Tuesday, 14 July 2009

Bear Market Musings

Inflation or deflation? There is a lot of debate right now about which one we are going to experience in the next several years. Because here is the thing: Whether its inflation or deflation doesn't really matter that much. What really matters is being prepared for either outcome, and then if you are wrong be able to reverse your stance as quickly as possible without losing too much accumulated wealth in the process. Personally, I am a deflationist, and that's because I listen to people who have been right about this whole economic downturn. I mean, people who were talking about it years before it actually happened. These guys had the prescient wisdom to see what was coming before anybody else. People like Bob Prechter, Peter Schiff, Marc Faber, Gerald Celente, David Tice and Jim Rogers. And none of those guys particularly agree on every issue. Bob Prechter believes in deflation and Schiff/Faber believes in hyperinflation. But that is beside the point. The guys were RIGHT. And I don't mean a little right. They were immensely RIGHT. It's like seeing the iceberg poking out of the water BEFORE the Titanic hit. I made a blog post earlier about an article I read exhuming the absolutely foolish statements from our so-called financial dignitaries, media pundits, and our quasi-government incumbents. I mean, in retrospect, these guys were just fantastically wrong about everything and they continue to be wrong 21 months into this current bear market. So why is anybody still listening to these people? Because these Harvardites, Yalies, and Princetonites that walk the prestigious halls of power are supposed to know how to fix things I presume. Well, their record says that they don't and they can't. So we really should stop listening to people who keep getting it wrong. Now, I am gonna tell you what I think. I don't think there is gonna be a recovery, and that's because the people I listen to are telling me that what we are experiencing now is a massive contraction of credit. What you need to realize is that the entire financial system is based on the expansion of credit. Credit expansion equals economic growth. You can't have one without the other the way this system is set up. With corporations and individuals colossally overleveraging themselves, their creditors have realized that they won't be paid back. When those loans go bad, more loans get called in and credit begins to contract. This contraction is in the trillions. Trillions have now entered into the lexicon of financial discussion. Trillions? Do you have any idea how much a trillion dollars is? And the United States is indebted to the rest of the world in double digit trillions. So, there won't be any recovery because the balance sheet of America is still jacked up. Bernanke and Obama want to expand even MORE CREDIT to fix the problem of too much CREDIT. Not going to work. That's just common sense. So I am preparing myself for deflation. This being a scenario in which the price of everything comes down, and the US dollar, paradoxically, increases in purchasing power. When Bernanke and Obama are finished shooting even more heroin into the veins of the American financial system, there might be a little jolt to the economy. But when it ends, asset prices will collapse to their true values, Interest rates will rise substantially, and those people with cash will be able to buy everything at depressed levels. So, I wouldn't buy into the whole “green shoots” idea to much. Another thing: Understanding human psychology and sentiment is indispensable to being able to invest and trade in financial markets. When the peak comes (which I believe to be this fall or in early 2010), you must expect that consumer sentiment and overall social mood will be optimistic, and even giddy. It will be ubiquitous. And that's precisely the moment when you will want to exit. Being a contrarian is extremely difficult but can be extremely lucrative.

1 comment:

Steph Fastre said...

very interesting. i agree