Sunday, December 28, 2008

Taking Stock

Wow am I exhausted. After countless trips around the Tri-State area we are back in town. A tremendous holiday for all - especially the little ones.

In any case, let me get back on the proverbial bike and start riding again - if not, the atrophy will take hold and it will be back to that blissful ignorance I remember so well as a child - or more truthfully, as a young man.

Over the course of the last month, the markets have been reseting their traps for another violent move. Who's to say it won't be that "equal and opposite reaction" - a bull charge of the likes we haven't seen since the early 1930's. It really does seem absurd to not be bullish on the markets in the short term. The bearish equivalent of greed perhaps? How much risk could possibly remain after being bisected in a matter of months? Isn't everyone tired of guessing the bottom? Hardly.

I can't say with any tangible description or reference; but I suppose the old phrase will apply - I will know it when I see (or hear) it. And frankly, there has been a bull market in bottom feeding and rather orderly markets (equity) considering the alternative to capitalism. Anecdotally, that doesn't help the markets in the near term. Here are a few things churning inside me.

I realize I keep coming back to the same reference points - but just as a trial lawyer methodically builds his case - I have been refining my perspective and trading thesis towards this market. The targets are always moving against sliding landscapes - the secret is to keep framing and observing the primary subject and its relationship and kinetic reaction to the current landscape at hand. I am not a pure technician. Far from it, I use technical analysis as a tool in the development of the thesis. Consider it my forensics lab. It isn't full proof - and it is still at the mercy of human error and misjudgement. If the detective only relied on the forensic report he would rarely be able to piece together a representable version of the story. Likewise, charts need to be placed within the broader context of market psychology, fundamentals and the intangible art of reading the Matrix. If it was a pure science the formula for success would be readily available and patented for sale at the neighborhood drug store - the smooth returns of Bernie Madoff would be legit! But as we all know, it isn't a pure science and just as much an interpretive art.

Here are some technicals that I am reading.

The Transports appear on the cusp - again. And just as I have mentioned in the past, the Transports have led us into every major market bottom. Those Dow Theorist really do deserve a merit badge. If I could be so brazen, it appear tomorrow will decide the near term fate of the Transports - and I suppose by extension, the overall market.

Although there appears to be two camps for interpreting the VIX - it has been cut in half in a rather timely fashion with very little benefit extended towards the equity markets. The same goes for the dollar's weakness as well.

Monday, December 22, 2008

Europe & Russia - More Munitions in The Dump

I keep coming back to this same article and wondering when the kaka is going to hit the fan:

excerpts from the UK Telegraph - October 28th, 2008

...“This is the biggest currency crisis the world has ever seen,” said Neil Mellor, a strategist at Bank of New York Mellon. Experts fear the mayhem may soon trigger a chain reaction within the eurozone itself. The risk is a surge in capital flight from Austria – the country, as it happens, that set off the global banking collapse of May 1931 when Credit-Anstalt went down – and from a string of Club Med countries that rely on foreign funding to cover huge current account deficits."

My response: Deflation is like breaking a window on a commercial airliner - Anyone close to the break is going to be sucked through the bottle neck; and those that panic or are unable to get to an oxygen mask will die from the loss of cabin pressure.

..."America is the staid old lady in this drama."

My response: Jim Rogers eat your heart out.

..."Western European banks hold almost all the exposure to the emerging market bubble, now busting with spectacular effect. They account for three-quarters of the total $4.7 trillion £2.96 trillion) in cross-border bank loans to Eastern Europe, Latin America and emerging Asia extended during the global credit boom – a sum that vastly exceeds the scale of both the US sub-prime and Alt-A debacles."

My response: And that was written when oil was at $60.

..."Russia too is in the eye of the storm, despite its energy wealth – or because of it. The cost of insuring Russian sovereign debt through credit default swaps (CDS) surged to 1,200 basis points last week, higher than Iceland’s debt before Götterdammerung struck Reykjavik. The markets no longer believe that the spending structure of the Russian state is viable as oil threatens to plunge below $60 a barrel. The foreign debt of the oligarchs ($530bn) has surpassed the country’s foreign reserves. Some $47bn has to be repaid over the next two months."

My response: Doesn't the phrase oligarchs remind you of the dark horsemen in the Lord of the Rings? Oh, and that was written when oil was at $60!

..."The threat to Britain lies in emerging Asia, where banks have lent $329bn, almost as much as the Americans and Japanese combined. Whether you realise it or not, your pension fund is sunk in Vietnamese bonds and loans to Indian steel magnates. Didn’t they tell you?"

My response: At least they didn't buy into the Euro!.

Saturday, December 20, 2008


Just as an EKG illustrates the indisputable artifact of a heart attack, the VIX displays the same for a market in severe distress. If we look back at the October 2002 lows and compared the print of the VIX then to the VIX now, we see remarkably similar emotions in the charts. See for yourself. I took the liberty of indicating where the November 13th and Nov 27th lows on the S&P would be on the 2002 VIX chart. As you can see, the final capitulation low on the S&P prints a lower VIX then the double tops.

To me it looks like the groundhog has seen his shadow and we may be in for six more weeks of winter.

Thursday, December 18, 2008

ZIRP - Helplessly Bernanke

I would like to preface this by saying I have the utmost respect for our Chairman. He's just in the wrong place at the wrong time.

With that said, some entertainment, courtesy of a version of Neil Young's Helpless, as seen through the eyes of Bernanke. A GuidePostings original production...

Wednesday, December 17, 2008

Some Perspective

The equity market's extremely weak under-performance compared to the Dollar weakness/Euro strength is quite bearish. If we are robbing from Peter to pay Paul, Paul is getting the shaft. Maybe it's a fund of funds thing... I can not really see much more strength in the Euro from here in the near term. Inquiring minds want to know.

Tuesday, December 16, 2008

Does This Look Like A Healthy Situation?

Talk about bait and switch. The pundits on CNBC high five one another while the equity markets go up a few percent and the dollar goes down the same. Robbing Peter to pay Paul. When our currency stabilizes and stops trading like a stock I will buy this market hand over fist. Until then, it's just a pink pong ball going down the stairs.

Sunday, December 14, 2008

Is Ben Bernanke Charles Ponzi's Lovechild?

