Inevitably, when shares begin to post record lows, some investors start to talk about ‘bottoming out.’ The best bargains are to be found when things can’t any worse, goes the logic. But Bill Bonner says things are about to get much worse for the markets as the great American consumer spending spree comes to and end. Bill argues that it was “dumb money” buying stocks at their peaks. Now that dumb money is gone, and stocks are getting whacked…

“Traders on alert for ‘capitulation territory,’” is the headline in today’s International Herald Tribune.

Stock markets all over the world are getting whacked. They’re at a 5-month low, even beneath where they were when Bear Stearns went bust. Japanese, European and American stocks (as measured by the S&P) are all in bear market territory – all down at least 20% from their peaks.

Naturally, “some investors are beginning to scent a possible end to the slide.”

It was dumb money that was buying stocks at their all-time peaks. Not only in the United States, but everywhere. It is imbecilic money that buys now, in our opinion.

We are a long way from “capitulation territory.” When it comes, you will not see stocks selling at 15 times earnings. You’ll see them selling at 5 times earnings. And you won’t see the Dow at 14 times the price of gold. You’ll see it at 2, 3 or maybe 5 times the gold price.

Most importantly, when investors finally give up on stocks, you won’t find articles in the major press telling you that investors are “on alert” for the bottom. They will have lost interest – and their money – long before.

Despite all their woes, Americans have still barely begun to cut back on spending and begun to save in a major way. Sooner or later they will. And if the savings rate goes back to where it was in the early ’90s – at nearly 8% of personal income – it will take about $800 billion out of consumer spending. You can imagine what that will do to retailers…to the auto and aviation industries…and to Wall Street.

Stay clear of stocks, dear reader. Stick with cash and gold.

Source: A Supersized Transfer of Wealth