Giants won the Superbowl...something they had not since the early '90s. The last time they did so, the U.S. economy went into recession soon after.

Then, there is the January Effect. As January goes, so goes the year, say the old timers.

If so, 2008, is going to be bad. In technical market terms: this January was a stinker.

On the other hand, copper is going up! Copper is often said to be "the metal with a Ph.D. in economics," because it tends to be a good advance indicator. Industries planning to build more refrigerators, more houses, or more airplanes buy copper. The price of copper rises...reflecting more economic activity underway. Copper is up 13% so far this year, after a steep tumble in October and November of last year. Is copper telling us that the worst is over?

Commodities, generally, are going up. The CRB index hit a new record high at 518 last week. Gold is near its all time high too. But there is still time to get in on our Trade of the Decade - especially since we think the price still has quite a ways to go.

And then, there's the bond market. What story are bonds telling? They went up in the fall, signaling a coming business slowdown. But lately, they've been going down - a sign of inflation and/or growth.

No, dear reader, we don't know which way it is going to go. There is a fierce battle raging - between inflation and deflation...between Mr. Market and the market manipulators...between greed and fear...between growth and recession.

In short, Boom...or Bust? Rats or Giants?

"Yes" is our answer. We're likely to see them all. Most likely the market manipulators won't be able to save the boom, because it has always been fraudulent and hollow. But they are god's own gift to the gold market. The more inflation they pump into the system to try to revive the boom, the more gold rises.

Our guess: At best, stock prices...house prices...buyouts...and Wall Street bonuses will stagnate. At worst, they will all go down. U.S. stock prices are down about 9% so far this year. House prices are said to be down about 10% from their top. And the financial industry is still reeling from the subprime debt crisis...which has leaked into all forms of debt - home equity, credit card, corporate, buyout, SIV...you name it. Last week, the Financial Times estimated losses from subprime alone at $400 billion. Banks and grand investment houses are quaking. Two of America's biggest had to be bailed out by foreigners. And the news this morning is that one German bank had to be bailed out with $7 billion.

Meanwhile, commodities and gold continue to hit new highs.

Expect corrections, reverses and surprises along the way...but the basic pattern is likely to hold for many months: inflation in commodities and gold....deflation in housing and stocks.

Still, the most important thing is to stay out of the crossfire. In any given month, the battle could go either way. Any day now, we could have a buoyant rally in stocks...and a breathtaking correction in gold. Or, stocks could crash...and gold could shoot over the $1,000 mark. Watch out. Hold gold and cash. Be happy.

Bill Bonner
The Daily Reckoning Australia

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