As everything gets crushed, it is natural to get out of Mr. Market’s destructive path. Although there will be all sorts of conflicting advice and recommendations, standing aside for a [...]
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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.
Nov 192011
Phoenix Capital Research has a very negative outlook on the near term. Their outlook is similar to my own (my emphasis added):
We have been getting MAJOR warning signs of a collapse for months now. No less than the Bank of England, the IMF, and legendary asset management firm Franklin Templeton have warned that we are facing an epic, hellish crisis.
We got the first taste of this in August when the S&P 500 literally wiped out a year’s worth of gains in two weeks The only thing that brought us back from the brink at that time was the belief that the EU mess might be solvable and a coordinated intervention from the world Central Banks.
We then had a spirited rally as the Fed and central banks went “all in” to force the stock market above its 200-DMA.
This final “hurrah” has failed and the financial system is literally imploding. The EU will be broken up in the next month or so and it is highly likely Germany will back out of the Euro altogether.
Moreover, the world central banks are now totally out of ammunition. They’ve spent Trillions of Dollars in bailouts, abandoned accounting standards, and even moved TRILLIONs in garbage debt onto the public’s balance sheet.
None of this has worked. The credit markets are jammed up just like in 2008. Italy, the third largest bond market in the world, is on the verge of default. No one wants to fund the EFSF. China is entering a hard landing and economic collapse. The US is in a clear depression.
So what does one do if one believes this or a similar scenario is unfolding? Given the uncertainty associated with any forecast, especially one of this type,one, one must be careful, flexible and agile. Positions should be considered temporary rather than long-term. You are renting assets rather than owning them! Positions must change frequently as your perceptions of what is happening changes.
Here are some thoughts, not meant to be recommendations but alternatives, that traditional investors normally do not consider:
- Turning coward for a while (i.e., going to cash) is not bad. That may mean 100% or some high percentage, depending upon your risk tolerance and outlook.
- Going short is another option, although riskier and not necessarily for people who like to sleep well. If chosen, this strategy does not have to be a full commitment. It can include hedging long positions you might want to continue to hold. Buying puts, selling covered calls, etc. are some strategies.
- Buying gold is another option in times of turmoil, especially when currencies are in danger of failing. Gold has been highly correlated with general market movements recently. While I don’t expect that to continue, if it does, it will not protect you from stock swings. The risk of sovereign defaults should bring gold back to its low or negative correlation to equities. Again, a relative shift in your portfolio rather than an all-in commitment is prudent for those considering this alternative.
These are not times for investors. Lots of money will be made and lost in the next few years, but it is unlikely that traditional investors will be on the winning side of the outcome. Conditions are ideal for gamblers which most of us have abhorred during most or all of our accumulation experience.
Err on the side of caution and conservatism. Five years from now, the elite performers will be those who preserved their purchasing power. Good luck and be careful, whatever you choose to do!
I welcome comments on whatever strategies those who foresee a similar future are using. Perhaps such a dialogue will be helpful to all.
Oct 302011
A long (90 minute) presentation on gold, silver, the stock market and inflation. A simple explanation that should help people understand what is happening with respect to asset cycles and money.
Mike Maloney provides an excellent presentation. It is up to you to determine whether he is right or not.
Hat Tip to Plan B Economics
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