The total value of the U.S. equity market has crashed, down 30% or so in the past in the past 12 months, with MOST of the decline coming since August 28, 2008. The Standard & Poor's 500 Index is back to 1998 levels! Since that time inflation has diluted the value of the index by over 40%.
At 500 points per day, the market will be at ZERO in 19 days. Somehow, at the very least I expect the rate of change to decelerate
With U.S. Treasuries yielding less than 1% for shorter term paper, and just over 3% for 10 year+ bonds, SUBSTANTIALLY less than the rate of inflation, and with U.S. real estate in shambles, it would seem that there should be little competition for equities... yet the equity market has left little but broken glass and tire marks all over the mutilated bodies of those brave investors out bargain hunting. What gives?
Either the credit system is broken beyond repair - which is what the U.S. equity markets appear to be trying to tell us... or, the massive amounts of liquidity being injected into the system by the various central banks and the U.S. Treasury will unclog the system. If the system breaks down, the U.S. will enter a deflationary spiral as bad or worse than the 1930's Great Depression. If the liquidity injection works and Fed & Treasury are able to reinflate the system, it is likely that there would be some unintended consequences... such as significant inflation. To me, there does not appear to be much middle ground. Deflation or HYPER inflation seems to be in the offing.
I cannot tell you for sure where this winds up; there are a great many moving parts here. My best guess is that TPTB will be successful in reinflating (from what level, well that is another moving part...), so I think you have to play both sides.
Historically Gold & Silver have held value well even in periods of deflation, as does currency and sovereign debt. Unfortunately, historically cash was backed by Gold the last time we had deflation... so you are on your own here...
If you are so inclined to bet that our system has a few more breaths to take, or that my vision of reinflation comes to pass, then you should hold some equity positions. This is not to say that TPTB attempt's to reinflate are going to work in a timely fashion with the markets deflating before the eventual inflating... sort of like the meltdown we are going through right now.
I was speaking with the Mad Scientist, and he pointed out that all of the companies that had passed on increased costs for commodities that are now not so expensive are going to be the beneficiary of the equivalent of the mother of all tax cuts, and that this should show up in their bottom lines in the next couple of quarters, PROVIDED that TPTB's efforts to unclog the credit markets are successful.
Still with me?
It would then follow (does it ever?) that if the unclogging is successful, and considering the inflationary effects of all of the stimulus along with commodity forced price increases for commodities that don't cost as much as they used to, combined with some HORRIFIC investor sentiment... add it all up and we could have one explosive move to the upside in the world equity markets, with some sectors more than others.
Or,
TPTB fail in their efforts, and the U.S. sinks into a Japan style deflation at best, and a 1930's style deflation at worst, and you and I will be cooking spam on a stick over a dung fire. But at least gasoline will be cheap... So we got that going for us...
Finally, there is always the possibility (probability) that Oil supplies will not be sufficient for producing REAL increases in production and output, and given the amount of stimulus, an inflationary crash could result... A person could go nuts thinking about all of this...
My bet is that the markets are VERY over sold. Of course, since I did not foresee the past 2 weeks collapse one might wonder what the hell do I know. That just ain't how it works. When it comes, you will want to be long this rally. The question is, do you want to be long tomorrow? And I have no idea...
Back soon,
Mentatt (at) yahoo (d0t) com
9 comments:
If national exhaustion with "trying to keep up with the Joneses" was a real economic concept, and if we saw just how little money is now available for spending, we'd have to consider the deflation option. We don't need all this junk we are buying, we don't need weekend trips to Olive Garden, and we don't really need more home improvements. Everything is lining up for a comprehensive collapse in demand across the board. It has happened before. And we'd just have to ride it out. The energy thing will have to wait a little while.
Long term trend is DOW 4000 or less, gold will spike upwards overtime and deflation it will be in the medium term as all that the FED has tried so far has failed. The credit markets are still frozen as indicated by the TED Spread http://www.bloomberg.com/apps/quote?ticker=.TEDSP:IND and the LIBOR-OIS and other credit market indicators. If credit remains frozen, earnings and sales will further deteriorate, unemployment will further increase and asset prices will fall faster as people try to pay off their debt/ can't afford to buy much.
