Even Dead Cats Bounce
Bill Bonner
Provided as a courtesy
of Agora Publishing & The
Daily Reckoning
Jan 7, 2009
What a beautiful day it is
in Paris. It's snowing. The streets are white. And the streetlights,
shoplights, and automobile lights make everything glow. It would
be a nice morning to sit in a café and drink a cup of
coffee.
But we don't have time for
that. We're back at our desk... there is another year to be reckoned
with... and it promises to be a doozy. The trouble with this
year so far is that it is missing the question marks. What lies
ahead seems obvious... too obvious...
"World stocks rise on
US rally, stimulus hopes," comes the headline from CNN/Money.
The Dow flew up 258 points
on Friday - stocks have been up in the last three trading sessions.
Oil rose to $46. Gold fell to $879.
The expected
rebound seems to be underway. Even dead cats bounce. And considering
the height from which this one fell, it would not at all be surprising
to see it bounce up 30% or even more... over the next three months.
Investors took a terrible beating
in '08. It was the worst year in stock market history. They'll
figure that this year is bound to be better. And along will come
many reasons to believe that things are looking up.
President-elect Obama is talking
about relief on a Rooseveltian scale. He wants to spread unemployment
and Medicare benefits around more freely, for example. But he
knows he can't just toss out a few dimes to bums on the street
corners; he needs a stimulus plan that knocks peoples' socks
off.
"Economists from all across
the political spectrum agree that if you don't act swiftly and
boldly we could see a deepening economic downturn," he said
recently.
We must be somewhere on the
political spectrum. But he didn't ask us. If he had, we would
have explained that every penny spent on a bailout has to be
taken out of the spending of the person who earned it. We'd add
that there is no economic problem at all. The markets are doing
what they're supposed to do... clearing away the mistakes of
the Bubble Epoch.
It's a political problem, not
an economic one. People don't like to have to pay for their mistakes.
So, they whine to politicians. And then the politicians make
things worse... by trying to prevent the correction from taking
place.
But, our "Head of State
Hotline" has been silent, here at The Daily Reckoning headquarters.
So we have to assume it was Barack Obama who was not calling
- along with every other government leader on planet earth.
Mr. Obama figures he needs
to do something spectacular... something that will give the impression
of really turning things around. He calls his project the 'American
Recovery and Reinvestment Plan.'
Ahh... here are some question
marks:
What is it meant to recover?
We don't know... maybe the glory days of the Bubble Epoch.
What is being reinvested? We
can't figure that out either. Typically, you reinvest a profit.
But you have to have a profit to reinvest it. As near as we can
tell, 2008 was a year of losses. You can't reinvest losses.
Nevertheless, we know what
American Recovery and Reinvestment Plan is... political claptrap.
And now it's expected to cost as much as $1 trillion. At least,
that is what state governors are calling for. Congressional leaders
say they want to stay below the "politically charged"
one trillion dollar level. But they also say the bill won't be
ready for Obama's signature until February. Congress needs time
to pry open the pork barrel and spread it around - no question
about that, either. By the time they're finished, there's almost
sure to be $1 trillion work of grease in the package.
"US Debt Expected to Soar,"
says the Washington Post, stating the obvious.
All this extra debt will do
no good for the economy, but investors will probably feel like
the good old days are back. And for a while, they will be...
*** This time of year you'll
find a lot of looking back at the year that just passed... and
with good reason. Strategic Short Report's Dan Amoss offers his
views on 2008... and what lies ahead for us in 2009:
"When asked by family
and friends over the holidays what I think about the 2008 stock
market and economy, my response has been, 'I expected a nasty
bear market in 2008, but the carnage since September took me
by surprise. The economy will remain weak, but I think the worst
of the widespread market carnage is behind us. Future damage
should be concentrated in sectors with horrible fundamentals.
Thankfully, 2009 should be a year when fundamental analysis should
start to matter once more.'
"This will be a welcome
development, because 2008 was a year when the following strategy
worked best:
- Sell short any stock or ETF,
without bothering to do any fundamental research
- Invest the proceeds in Treasury
bonds, preferably with as much margin as possible
- Repeat Steps 1 and 2, over
and over.
"Clearly, this 'deflation
trade' strategy is not sustainable over longer time frames --
not in an era of worldwide paper money standards. In fact, I'd
expect that such a shotgun-based investment strategy of short
S&P 500/long Treasuries could lead to big losses in 2009.