All this talk about the greatest ponzi scheme of all time had me look up the real macoy - Charles Ponzi. After glancing at his mug shot for five seconds I realized who he strikingly resembled - Ben Bernanke. Granted, Mr. Bernanke is missing a few of the fuzzy traits, but the likeness is uncanny.

Where is this guy going with this you ask?

If we think that the Bernie Madoff ponzi scheme is big, just wait until the Fed and Treasury's redemptions (hello China, hello Japan, hello World) come knocking. All Bernie Madoff did was pull a page from the fiat monetary policy page book. As long as new suckers, I mean purchasers, continue to buy up our debt, the scheme, I mean American Dream, continues. When will the music stop? Go ask Chuckie Prince.

Friday, December 12, 2008

The Ghost Of Christmas Past - Circa 1990

I have been comparing the 1990-1991 Savings & Loan bear market as a navigation tool through the current bear. It isn't a perfect parallel, but the fact that it was driven by a severe banking crisis holds relevance to today. Think of it as a fender bender bear. The market we are currently experiencing is the highway collision bear. The dynamics and reflexes are similar, the severity of the collateral damage is worlds apart. The first two charts are of the two bear "financial accidents". Although the magnitudes of the declines are standard deviations away from one another, the trends are very similar. For clarity, you can see that the 1990 Bear carved out three separate lows over the fall crash cycle. The 1990 bear crash/liquidation cycle started almost two months earlier than the current crisis. Setting them on the same timeline, we will experience a third low next week or soon thereafter. To sound like a broken record, I have been following the gold/silver ratio as a barometer of risk appetite in this financial crisis. To further simplify, I have removed silver from the ratio and replaced it with the SPX. I then compared the two financial crises in this ratio. They trend with stunning similarity. You be the judge.

Thursday, December 11, 2008

A Christmas Carol

To date, this market has been visited by one ghost; the Ghost of Christmas Past. The Ghost's of Christmas Present and Future are approaching. And Just like Ebenezer, I am scared.

The powers that be, from the Fed to the ECB, to Macy's for that matter, would love for the Ghost's of Christmas Present and Future to remain there frozen in time. And just like Ebenezer, they are bound to follow the Spirit and witness the obvious truths. These are hard times. Strike that. These are dangerously hard times.

Let's not fool ourselves, the action in the futures market tonight and what's coming down the pike tomorrow morning was going to happen regardless of what was done in Congress. All Congress is doing is expediting it's delivery. For once they deliver. The irony is everywhere...

For those of you who were depending on this bailout to deliver a Christmas rally (they run the gamete of bulls and bears alike), shame on you. Does this feel and smell like a normal market? Christmas (curse tense), look what happened after the 700 billion dollar bailout was approved, the market's didn't exactly wake up to the upside and turn the corner, they imploded! Keep things simple. If you are not terrified at how this market has performed after receiving every hand-out imaginable, you need the phrase P O L L Y A N A (a synonym for Dennis Kneale?) tattooed to your forehead.

This is a Class-5 hurricane, throwing sandbags (the Fed, Congress, Interventionists) is inconsequential. The collective fear is the market's equivalent of Mother Nature. It will walk and romp where it wants. Follow the infrastructure in the charts, they show the GuidePosts along the way.

Wednesday, December 10, 2008

Dead Cat Bounce

Tuesday, December 9, 2008

Bull Trap...Again

When will they ever learn? If everyone is calling a bottom at the same place, what do you think will happen when the market doesn't provide that outcome? Meaningful bottoms occur when both the bears and the bulls are on the same page and the page is torn out. Katie bar the door. Remember the mini crash in February 2007? The electronic trading platforms could not keep up. We have not even seen sell orders of that magnitude yet. This market has been orderly, I expect things to get chaotic shortly. More later on.

Thursday, December 4, 2008

The Edge of The Abyss

Taking a step back from the nuisance and noise of the present day, one can fully appreciate the arc of violent dislocations transpiring across the global financial system. Over the course of the last decade, the world has experienced exogenous shock after shock; the Asian Financial Crisis (1997), the Russian Financial Crisis (1998), the Technology Bubble (2000), Enron and Worldcom (2002), the Housing Bubble (2006), the Credit Bubble (2007), the Emerging Markets and Commodities Bubble (2008) and coming to theaters near you, the Bond Bubble (2009). From the perspective of a former geologist, these were the initial tremors of friction.

Make no mistake about it, the financial markets are the dog, the political fall-out and massive global instability that arises after economies and governments collapse is the tail. I believe Nassim Taleb was correct in describing the present as perhaps the most dangerous episode in American history since the Revolution. 

The kinetic energy of these crises has always been maintained within the system. Each time a monetary policy or fiscal policy official tells the public the problem has been contained; it mutates, changes shape and shows up somewhere else. Nothing is resolved and no maladies are purged from the system. It is just like a doctor treating the symptoms, but never isolating the cause. Worse yet, the doctor seems to always prescribe steroids for these ailments, further masking the cause and pushing down the road the inevitable collapse of the patient.

As a cynical observer of these events, the present culmination of disruptive forces within the financial system is nothing less than poetic. Whether it is our current President's complete lack of political capital to affect any necessary change or Henry Paulson's impotence and maleficence to Treasury's (aka Goldman Sachs) role within the meltdown, the crisis has reached critical mass and will begin to act disorderly, or more succinctly, chaotic. Despite the tremendous volatility and downward pressures upon the system, the markets overall have been orderly and methodical. I believe we are about to cross that threshold.

Milton Friedman once said that he did not believe the Euro would survive it's first crisis. It appears that the crisis has arrived.

"The euro is going to be a big source of problems, not a source of help. The euro has no precedent. To the best of my knowledge, there has never been a monetary union, putting out a fiat currency, composed of independent states.

There have been unions based on gold or silver, but not on fiat money—money tempted to inflate—put out by politically independent entities...

Inflation is a monetary phenomenon. It is made by or stopped by the central bank. There has been no similar period in history like the last 15 years in which you’ve had little fluctuation in the price level. No matter what else happens, this will maintain as long as the US Federal Reserve maintains strict monetary policy and control of the money supply.

The same thing is true in Europe. The ECB (European Central Bank) has held down the rate of monetary growth. So there have been stable prices. The pressures in Europe, however, will be much stronger than in the US. The main pressure is to print money and be more expansive in order to promote employment.

