Thursday, 19 February 2009

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The Big Picture

In a society that has become so focused on the short term, I think it makes sense to look at the longer term picture. Why? Because no one is looking at it; hence, the reason that people get clobbered when the long term trend really gets going. I put this chart up because it shows the progress of the stock market from the start of the 20th century. The red areas were major bear market periods. Doubtlessly, you will be able to deduce your own conclusions from the chart. What I want to talk about is the nature of the time period we are in. For those of you that know your history, it might be a little easier to understand what the possible consequences of the rest of this major bear market period will look like. We have been in a bear market that started in 2000. If history is any guide then the current bear market, will last until 2014-2016. The current period is deflationary just like 1929-1949, but this time around the Fed is printing money like crazy. In the 1930s, the Fed didn't try to come to the rescue until a lot of the damage from deflation had been done (i.e. banks failures, panics, skyrocketing unemployment). Can the Fed really stop deflation? It's a question I would really like to know, because it would help me position my investments/trades. I do think that a major low in this current bear market has to finish below the October 2002 lows. If the Fed is unable to stop deflation, I think it should look something like the 1929-1932 spike downward (see above). It has to. There is nothing else that a deflationary crash would look like. If the Fed is able to arrest deflation, then I think the market makes a new low just near the October 2002 lows. But then a serious currency devaluation for the U.S. dollar is coming. Either way it isn't going to be pretty, and people who are trying to fool themselves into thinking everything is going to be okay are going to end up with a seriously impaired standard of living.

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