One Year Later and the Worst Is Still to Come

This week was the anniversary of the Lehman bankruptcy and financial collapse of last autumn and it was curious to hear the financial pundits talking as though this problem is fully behind us.

There were also some widely trumpeted figures about the success of the Chinese mega-stimulus (equivalent to 50 per cent of GDP in the first half) in sustaining GDP growth around eight per cent.

Chinese exports slump

Almost uncommented was the 20 per cent slump in Chinese exports over the first eight months of the year, and that in the world’s most export dependent economy.

Talk about a shift of growth from economic fundamentals to an unsustainable credit bubble! And just how long can a country keep that kind of stimulus going when its exports are crashing? Perhaps for a while and then?

That would be an issue even if financial markets had stayed down on the floor since the depths of March. But they have not. The stimulus money has gone into a new bubble. Markets have surged upwards, discounting a recovery that shows absolutely no sign of appearing in the real economy.

Therefore markets have now to correct back from an over-bought condition to an over-sold position. After a historically unprecedented 50 per cent recovery from lows, there is no other place for the market to go, and no liquidity or buyers to take it anywhere else as the economic stimulus packages unwind.

It was interesting to read the reflections of fund managers in Gulf News today who looked back on the collapse last autumn. None of them seemed to have seen it coming or made the obvious move into cash and bonds, gold or short positions before it happened.

Crash warning

This ought to be a warning written in letters 10-feet high to anybody thinking about diving into financial markets this autumn. This is a selling opportunity, not a buying opportunity. You can buy to sell short but that is it.

How long will this reversal take to happen? If only such exact market timing was possible we would all retire on our market profits.

But anybody who read the commentary on this website a year ago will know that it was saying exactly the same thing again a year ago, and those who chose instead to trust their professional advisers are still counting the cost.

Down will come equities, commodities including oil and gold, and real estate. Bonds should have a last hurrah and the dollar rally. So why still hold some gold? This is a hedge with a limited downside and the asset class of the future.

Comments

[tjfxh]

There are good historical reasons to think that gold is not so much a commodity (unless you subscribe to the commodity view of money) as much as that which has the most real "moneyness." CB's are going to be easing for the foreseeable future, and gold will be a hedge against currency depreciation. Asians, especially, have a strong preference for gold, and as Asia increases in wealth, look for them to seek safety in gold, which they have done traditionally. Moreover, the opportunity cost of holding gold is minimal when interest rates are low, as CB's intend to hold them. So would definitely be hedging both monetary inflation and currency depreciation with gold (and some other PM's).

2009 Sep 13 10:40 AM

[Nick36]

Perhaps most people have a tendency to believe that present trends will continue into indefinite future.

That's why when house prices kept going up during the recent housing boom. Many professionals and amateurs assumed that house prices will keep going up forever. And they made their financial plans accordingly.

It's a flaw in people's thinking where they can't envision a break in the present trend and a trend in the opposite direction. And that's why they keep making the same kind of mistake again and again.

Perhaps some Wall Street professionals who are well versed in math know what's going on. And they try to profit from it by encouraging and feeding the misperceptions of naive investors.

2009 Sep 13 10:40 AM

[Donald Ingram]

I agree. What we have seen so far in the financial crises has been but a dress rehearsal for what is coming. If you are one of the crowd that thinks the worst is over - there is a rude awakening coming. Protect your wealth - hold physical gold or silver.

2009 Sep 13 11:53 AM

[Laurence Hunt]

I agree with everything Mr. Cooper has said, with one exception. The market is not rational but communicative. Following the markets is more like following Australian Aboriginal songlines. You have to listen to hear what song is being sung by the dispersed tribal population. There will certainly be a next time down, but I'm not expecting it so soon. I certainly see the present move as a secular bear market bounce, but the song seems to be about more bouncing for the time being. The market can climb for months longer without altering the prevailing message that this is a secular bear market. However, now is probably not the time to short the broad market. Gold and silver are leading, and their song has been the same since 2001. Currencies are in trouble, governments are in trouble, businesses are in trouble, and nations and peoples are in conflict. It is in times such as these that general optimism gradually fails. We have certainly not seen the bottom in the broad markets, but the unwinding is a very lengthy and complex process. Patience is indicated.

2009 Sep 13 12:10 PM

[adan]

nice article, thanks!

especially liked, considering all the "market if forward looking" talk, from those analysts who "only" think things'll keep going up, even if only "for the forseeable future" :

"It was interesting to read the reflections of fund managers in Gulf News today who looked back on the collapse last autumn. None of them seemed to have seen it coming or made the obvious move into cash and bonds, gold or short positions before it happened...."

2009 Sep 13 02:04 PM

[Hmm?!]

I really like the conviction at the very end of the article. I think you are right, but I hope Gold takes a bit of a dip.

2009 Sep 14 12:10 AM

[djk!]

Peter says,
"But anybody who read the commentary on this website a year ago will know that it was saying exactly the same thing again a year ago, and those who chose instead to trust their professional advisers are still counting the cost.

Down will come equities, commodities including oil and gold, and real estate. Bonds should have a last hurrah and the dollar rally. So why still hold some gold? This is a hedge with a limited downside and the asset class of the future."

have you really been saying this stuff for a year? I thought you started on 4/13/09. You and your socket puppets missed the greatest rally in a dozen years. So yeah, why not short the market? You advised to short the market back on 4/13, boy! what great advice. Do you have people that actually pay you for your advice? Oh well, your rating continues to drop so people really are not all that dumb. Soon you'll be out of the top 100 and just a has been. The *suckers* have made a lot in the mean time.

2009 Sep 17 12:38 PM

[Peter Cooper]

Thank you for your kind thoughts!


On Sep 17 12:38 PM djk! wrote:

> Peter says,
> "But anybody who read the commentary on this website a year ago will
> know that it was saying exactly the same thing again a year ago,
> and those who chose instead to trust their professional advisers
> are still counting the cost.
>
> Down will come equities, commodities including oil and gold, and
> real estate. Bonds should have a last hurrah and the dollar rally.
> So why still hold some gold? This is a hedge with a limited downside
> and the asset class of the future."
>
> have you really been saying this stuff for a year? I thought you
> started on 4/13/09. You and your socket puppets missed the greatest
> rally in a dozen years. So yeah, why not short the market? You advised
> to short the market back on 4/13, boy! what great advice. Do you
> have people that actually pay you for your advice? Oh well, your
> rating continues to drop so people really are not all that dumb.
> Soon you'll be out of the top 100 and just a has been. The *suckers*
> have made a lot in the mean time.

2009 Sep 19 01:49 PM