What the ECB does really depends on whether Germany and France and Italy will back it. Italy may well be the main problem...

In this sense, the euro is good for Europe. But only if there is flexibility all around. The problem is that, in a world of floating exchange rates, as Italy was before the euro, if one country is subjected to a shock which requires it to cut wages, it cannot do so with a modern kind of control and regulation system. It is much easier to do it by letting the exchange rate change. Only one price has to change, instead of many.

But now, in the euro, that option is taken away. The only alternative if a state has to adjust to a shock is to let internal prices vary. It has to let wages go down, if necessary." - Milton Freidman 2006
Below is an article from the UK Telegraph that neatly sums up the gauntlet of moving parts now unfolding across the Atlantic. I would urge you to read the entire article. Anyone expecting (the Fed and ironically Jim Rogers) the US dollar to weaken and resume its decline will be greatly disappointed, or as the Telegraph puts it, "America is the staid old lady in this drama."

By Ambrose Evans-Pritchard
Last Updated: 10:52AM GMT 26 Oct 2008

The financial crisis spreading like wildfire across the former Soviet bloc threatens to set off a second and more dangerous banking crisis in Western Europe, tipping the whole Continent into a fully-fledged economic slump. Currency pegs are being tested to destruction on the fringes of Europe’s monetary union in a traumatic upheaval that recalls the collapse of the Exchange Rate Mechanism in 1992. “This is the biggest currency crisis the world has ever seen,” said Neil Mellor, a strategist at Bank of New York Mellon. Experts fear the mayhem may soon trigger a chain reaction within the eurozone itself. The risk is a surge in capital flight from Austria – the country, as it happens, that set off the global banking collapse of May 1931 when Credit-Anstalt went down – and from a string of Club Med countries that rely on foreign funding to cover huge current account deficits.

The latest data from the Bank for International Settlements shows that Western European banks hold almost all the exposure to the emerging market bubble, now busting with spectacular effect. They account for three-quarters of the total $4.7 trillion £2.96 trillion) in cross-border bank loans to Eastern Europe, Latin America and emerging Asia extended during the global credit boom – a sum that vastly exceeds the scale of both the US sub-prime and Alt-A debacles.

Europe has already had its first foretaste of what this may mean. Iceland’s demise has left them nursing likely losses of $74bn (£47bn). The Germans have lost $22bn. Stephen Jen, currency chief at Morgan Stanley, says the emerging market crash is a vastly underestimated risk. It threatens to become “the second epicentre of the global financial crisis”, this time unfolding in Europe rather than America. Austria’s bank exposure to emerging markets is equal to 85pc of GDP – with a heavy concentration in Hungary, Ukraine, and Serbia – all now queuing up (with Belarus) for rescue packages from the International Monetary Fund. Exposure is 50pc of GDP for Switzerland, 25pc for Sweden, 24pc for the UK, and 23pc for Spain. The US figure is just 4pc. America is the staid old lady in this drama.

Amazingly, Spanish banks alone have lent $316bn to Latin America, almost twice the lending by all US banks combined ($172bn) to what was once the US backyard. Hence the growing doubts about the health of Spain’s financial system – already under stress from its own property crash – as Argentina spirals towards another default, and Brazil’s currency, bonds and stocks all go into freefall.

Broadly speaking, the US and Japan sat out the emerging market credit boom. The lending spree has been a European play – often using dollar balance sheets, adding another ugly twist as global “deleveraging” causes the dollar to rocket. Nowhere has this been more extreme than in the ex-Soviet bloc.

The region has borrowed $1.6 trillion in dollars, euros, and Swiss francs. A few dare-devil homeowners in Hungary and Latvia took out mortgages in Japanese yen. They have just suffered a 40pc rise in their debt since July. Nobody warned them what happens when the Japanese carry trade goes into brutal reverse, as it does when the cycle turns.
The IMF’s experts drafted a report two years ago – Asia 1996 and Eastern Europe 2006 – Déjà vu all over again? – warning that the region exhibited the most dangerous excesses in the world. Inexplicably, the text was never published, though underground copies circulated. Little was done to cool credit growth, or to halt the fatal reliance on foreign capital. Last week, the silent authors had their moment of vindication as Eastern Europe went haywire. Hungary stunned the markets by raising rates 3pc to 11.5pc in a last-ditch attempt to defend the forint’s currency peg in the ERM.

It is just blood in the water for hedge funds sharks, eyeing a long line of currency kills. “The economy is not strong enough to take it, so you know it is unsustainable,” said Simon Derrick, currency strategist at the Bank of New York Mellon. Romania raised its overnight lending to 900pc to stem capital flight, recalling the near-crazed gestures by Scandinavia’s central banks in the final days of the 1992 ERM crisis – political moves that turned the Nordic banking crisis into a disaster.

Russia too is in the eye of the storm, despite its energy wealth – or because of it. The cost of insuring Russian sovereign debt through credit default swaps (CDS) surged to 1,200 basis points last week, higher than Iceland’s debt before Götterdammerung struck Reykjavik. The markets no longer believe that the spending structure of the Russian state is viable as oil threatens to plunge below $60 a barrel. The foreign debt of the oligarchs ($530bn) has surpassed the country’s foreign reserves. Some $47bn has to be repaid over the next two months.

Traders are paying close attention as contagion moves from the periphery of the eurozone into the core. They are tracking the yield spreads between Italian and German 10-year bonds, the stress barometer of monetary union. The spreads reached a post-EMU high of 93 last week. Nobody knows where the snapping point is, but anything above 100 would be viewed as a red alarm. The market took careful note on Friday that Portugal’s biggest banks, Millenium, BPI, and Banco Espirito Santo are preparing to take up the state’s emergency credit guarantees.
Hans Redeker, currency chief at BNP Paribas, says there is an imminent danger that East Europe’s currency pegs will be smashed unless the EU authorities wake up to the full gravity of the threat, and that in turn will trigger a dangerous crisis for EMU itself.

“The system is paralysed, and it is starting to look like Black Wednesday in 1992. I’m afraid this is going to have a very deflationary effect on the economy of Western Europe. It is almost guaranteed that euroland money supply is about to implode,” he said.

