We are getting closer and closer to some unknown upset in markets and possibly the sanctity of law. The MF Global blowup certainly demonstrated the latter. Is MF Global a [...]
markets
Jan 232012
The sage Richard Russell said recently (my emboldening):
As the world deleveraging process continues, commodity prices turn soft. Deleveraging means that people will be tightening their belts and using less of everything.
However, I don’t get the feeling that Americans believe that hard or harder times lie ahead. All one has to do is survey the car-filled freeways or check out the crowded restaurants to realize that Americans, for the most part, are still sipping from the punch bowl.
As for the timing of trouble, we should have our eyes glued to the stock market. If or when the Dow breaks below 12,000, that would be my first danger signal. Below 11,000 on the Dow would be my second danger signal. And below Dow 10,000 would be my signal for “all out trouble.” In the meantime, we wait and watch and avoid doing anything stupid like loading up on stocks.
Jan 102012
Richard Russell
It is nice to see that Richard Russell, famed octogenarian investment newsletter author, has apparently recovered fully from his recent setback. This quote is an example of his outlook on markets (emboldening added):
Subscribers who are buying or holding stocks on the on the basis of the better employment news should remember that deteriorating internals in the face of improving newspaper headlines give us the worst of all markets. I cannot warn subscribers strongly enough that they face hard times in both the market and the economy during the months ahead. The operative words now are “extreme caution.” Please be out of all common stocks with the exception of the mining shares. According to my studies this year it’s going to be a long, cold fall and winter.
It is difficult to argue with his outlook, although mining stocks likely have not done well in down markets, at least during the primary downward moves. Longer term they should be fine. I currently own them although not in aggressive quantities.
Dec 032011
On the roller coaster that we call the stock market, it is easy to miss the forest for the trees. Volatile short-term moves are especially pronounced in today’s economic environment. But do they have any meaning in the larger scheme of things?
The following chart provides a big picture of the stock market. More important, it provides the picture in terms of purchasing power, that is adjusted for the deterioration in the value of the dollar.
Major moves tend to be a decade or more in length. Forget this week or last month and recognize that we are in a downturn and have been for a bit over ten years. Is it about to end or do we have another decade left to endure the bear market?
Of special interest is the rise of 266% during the Great Depression! Those who bought at the right time in 1932 looked like geniuses until the turnaround in 1937 occurred.
Where are we now? Are we nearing 1932 or are we headed for 1937? Money is to be made, but is it on the long or short side of markets?
When markets respond to Central Bank liquidity injections by rising, are they rising enough to offset the potential loss of purchasing power that will likely accompany such moves?
These are all questions to ponder. These are not easy times for investors. There is no yield on bonds and great volatility in other markets.
Yesterday was a big day in the stock market! The Central Banks of the world came to the rescue of Europe, at least that is what you are supposed to believe. In reality, nothing positive happened yesterday unless you were long the stock or commodities markets.
The actions of the Central Banks signal how desperate the situation is. Nothing was done to help Greece, Spain or the other insolvent European sovereigns. Yesterday was an attempt to keep the dysfunctional world financial system going awhile longer. Banks were increasingly unwilling to lend to other risky banks. This condition precipitated the 2008 debacle.
Central Banks flooded the system with liquidity, or at least the potential for liquidity. There is one important difference between now and 2008 — the financial system is much weaker today. Despite the trillions of taxpayer and central bank created dollars, euros, etc., banks in the US and Europe are closer to failure today. Everything done has failed to improve the dying financial system.
Stock markets around the world “approved” central bank actions by rising dramatically across the board. Increased liquidity or the promise of same always produces a Pavlovian response in financial markets. But that response is likely short-sighted because the recent actions did nothing but buy time, a quantity we are rapidly running out of. Here is what was unaffected by yesterday’s policy actions:
- The sovereign insolvencies called Greece, Spain, etc. did not benefit from the Central Bank action. Nothing was accomplished with respect to strengthening the weak governments of the EU.
- The economies of the world are in just as bad a shape today as they were before the action. Nothing was accomplished regarding growth, employment, etc.
All that happened was a concerted action by governments of the world to defer the collapse of the financial system. It was an attempt to prevent another Lehman-type event.
What does it all mean? It means several things, none of which you are supposed to know or understand:
- Governments are desperate and will do anything to prevent the havoc which they created from surfacing.
- Extend and pretend is in full flower. No attempts are being made to solve problems.
- Inflation, as many suspected, is the vehicle chosen to extend the unsustainable.
- A Depression is inevitable. Whether it is preceded by a hyperinflation cannot yet be determined.
In the short-term these actions mean that stocks are likely to rise. Commodities may soar. Economies are not helped, nor are bankrupt governments.
In the long-term, these actions only worsen matters:
- Depression will eventually come (whether it will be preceded by hyperinflation cannot yet be determined).
- Sovereigns will fail. Welfare states will collapse.
- Civil unrest will develop around the world.
- Politicians may use war as a means to divert the attention and energy of their citizens.
Investors beware. Your father’s stock market has turned into a game that only regulars at Las Vegas should be comfortable with.
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