Prof. Charles Kindleberger wrote a marvelous book about market panics. That knowledge can help you steer through the current malaise - profitably.
1. Kindleberger's anatomy of a crash
Prof. Kindleberger wrote a marvelous anatomy of a crisis:
o Displacement happens when the economic outlook is altered by improving profit opportunities. Here are such displacements that have fed the current boom:
- the tragedy of 9/11 forced the Fed to pump massive liquidity into the market;
- the emergence of China and India have added fuel to global market booms;
- massive wealth has fled Eastern Europe and Russia, and
- the commodity boom has created a further excess supply of money due especially to higher oil and metals prices
o A boom ensues. Bank credit and personal credit expands significantly. This results in Adam Smith’s “overtrading”: pure speculation, overestimation of profits and excessive gearing step forward. (currently: ETFs and specific stock valuations based on air). Bubbles occur. Economists define bubbles as “deviations from fundamentals.” Back to The Economic Clock™: the only big markets that demonstrate such a deviations from their respective fundamentals are the USA and Japan. In America, the SP news is what has highlighted the disconnect between America’s worsening Economic Time and its muscular stock market.
o Distress sets in. The smart money starts selling. One single event is the tripwire: this time it is the SP news. “Revulsion” rears its ugly head: revulsion against commodities or securities leads banks to stop lending on the collateral of such assets. Yesterday’s darlings – stocks, commodities and high yield bonds (I sold all of mine seven weeks ago) all get tarred with the same brush – akin to America now saying that ALL products made in China are “unsafe”
o Panic sets in. Everyone bolts for the exits. This is what is happening. Then, one of three things happens. Either
- prices fall so lowly that people load back up (that is what happened this February market;
- “circuit breakers” are established, i.e. trading is stopped if certain price limits are reached, or
- a lender of last resort stabilises confidence
• Currently America is entering the "panic" phase, but it will last a long while as the credit noose is tightening. Even healthy borrowers are finding it tough to get money from the bank.
• In the context of The Economic Clock™, America has an
• excess demand for money, and an
• excess supply of goods: payrolls data are softening, cost push inflation is rising, so the profits outlook will dim
2. How to Make Money Off This Idea
1. Buy into weakness in China and India: they are undergoing their first industrial revolutions.
2. In China, buy into the property and banking sectors. Same in India.
3. Short the American market.
4. Particularly, short American stocks related to homebuilders, mortgages and investment banking.