A grain of comfort for British readers: UK banks have almost no exposure to the ex-Communist bloc, except in Poland – one of the less vulnerable states. 
The threat to Britain lies in emerging Asia, where banks have lent $329bn, almost as much as the Americans and Japanese combined. Whether you realise it or not, your pension fund is sunk in Vietnamese bonds and loans to Indian steel magnates. Didn’t they tell you?

So what to expect over the coming year? Pretty much every major financial crisis that the world has experienced in chapters over the last decade rolled into one giant cannoli. Deflation has arrived. Can the world digest it?

Wednesday, December 3, 2008

The Thomas Friedman Top

It's easy for us to pick apart recent history and say all the information was there; tight credit spreads, an LBO buyout binge, a housing bubble, a commodities bubble, Goldman Sachs and Thomas L. Friedman. 

Yes, Thomas L. Friedman.

From Wikipedia:

"In the book, Friedman recounts a journey to Bangalore, India, when he realized globalization has changed core economic concepts. He suggests the world is "flat" in the sense that globalization has leveled the competitive playing fields between industrial and emerging market countries."

Could there be a more appropriate illustration of Friedman's captive audience or should we say the choir of advertising executives posing as free-market capitalist?

The World is Flat by Thomas Friedman Wins Financial Times and Goldman Sachs Business Book of the Year Award
November 22, 2005

Lionel Barber, editor, Financial Times said: 'We've had a wonderful set of entries for this prestigious prize. Thomas Friedman is a worthy winner. His book is compelling, hugely enjoyable and relevant to the most pressing issue on the minds of politicians and business people around the world.'

Lloyd C Blankfein, President and Chief Operating Officer, Goldman Sachs, said:

'Thomas Friedman has identified the most important economic and political theme of the early 21st century and has provided us with the vocabulary for debating its merits and challenges.'

Speaking from Washington DC, Thomas Friedman commented:

'I'm absolutely thrilled and honoured to be the first recipient of the Financial Times-Goldman Sachs business book award. I'm thrilled and honoured because these are two such classy organizations, who take business and business reporting seriously. I'm thrilled and honoured because the judges who made this award are such an esteemed group. And I'm thrilled and honoured because I think this Financial Times -Goldman Sachs award for business-financial writing is going to become a much sought-after prize, as more and more writers and publishers get to know about it in coming years. I'm sorry that my crazy travel schedule - I've been between Beijing and Jerusalem in the past few weeks - did not allow me to be in London.'

Where have I heard such confidence and illuminating insight before? Perhaps Alan Greenspan, circa 2004?

"Overall, the household sector seems to be in good shape," "American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage. To the degree that households are driven by fears of payment shocks but are willing to manage their own interest rate risks, the traditional fixed-rate mortgage may be an expensive method of financing a home."
It appears Friedman was as prescient to the strengths of globalization as Greenspan was to housing or more or less everything.

Fast forward a few years and here we are. The chart to the left illustrates just how bubblicious the concept of globalization became. From the ever worthy fellows at the Bespoke Investment Group:

"Just as it’s been a Black October for the equity markets, it’s been even worse for global commerce. The Baltic Dry Index, which is often cited as a barometer for global shipping rates, is now down fourteen days in a row and has declined on all but one day in October, with a month to date fall of 64.3%. Since its peak reading of 11,793 in May, the index is now down by 90.3%.

As shown, the Baltic Dry Index had a meteoric run since the start of the decade, as it became one of the key symbols of the ‘globalization’ trade. Many argued that globalization would work its way into every aspect of the economy, with some health care companies in the US even going so far as to send their patients to emerging countries for surgical procedures. Judging by the recent performance of the Baltic Dry Index as well as global currency markets, however, it now appears that like any ‘new thing,’ the globalization trade went too far. In fact, when compared to the bursting of prior bubbles, the decline in the Baltic Dry Index from its peak is greater than every single one."

One last excerpt from the book quoting Bill Gates. I can't dispute the man's genius, but I think he may have gotten a bit carried away here. Kind of like when he was CEO for a bit too long.
"Bill Gates explains the meaning of this transformation best. Thirty years ago, he tells Friedman, if you had to choose between being born a genius in Mumbai or Shanghai and an average person in Poughkeepsie, you would have chosen Poughkeepsie because your chances of living a prosperous and fulfilled life were much greater there. ''Now,'' Gates says, ''I would rather be a genius born in China than an average guy born in Poughkeepsie.'' - The World Is Flat

I'm not sure the people in Mumbai or Shanghai will feel the same way in the next decade. Just like the markets, they revert to the mean.

Going Lower

As Dennis Gartman often notes, a good trader "Trades like a mercenary guerrilla. We must fight on the winning side and be willing to change sides readily when one side has gained the upper hand." Dogma is a dangerous attitude to front in markets such as these.

With that said, I believe as traders we need to move even further out on the continuum of risk and frankly those that have been dogmatic (towards the downside) have been consistently rewarded. That paradigm will change for sure, but guessing that inflection point will be tremendously difficult. Based on my proprietary research, I believe the odds are growing that between now and the end of January the market will move another leg down, perhaps into the mid 600's on the S&P.
Some things I am looking at:

- The damage sustained to the BKX;

- The expanding gold/silver ratio;

- Weakness in the Euro, strength in the Dollar;

The velocity of these moves, both up and down, have sustained the dominant trend lower. Until the market can break out to the upside and consolidate in a narrow range, there will be no traction. These markets are hollow right now. Just look at SAP Capital or Picken's hedge fund. They are almost completely in cash and waiting. Perhaps you should too!

Monday, December 1, 2008

Oversold is a Relative Phrase

We are currently experiencing the practical application of the old adage "Markets can stay irrational, longer than you can stay solvent". Or perhaps today's version, "Markets can get oversold and remain oversold longer than you can remain solvent." Many of the traders in the past year have received a crash course in this axiom. Their guidposts that they follow on a daily and weekly basis have become the Bonneville salt flats. Wide open, barren, desolate, hard and fast if you find momentum.

I think traders looking for a sustained rally here may be asking for too much. Isn't everyone from Barton Biggs to Marc Faber waiting for that? Granted Barton Biggs has been saying that for no less than a year and a half, I firmly believe that on a longer term trading horizon (weeks and months) the carnage in the financial sector (BKX) foreshadows considerable downside to the overall market. The fact that this is a financial crisis of the likes there are few comparisons, and that the financials constitute the single largest (~16%) percentage of the S&P 500, it should be no surprise that the 2002 lows will be substantially violated; and I am not talking about 741 verses 768. We are talking about a possible 40% decline from the lows.