I think any of the scenarios you've described might play out in the short term, but in the longer term we are watching a systematic collapse of faith in fractional banking. By the time the next month has played out, the majority of banking will be government owned or supported, and therefore will dump anything that sounds like that nasty 'investment banking' and concentrate on deposits and small business banking, just to satisfy their voters and oversight committees.
All other government spending will collapse, because they'll already have borrowed to the limit. Many governments will be like Iceland - effectively bankrupt with nowhere to go for help.
If we were to take a step back and think about 1 or 2 years hence, after the dust has settled, the economies will be far smaller than now, the retail sector will be one-tenth the current size and few countries will have currency to pay for imports, so without retail sales and without imports, there won't be many equities worth having.Credit will need a 20% deposit and a solid credit record, and most people will have to save for a while before they buy something.
Hang on a minute, isn't that how it USED to be?
Viv:
Neither people nor governments role over and die easily. There is a great deal that we can do in the short term, and the Oil crisis just might cause us to do some intelligent things.
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Scott:
Ever read Freud? crazy bastard, but certainly on to something...
Everything Man does, he does in order to "win the heart of the fair maiden". If you can change that... well, let me know.
"Every man has a big head and a little head. Unfortunately we only have enough blood to operate one at a time" - Robin Williams
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Donal:
Hope all is well...
I am ONLY concerned about the next couple of years. Looking beyond that, well there are SO many moving parts...
"the evil of the day is sufficient unto itself" - Jesus of Nazareth
Great Depression 1930s-
*US has massive oil reserves
*US is world creditor
*US has brand new industrial plant
*US has few indebted consumers
*Mortgages had 50% down & short terms
*Most people had farm families
*US had no expensive wars going
*Financial markets small
*Little national debt
*Not dependent on foreign credit
*Most essential production domestic
*Many foreign friends
*Population has strong thrift and practical skills
Current Situation-
*US imports 70% of crude oil
*US has outsourced major industry
*Massive budget deficits
*Massive trade deficit
*Essential production is outsourced
*Many expensive foreign & war entanglements
*Finanical sector runs nation & accounts for 40% corporate profit
*Population has no connection to food production
*Massive corruption in all sectors
*Incompetent leadership
*No preparation for energy depletion
*Huge "service economy".
*US population lives in TV fantasy world in large part
*Nearly 50% of population depends on govt checks to survive
*30 years of runaway debt growth
*Population heavily indebted
*Powerful foreign enemies and few foreign friends
*Essential health care costs out of control
*Dollar in danger of losing reserve currency status
*Nation in danger of losing the Trillion USD/year foreign credit we need just to keep the nation alive.
Add it up..
Anon 8:54
I hate to admit it but your right. We will probably resemble Argentina by the end of the year if we are lucky. If not we may look more like the Soviet union post collapse.
I'm thinking that this whole credit bubble as much more than just the housing bubble. The housing bubble is just a symptom. After 9-11 Greenspan opened the floodgates on credit. the problem was that the US stood still, and the money flowed to China, India, etc and funded the economic boom there. The money had to come back, and housing was convenient. If the insane mortgage qualification requirements hadn't existed, the bubble would have appeared somewhere else. This whole mess is the market trying to rationalize the difference in production costs between here and the Far East. Bad news for us.
And quit the whining about greedy Americans. We've all been living and working in the market that exists around us. To the individual, the bubble was invisible. Unless you've already moved into a 600 square foot house, and sold your cars, shut the f*^k up.
Mish talks about massive overcapacity in every area. Well, when the US loses the ability to buy abroad because the $ is worthless for foreign trade, the US will have massive undercapacity in every area. We still have massive resources. Then we will rebuild. It's Western Europe that's really screwed.
Wish I was wrong....
There's got to be some positive data or perspectives out there somewhere... just not finding them as concerns the US surviving the correction of these imbalances.
Though I am a reborn pessimist, I like to make money, and that is usually done when the economy is happy. But I'm having trouble finding where in the heck the currency is gonna come from when we have so many things working against us: no cash, credit maxxed, banks afraid to lend, Fed and state governments in heavy debt and obligations up the wazoo, baby boomers now trying to retire by liquidating their stocks (moving from producing to consuming), peak oil, lost U.S. factory capacity, low paid jobs, no politicians willing to tell the truth (including Obama), expensive education, overstretching foreign activities ... I mean, who is gonna support our "happy economy?"
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