Bears Run Amok in Market Prophet's Vision

In an interview last week, Belkin said everything that made him bullish last November now makes him bearish. His forecasting model, which consists of a nonlinear set of probability distributions, shows equity markets in every developed country around the world "wanting to turn down." At the same time, he sees emerging markets such as Brazil, Chile and China "turning up in parabolic fashion."

The way Belkin sees it, we're "at the end of a liquidity bubble." Liquidity is analyst-speak for money, particularly dollars that the Federal Reserve prints and pushes into banks in a variety of ways for a variety of economic, political and social purposes. ("When the Fed makes new money, it's like counterfeiting, only it's legal," he quips.) He learned long ago that it made sense to buy into a liquidity bubble while it's happening, but that you needed to be able to identify its final days and get out a little early.

Belkin's Bearish Case

He defines major bubbles as excessive deviations from stocks' 200-week trend, while major crashes entail reversion to their 200-month trend. That's not information you can use to daytrade, but it helps with the big picture. And the big picture, in his view, amounts to this:

In March 2000, his prediction for a 65% decline for the Nasdaq was predicated on a belief that it would sink to its 200-month (or 16.5-year) average.

In October 2002, the Nasdaq rebounded off that level, which was around 1180.

In November 2002, his belief in a Nasdaq rally to 2280 was predicated on a belief that it would rise to its 200-week moving average at that level amid a business-cycle bounce.

Now he thinks the index will fall short of his predicted move because private-sector credit growth is declining sharply despite the Federal Reserve's neutral-to-slightly-stimulative stance.