And for those of you glancing at the shocking depths of these rsi readings on the S&P 500 and speculating that the only move from here is up, check no further than the BKX chart. It has been in the red-zone (<30) for more or less a year. Comparatively, the S&P has only been in the red-zone since October.


The rapid deterioration of the equity markets this morning smells like something more than a retracement of recent gains. Furthermore, the gold silver ratio that has been an excellent forward looking barometer of risk seems to be pointing towards another spell of liquidation and perhaps a lower, low. Maybe it is just another test of the recent lows, or perhaps not.

For certain, weak hands are selling today. If we get down to 800 or slightly lower, we will see what mettle this rally holds.

Wednesday, November 26, 2008

The Intersection of Value & Contrarian Thought

Over the course of the last year, the most grizzly of bears have come down off the mountain, frolicked and pillaged in the market torrents and crossed the wild terrains in pursuit of the once in a generation pilgrimage to Pamplona. These grizzlies want to run with the bulls. Should we heed their transformations? By nature they are prudent beasts. Will they arrive early to the party just as they did with their warnings of an over-leveraged and frothy marketplace? Would they have been playing for the same team in 1873, 1874, 1875...1929, 1930, 1931? I realize these are moving targets, but do contrarians need to move even further out on the continuum of risk? These are some of the crosscurrents running through my brain these days.

Back in the summer of 2007 it was Richard Russell blaring the trumpets of a new bull market. The octogenarian investor/market pontificator was one of the few who picked to the day one of the great bear market bottoms of the 1970's. However, this time the usually bearish Russell seems to have been left flat footed and whipsawed by the market's bi-polar convulsions. Here he is in the summer of 2007:
"We are experiencing a global bull market of Titanic proportions. The central banks of the world now have the ability and the power to create fiat money at will." - August 30, 2007

The tragic irony of his untimely call was his continued bearish posture and skepticism throughout the 2003-2007 cyclical bull market. Even the great ones get it wrong from time to time. Today there is a bull market in the carcasses of former prescient investors and traders. To quote from Buffet once again, "It takes 20 years to build a reputation and five minutes to ruin it."

The list of financial luminaries below illustrates the depth and breath of typically conservative and tactically bearish investors that have begun buying this market.

Jeremy Grantham
"Most of the damage is behind us now and the US market is trading exactly at fair value." "We've probably stumbled into doing enough things right that the meltdown is finished," he says. "We're in for a bit of a recovery followed by a meat grinder." - November 1, 2008.

Warren Buffet
"So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities."

John Neff
"His current portfolio contains about seven stocks. His on-again, off-again love affair with banking giant Citigroup Inc. is on again. He famously bought a big stake in that company for Windsor in the early 1990s when bad loans in real estate and in developing countries pummeled its shares.

He has been buying Citigroup again, believing that its stellar network of offices around the world will help it thrive when the global economy recovers. Citigroup now accounts for about 13 percent of his portfolio." October 15, 2008.

Marty Whitman
"TORONTO -- Marty Whitman, the octogenarian dean of deep-value investing, sees great bargains to be snapped up from the current stock market meltdown.

"It's a great time," enthused the 83-year-old founder of New York-based Third Avenue Management LLC before speaking yesterday at a conference organized by AIC Ltd.

"We can't try to pick the bottom, but it seems to me that there are great values out there now, just like in 1974," the firm's co-chief investment officer said in an interview.

The stock market crash of 1973-74, which affected all the major stock markets around the world, lasted 694 days before bottoming out.

"Everything went down every day, and if you bought, you hit a lot of 10-baggers," recalled Mr. Whitman. "I hope that we do it with a lot of what we are doing now." September 18, 2008.

John Hussman
"As of last week, the Market Climate for stocks was characterized by favorable valuations and unfavorable market action. From the standpoint of the general approach described in the Strategic Growth Fund's Prospectus, this places us in the “moderate” yellow box. The appropriate investment strategy is to increase market exposure gradually on substantial price weakness, which is exactly what we are doing here."

Steven Leuthold
"People say we haven't seen anything like this before. They just haven't looked.""Today's stock market is quite undervalued, in the low 15 percent of our 60-year valuation history."

I am sure Nassim Taleb would have thrown out these reflections as irrelevant and completely out of perspective to this markets character and danger. He may say, "This is not your grandfather's depression, keep going out on that continuum of risk". Of course value investors would be frothing at the mouth in this environment, they have been conditioned their entire lives for moments such as these. Where else in their lifetimes have the most high quality blue-chip companies been cut in half in one year? They are paid to work in these environments. I guess that is all the information we need...

Tuesday, November 25, 2008

Is New Jersey The Next Michigan?

If a rising tide lifts all boats, then naturally, as Warren Buffet says, "only when the tide goes out do you discover who's been swimming naked." It appears that New Jerseyans have been swimming completely bare and in the moonlight for quite some time. It was not always the case. Besides being the whipping boy and the low hanging fruit for comedians bent on exhausting the irony of the Garden State, New Jersey once had a dynamic and diverse economy.

New Jersey has successfully adjusted to changing economic climates in the past. Over 150 years ago, the agricultural-based economy matured and became an industrial and manufacturing-based economy. Paterson became "Silk City". Trenton was "Trenton Makes What the World Takes". Camden became "On Camden Supplies, the World Relies". You could say resourcefulness and salesmanship is in the DNA of New Jerseyans. However, the consistency of their financial success is most likely attributable to the geography and being within a stone's throw of New York City, Philadelphia, Washington D.C and Boston.

In the early 1980's New Jersey completed another transformation, this time to a post-industrial, knowledge-based, high business IQ economy. Businesses flourished in the upper echelons of the pay scale; telecom providers, pharmaceuticals, financial services and information services. Everything that was touted as the very best of America's new "finance driven economy" was within New Jersey's footprint. In 1990, New Jersey had 20% of the nations pharmaceutical jobs. Jobs that average $100,000 a year. Worries were cast aside that they no longer needed the manufacturing sector as ballast. Property values soared, running commensurate with New Jerseyans rank as first in household income and third in per capita income. Tony Soprano was flush. All was well...