"Overall, I'm happy with
Strategic Short Report's performance. Obviously, I could have
done even better, had I been more bearish since September. But
it certainly felt unwise to sell short into an already panicked
market. Let's learn as much as we can from our experiences and
move on; it never helps your trading discipline to dwell on past
mistakes and missed opportunities."
*** It all seems so simple.
After the crash comes the bounce. And the bailouts. The bailouts
cost money we don't have. So, we get more debt... and more printing
press money. What's to wonder about?
In the last two months of last
year, MZM - a measure of the money supply - grew at 11% per year.
Gold rose. With the Obama bailout... and the Fed's bailouts...
it seems a cinch that the price of gold will go up.
At $879 an ounce, gold is today
no higher than it was 29 years ago. In January 1980, it briefly
hit $875. If it were just to reach the same level now, adjusted
for inflation, it would have to go to $2,400.
What bothers us about this
is that it is so obvious. Looking at the facts, a sensible person
would conclude: the price of gold is going up. Most likely, it
will go to three times its current price.
And so, sensible people seem
to be doing the sensible thing; the World Gold Council says demand
for gold is increasing fast. The price of gold rose more than
$100 - while every other asset, save U.S. Treasury paper - fell.
Gold coins have become difficult to buy; the premium on a bullion
coin has risen to about 10% over the gold price.
Still, the price of an ounce
of gold is under $900... not over $2,000. Does the big money
- the inside money - see something we don't? Or do we see something
it doesn't? We don't know... but it worries us.
Will there be no run-up in
gold? Or will it come on sooner and more violently than even
we ever imagined?
There's bound to be
a surprise waiting for us somewhere... but, just to be on the
safe side, we'll hang onto the gold we have. And we urge our
dear readers to do the same. No gold? There's still time to pad
your portfolio with our favorite yellow metal.
*** It also troubles us that
so many people expect a bounce... followed by a further collapse.
How can Mr. Market work his mischief if so many people see what
he is up to? Where's the surprise? Will the bounce not come at
all? Or, will it come much more emphatically than people expect?
Perhaps markets will rally
strongly all over the world. Chinese manufacturing will show
signs of recovery. Housing in the United States will appear to
have stabilized. Commodities will edge up. Investors may begin
to believe they have another bull market on their hands - or
at least a tradable rally. They won't want to miss the opportunity
to 'get even.' And then, as stock prices rise, investors will
slip back into their old habits. They will turn to risky investments
in order to boost their profits. Among other things, they are
likely to invest in emerging markets, which will probably rise
more than the U.S. market itself. Currencies such as the Brazilian
real and the ruble will go up against the dollar.
As the rally recovers 40%...
50%... maybe even 60% of last year's losses, investors will be
suckered into seeing it not as a bear market rally, but as a
genuine new boom. They will think it is real... and durable.
And they will forget to sell.
Mr. Market will have pulled
another fast one.
*** "In a severe crisis,
orthodoxy can prove a very bad strategy," said Ben Bernanke
last week.
We are as puzzled by this as
by Obama's American Recovery and Reinvestment Plan. Economics
is not improv theatre. You can't just make it up as you go along.
You make a change in banking regulations or fiscal policies,
for example, and it will take months or years before you know
if it has worked. That's why you need theories to guide you...
you can't wait to see how an economy reacts. In the absence of
a theory about the way things work, you are just committing random
acts of kinkiness.
Today's news from Bloomberg
also tells us that the "Fed has abandoned monetary policy."
We're puzzled by that too. With rates at zero, what monetary
policy did the Fed have left? Not much.
*** Poor Ireland. The Celtic
Tiger has been de-clawed and spayed. House prices have fallen
as much as 50%. Bank shares are down 90%. Unemployment - which
had all but disappeared in the boom years - is headed back to
10%.
Until tomorrow,
Jan 6, 2009
Bill Bonner
Source:
http://www.dailyreckoning.com.au/stocks-trading-sessions/2009/01/06/
email: DR@dailyreckoning.com
website: The
Daily Reckoning
Bill Bonner
is the founder and editor of The Daily Reckoning.
Bill's book,
Mobs,
Messiahs and Markets: Surviving the Public Spectacle in Finance and
Politics, is a must-read.
He is also the
author, with Addison Wiggin, of The Wall Street Journal best seller
Financial
Reckoning Day:
Surviving the Soft Depression of the 21st Century (John Wiley
& Sons).
In Bonner and
Wiggin's follow-up book, Empire
of Debt:
The Rise of an Epic Financial Crisis, they wield their sardonic
brand of humor to expose the nation for what it really is - an
empire built on delusions.
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