Amar Narayanan

Market Bears Take a Breather

Pauly B,

Although I am not a big fan of Wall Street myself, it is probably a bit unfair to only blame Wall Street for this mess. The operative word is greed. Greed made Wall Street mavens get into this entire securitization nonsense, just to make a few basis points more. Greed drove home-buyers to continue borrowing against their homes, even as a housing bubble looked ominous. Greed drove investors to push stock prices higher even as the potential headwinds of a sub-prime contagion and credit crisis were obvious.

As Warren Buffett says, only when the tide goes down do we discover who's been swimming naked. Well, the tide's gone now and the sight ain't pretty. :)

Amar Narayanan
Trader Thoughts

Market Bears Take a Breather

Will Rahal & Pasobill,

Inflation has remained persistently high because we are in a multi-year commodity boom. Jim Rogers realized it the earliest. After almost two decades of declining real prices of foodstuffs, prices started climbing earlier this decade. Although prices have shot through the roof, only a glance at the long term CRB Grains index is needed to convince that commodities have a lot more upside. Ditto with crude oil... after struggling at the $40 level for 25-30 years, they finally broke out the last few years and the result is there for everyone to see. Having said that, the current situation, although superficially similar to the hyperinflation in the 1970s, has some notable differences.

The economy is now a lot more resilient to an oil shock (at the very least it will take a much higher price of oil to cause a similar dent in the economy). Plus the relatively benign interest rates currently give the Fed a lot more ammunition to fight inflation if push comes to shove.

While inflation certainly reduces the value of whatever we own, it is not my major worry over the long term. The kind of headwinds facing the economy are strong enough to pull down demand drastically, thereby nipping inflation in the bud. The Fed realized it, albeit rather too abruptly (last August, in a week they shifted their focus from fighting inflation to salvaging growth).

My bigger worry - and presumably the Fed's too - is the looming threat of deflation. Or Stag-deflation if you will. A housing bust is not to be taken lightly... we all know what has transpired in Japan since the late 1980s when a housing bubble was propped up by short-sighted policymakers leading to the most prominent deflationary spiral since the Great Depression. Japan is still struggling to get over that crisis despite an almost ZIRP (Zero Interest Rate Policy).

For the Fed, it is essentially choosing between the greater of two evils... they want to prop up growth a bit or at least ensure that a possible recession doesnt snowball into anything bigger. Once this is taken care (and this will in turn take some steam off inflation as well), they will presumably get back to their hawkish inflation-fighting ways.

Will 2008 Be the Year of the Bear?

Although not mentioned in the article above, the Russell 2000 has given a classic Dow Theory sell signal (a series of lower troughs and peaks)... along with similar signals on other indexes. The odds of a longish bear market are very high indeed

Will 2008 Be the Year of the Bear?

Opportunities exist all year round... but it requires a discerning eye to figure it out. Some smart minds are clearly jumping in... look at the spending spree Warren Buffett has been in... look at timing of the number of distressed debt funds from very sophisticated investors.

As regards the stock markets, I personally believe some more excesses would have to be unwound before stocks become bargains.