The Gathering Storm

New Jersey's tax code use to be a friendly partner to business. Today it is ranked 49th out of 50 for state business tax climate. It's declining cost competitiveness is forcing those hands that once fed the coffers of the State and the people elsewhere. Whether it is the Sunbelt or friendlier international suitors, the depth and job diversity is thinning. For example, whereas in 1990 the State had 20% of the nations pharmaceutical jobs, today New Jersey has only 10% and it is declining rapidly. Comparatively, the State is one of the most expensive places to live, with an overall cost of living 32 percent above the national average. Real estate, rent, property taxes and insurance are high.

Similar to New York City, New Jersey is just arriving at the new great depression in real estate. Interestingly,
"New Jersey was one of just three states (besides Indiana and Alaska) where home sales actually increased from the year-ago period, rising 4 percent in the first quarter, the NAR said."

Just like the stock market was the last to unwind with the credit crisis (real estate peaked in June 2006, credit peaked in early 2007, the stock market in October 2007), New Jersey appears to be following a similar trajectory. It should be no coincidence, since 30% of the State's high paying jobs come from Wall Street or a street running parallel to it. Just look at Jersey City.

"Workers, Mayor Worry City's Giants May Lay Off Thousands

Tuesday, September 16, 2008

With the grim financial news from AIG, Lehman Bros. and Merrill Lynch, much of the speculation in the Downtown Jersey City financial district has concerned how many employees will keep their jobs.

The Dow Jones Industrial Average plummeted 504 points yesterday after being slammed with the double-barrel news that Lehman Bros. was declaring bankruptcy and Bank of America would be buying investment banker Merrill Lynch for $50 billion - half the price it would have cost a year ago. News also came through that insurers American International Group reportedly asked the Federal Reserve for a $40 billion bailout.

All three companies have offices at 101 Hudson St., while Lehman Bros. has an office on Hudson Street and Merrill Lynch has one on Greene Street. Lehman Bros. employs 1,700 in Jersey City while Merrill Lynch has 1,500 jobs in the city. AIG refused to say how many employees it has in Jersey City, but one estimate puts it at around 200.

Jersey City Mayor Jerramiah T. Healy fears that between Lehman Bros. and Merrill Lynch, thousands of jobs could be lost in the city with a deep effect on Downtown restaurants, bars and stores. "It is bad enough that 2,000 people may lose their jobs," Healy said. "But it's made even worse by all those satellite businesses that rely on the foot traffic." Gov. Jon Corzine said yesterday that between one-quarter and one-third of New Jersey's economy depends on Wall Street, either directly or indirectly."

Just The Tip of The Iceberg

For those New Jerseyans who thought there may be a silver lining somewhere... guess again. To truly be horrified as to what is coming down the pike fiscally, look no further than the ever prescient, Mike Shedlock at

"The state of New Jersey is insolvent. Bankrupt might be a better word. New Jersey is $60 billion in the hole on pension funding and the Governor is planning on skipping payments in a "pension payment holiday" until 2012 so as to not increase property taxes.

The Star Ledger is reporting New Jersey pension funds lost $23B so far this year.

New Jersey's pension fund has lost more than $23 billion this year, dropping to its lowest level since 2003 as a collapsing financial market battered its investments, a new state report shows.

The latest losses -- nearly $9 billion in October, and another $3 billion so far this month -- mean the fund is now worth $57.8 billion, or less than half the $118 billion in benefits it is due to pay out over time.

What Happens Now?

New Jersey is burning $5.2 billion a year. If the market is flat over the next 5 years, New Jersey will have a minimum of $118 billion in obligations and will be sitting on $31.8 billion. But what happens if the S&P falls to 450 or 600?

S&P 500 at 600 would be a drop of 24% from here. Assuming the pension plan assets dropped the same, plan assets would fall to $44 billion. On a drop to 450 on the S&P, plan assets would fall 43% from here to approximately $33 billion.

At $5.2 billion a year, New Jersey's pension plan would be completely out of cash in about 6 years in my worst-case scenario of a drop to 450 on the S&P.

However, even on a drop to 600 or 700 on the S&P (highly likely in my estimation), New Jersey, would run out of cash rather quickly putting in $1 billion a year and taking out $5.2 billion a year while assuming growth rates of 8.5% that are totally unrealistic." - Mike Shedlock

In many ways New Jersey is an amplified microcosm of the broader problems we face as a nation. Too much debt, too many entitlement promises, too much consumption, too high taxes, not enough savings and an economy much too dependent on creative finance. It is up to our leaders now globally, nationally and locally to make the hard decisions and to put us on sounder financial footings.

It only seems appropriate to end with a quote from New Jersey's own Tony,

"She was part of that generation who grew up during the Depression. But the Depression to her was like a trip to Six Flags." Tony Soprano

Barbarian's At The Gate

Watch the Prince rationalize why he's made a round trip with his position in Citigroup:

Then watch the Prince shoot his AK-47:

Do you think Vikrim and the other "Prince" sleep well at night?

If this is where we are looking for liquidity, we are screwed. If this is our Rockefeller or our J.P Morgan, the Dark Ages Part Deux may be coming round the mountain.

Monday, November 24, 2008

Which is the Best Analog- 1929 or 1873?

I was first introduced to perhaps the more appropriate historic analog of the 1870's by Bob Hoye, CEO of the market research firm, Institutional Advisors. Mr. Hoye's research has always attempted to place the current market environment inside a broader historical context. The belief being that the market forces that are currently present have been operating since the advent of the civilized marketplace. You could argue it is just another example of nature in the nature verses nurture argument. If you really want to wax philosophical, you could say there is very little free-will to the collective marketplace, since it is evident throughout history that we recreate the same market conditions associated with fear and greed. The stock chart is just our double-helix to that psychology. I have free-will to individually guide myself through the collective, but standing from space I am lost in the crowd.

In any case, here is a piece by Paul Kedrosky at the Infectious Greed blog.


Get Your Banking Crises Correct: 1872/73 vs. 1929

I've been saying this privately for some time, but only now finally getting around to saying it here: In many ways, the banking crisis of 1872/73, less so the bank failures around the Great Depression, is the right mental model in which to think about the current crisis.

