Bursting Bubbles

Economist forecasts another dip before true recovery.

April 07, 2011

CHICAGO - Economist Walter Zimmermann believes in optimism, just not as it applies to the current economy ?" and especially not when it allows investors to overvalue Wall Street.

Speaking before about 400 attendees at this year??s NACS State of the Industry Summit, the chief technical analyst for United-ICAP said behavioral influences including a "herd mentality" oftentimes influence everything from commodity prices to consumer confidence.

Though describing the economy as recovering in terms of productivity, other trends such as jobless figures, home values and other indicators do not bode well going forward.

"The good news is I don??t see a high probability for an all-out depression," he said, but added that numerous signs indicate a second dip to follow what has currently been an "anemic" recovery.

Zimmermann named a bullish commodity market as one of the signs of a looming selloff, one that could lead to a second "dip" in the economy. As an advisor to investors, he noted that such a situation indicates a time to sell, with the only question being when.

"I tell people it??s like standing on the tracks and you see a train coming," he said. "Do you want to get off too early or too late?"

Other signs of a market bubble about to burst include:

  • A bidding war for stock exchanges
  • Mutual funds at an all-time low as percentage of cash
  • The circulation speed or "velocity" of currency being "Fed induced" vs. spurred by actual consumer spending
  • Multiple indicators showing stocks as overvalued
  • Consumer credit is plummeting
  • Housing starts at multi-year lows

Pointing to federal control of interest rates, Zimmermann said the government??s policy of keeping rates "ultra low" to zero is creating the environment for "speculative bubbles," ones that ultimately burst and send the values of stocks tumbling. He said interest rates should be controlled by market forces and should reflect the "actual risk of borrowing."

On the gasoline front, he did warn of a potential spike in RBOB rack prices potentially in the $4.50 to $5 range if negative circumstances surrounding blending occur. He said Houston has already experienced the shuttering of a couple of plants in the area and that any "dramatic or unique" logistical issue may trigger a spike.

Ultimately, Zimmermann said the middle class is "getting crunched and wealth creation is not happening."

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