The context: A banking crisis in Europe took hold in 1872 after a mortgage lending boom, one in which house prices climbed endlessly, houses became loan collateral, and all sorts of dubious banking and lending behavior went on, much of it pushed by return-seeking banks. Everything came unglued in late 1873 as the European economy unwound and housing prices began falling, thus causing European banks to fail in a cascade, and interbank lending rates to soar as no bank knew which other bank would fail next. The problems spread to the U.S. in 1873, where debt-needy railroads began failing as European banks withdrew funding, this after a long boom had produced an over-levered mess, and then large numbers of U.S. banks followed afterward.

The whole thing took around four years to unwind in the U.S., and slightly longer in Europe. Admittedly, there was little done at the federal level to ameliorate things in any meaningful way, and there were widespread labor troubles at the same time, both of which helped cause the economy to stay down for the count, adding to the woes.

Nevertheless, people need to focus on the right things. And to my mind that is the banking crisis of 1873, and less so the causes and fixes of 1929.


What history provides us with is a mirror to realize that however unique and different we appear to be, we are just another version of our parents, grandparents, great-grandparents and so on down the line. As the saying goes, "the apple doesn't fall far from the tree".

Additional References:

Where To Now?

Is the 2008 Bear Market Over? Is it the low or just a low? Technically speaking, the market performance last week satisfied both the bulls and the bears alike. That should provide some information in of itself. You will notice that I frequently view the market through a technician's lens. I believe it is absolutely necessary to do so in a bear market since the previous price performance is the only structure establishing reference points for traders. The charts do not lie and the charts provide guideposts. They also give you a visual map as to where the program trading desks will likely take the market. A majority of the markets liquidity is provided by program trading (i.e. hedge funds). These are algorithmic based systems that buy and sell the market on autopilot over and over again. The reference information that they trade off of are visually presented in charts. Bull markets create new buying and selling data as they go up. They are in fact building the infrastructure for the next bear market. In bull markets, charts are much less meaningful since the information has very little context. People just buy high and sell higher.

Getting back to technician speak. The bears point to the violation of the 2002 bear market low (closing below 768) as indication we are in for substantial weakness over a considerable length of time. Some very respected technicians are now calling for the market to fall to the 600's on the S&P in the short term and 400's over the course of this recession/depression. Here is arguably one of the best, Louise Yamada.

However, those lows were quickly recaptured Friday afternoon and seem to be continuing this morning. Market technicians could now point to a potential long term double bottom or something called a Wyckoff Spring as illustrated on The Big Picture's site.

"A Wyckoff Spring occurs when a market average (or stock) falls below its trading range, and makes a new “panic low” — and then “springs” back into its previous range.Its a relatively rare situation, one that is usaully associated with a sell off. That is a rather apt description of the entire week’s action."

This could very well be just another oversold bounce that we have seen again and again throughout the course of this crash. Market emotions tend to be binary and incapable of evaluating grey areas. I would argue, the only way this market get's a foothold, is to have a substantial rally over the short term with consolidation in a much tighter range. If the market languishes down in the 800's for too long or jumps up and down in a 200 point range (S&P) it will be very hard to recover from technically and therefore fundamentally.

Thursday, November 20, 2008

This Is A Bear's EKG

- Beautiful chart by Doug Short of and found on the Calculated Risk blog,

This should put things into perspective for those staring into the abyss. What is truly striking is the remarkably tight range of these great bear market declines (47.9 to 49.1). The entire decline of the Great Depression was almost 90%, however, there were strong bull runs of over 20% between the overall high and low.

One could postulate that the chart illustrates the temperature (velocity of decline) of this crisis in scale. In its current posture, it makes the technology bubble look like a walk in the park; it is more severe than the recession(s) of the 70's; but not as severe as the Great Depression. I believe the next few months in the equity markets will telegraph strong clues as to whether we are in for another depression or if it is truly "different this time".

It's Always Darkest Before The Dawn

My contrarian heart strings have begun pulling me back into this market. There is a complete absence of any news remotely positive. At this rate, the Dow will be at zero come Obama's inauguration! Looks like Bush will have one last laugh. Much like a spoiled older sibling having to turn over the stolen toy, they break it at the last moment, "Here, have fun playing with that!".

All joking aside, If anything Obama would like to see as much speculation and pessimism wrung out of the market before he gets a chance to drive it. I believe that is why his initial press conference after the election was so anticlimactic and void of any real news. Many market pundits were expecting him to reveal his Treasury Secretary or at the very least give a glimpse into his approach of this crisis. By moving the starting line of his administration further into the future the market uncertainty gives the crisis another chance at exhausting itself before he gets the reigns.

In the short term I believe there are two possible scenarios:

1) Bottoming around 770 to 795 (795 was hit on the S&P futures overnight) or

2) Moving much much lower, possibly below 700 in a final capitulation crash.

If I was to handicap things (that's all a good trader is), I would put the chances of a sub 700 S&P in the near term much less than a healthy bounce from here.


9:47 follow up

So this is what the edge of western civilization looks like? Scary stuff. Would you like a value meal, or one share of Citigroup (5.45!). Line in the sand for today is 7750 on the Dow. Let's pray it holds.


1:04 follow up

So far so good, but three hours is an eternity in this market. 7750 held for now. All it will take for things to stabilize is one gram of good news. The automobile industry loan may just be that catalyst. I like what I am seeing with the gold/silver ratio, it looks like it's about to rollover. This market needs the return of risk like a heroin addict needs methadone. 2:30 press conference with Senators may be the moment of truth. Let's hope they don't grandstand like they did with the bailout. I'm not holding my breath.

Tuesday, November 18, 2008

Anatomy of the Boom & Bust

Here's a little mock up of the varying boom and bust cycles starting in 1994 or so. One interpretation may be that we are currently going through the second and more destructive deflationary wave. Although it was only marginally higher intraday, you could interpret the recent October 2007 high as the head of a giant head and shoulder formation. You get a cleaner fit using the DJIA. In any case, this decline should take us down to the 600's at some point on the S&P. From there you could speculate the current fiscal stimulus will morph into the next bubble, possibly TIPS and precious metals markets.

Monday, November 17, 2008

Bank Index

There is so much quantitative data on the market right now that it so overextended that it is almost useless to interpret it. Basically, most of it is saying the market is so oversold that we should rally, and should rally hard. But I have been following a few indexes and ratios as guideposts. Since this is arguably the greatest financial crisis ever, the banking index (BKX) is an excellent forward looking vehicle to guide us where we are heading. Big surprise, it doesn't look good. Today we took out the Philadelphia Banking Index's lows from early October and last July. I think this is a pretty big deal and pulls 800 into the crosshairs pretty quickly, maybe by the end of this week or at least the end of November.


Dig a little deeper and you can see an interesting relative performance chart for the BKX and the S&P 500. In both instances, the BKX led the turn in the overall market by several months. Back in July of this year, the ratio bounced HARD off of the bottom established in the 1998-2003 bear market.

Assuming logic and geometry prevails (if you have any question about this market's geometry look no further than the 2 beautiful tops that the market carved out in 2000 and 2007 on the S&P - as much as the market feels random and volatile, there is a rhyme and rhythm to this beast):

The fact that we took ourselves back down to the last bear market lows in this ratio puts the very real possibility that the 768 intraday low on the S&P in October of 2002 will be revisited in this waves decline. Slightly scarier, is the ratio's decline during this bear took out the intraday low from the previous by a substantial margin. Obviously, if those lows are taken out on a closing basis (especially on the weekly or monthly charts) this market will gain new and uncharted territory potential towards the downside.

Sunday, November 16, 2008

Could This All Be Part of The Plan? - Part I

I remember the exact moment Henry Paulson, or Hammerin Hank as they like to call him, was named to be Treasury Secretary. It was the morning of May 30th 2006. I had been predominantly trading on the short side of the market for a few weeks. The stock market had been sliding since early May after catapulting higher out of the gates in January. It was the top of the housing bubble. Bob Toll, of Toll Brothers, was selling billions of his own company's stock every few months and buying everything from Atlantic City real estate to Philadelphia newspapers. The price of gold had screamed from $400/oz. a year earlier to over $700/oz. by the end of April. Every gold bug from Geneva to Vancouver were plastering their hyperbolic forecast calling for $2000 gold by the end of the year.

Looking back, you can clearly see they were the initial tremors, the friction points of this current crisis. For me as a trader, the appointment of Henry Paulson as Treasury Secretary was a game-changer. There was so much information to be interpreted by his appointment. This was a man who's very entrance into the Treasury said, "Houston, we have a problem". By Paulson's own admission, he does not walk from a problem or even to a problem, he runs towards the problem. to be continued.

Friday, November 14, 2008

Is Jawboning Bernanke's Only Currency?

In 2002, when then Federal Reserve Governor Ben Bernanke made his famous speech, "Deflation: Making Sure "It" Doesn't Happen Again", was it just behavioral propaganda designed to give the future Chairman street credibility? Just as an organized crime boss builds his reputation through a mixture of legend, occasional brutality and folklore, the Chairman's own legend as the premier academic scholar of the Great Depression and folklore such as a helicopter dropping reflationist seems to have all been premeditated and selected for this very moment in history.

Will it work?

Never has before. I guess there's always a first. Just like the crime boss seems invincible until he's laying in a pool of his own blood, the Chairman is perceived as infallible until he's irrelevant. Look back no further than the previous Federal Reserve Chairman, Alan Greenspan, to see how far off the pedestal they can fall.

And again we keep hearing daily why it's "different this time". The Chairman is creative. The money supply is exploding. They have it under control. Bob Hoye, over at Institutional Advisors (an absolute must read realist) puts things in perspective:

"Those close to Mr. Bernanke believe he can handle any worrisome economic conditions given his academic pedigree. He scored 1590 out of a maximum of 1600 on his SATs, has an economic degree from Harvard, and a doctorate from MIT. He has taught at Princeton for 17 years."

- That was from the February 1, 2006 edition of the Financial Post, which included a comment from Robert Frank who wrote a textbook with Dr. Bernanke:

"I'll bet on Ben's ability to see what is coming around the next corner over just about anybody else."

Some perspective on power and monetary madness is provided in an observation made by Mayer Rothschild in 1836:

"Give me control of a nation's money, and I care not who makes the laws."

In 2002 there was an event to honor Milton Friedman, and Bernanke's address included:

"I would like to say to Milton and Rose: Regarding the Great Depression you're right, we [the Fed] did it [caused the depression]. We're very sorry. But thanks to you [Friedman] we won't do it again."

In so many words, Bernanke claimed that the Fed had learned its lessons. The problem is that those (including Friedman) who have claimed that the post-1929 contraction was caused by a policy blunder have been wrong.

With adequate research anyone would conclude that great contractions are caused by great financial manias."


Is it arrogance, or just in the world's best interest to posture, "We (the Fed) did it...we won't do it again"? By attempting to own it, will they prevent the next crisis? I believe we are currently experiencing the inflection point where jawboning's considerable limitations are revealed, or simply where the rubber meets the road.

Wednesday, November 12, 2008


If Yogi Berra was a behavioral economist he might have said, “Perspective is 90%, the other half is dumb luck”. But for the majority of Americans, luck has been a part of our story as much as homemade apple pie and the white picket fence. In fact it has been our birthright. As a nation we have been sailing for quite sometime downwind and through the warm protected waters of the global financial system.

Now I realize there are significant populations of Americans who do not enjoy the wealth and opportunities of this nation, but for arguments sake, let’s assume most of us have enjoyed a comparatively privileged lifestyle. For the last century, each generation built upon the wealth of their successors. The European immigrant labors of the early 20th century established stable working class cities and neighborhoods to raise families. Small businesses enabled those immigrants a foothold to what we now call the American dream. Their children obtained at the very least a high school education with the possibility of a college degree and social security to see their modest dreams realized. And so on and so on.

Where that leaves us today is two or three generations of extremely privileged citizens who fully expect to continue the expansion of wealth that their parents, grandparents and great-grandparents extended to them. Unfortunately for all of us (I happen to be a card carrying member of one of these privileged generations), the wind’s have disappeared and we are currently sitting in the doldrums, waiting. Many of us are completely ignorant to the situation and its significance and fully expect conditions to improve just like they have time and time again in our lifetime, our parents and grandparents generations. However (and to continue the pretentious sailing analogies that seem so appropriate), I fully expect a storm to emerge that will capsize most of us floating precariously offshore and far from safety. From my perspective the storm clouds are everywhere, they have been for quite some time.

Let’s just keep this simple, we could blame everyone for today’s problems. Our grandparents for setting up our economy around a substance predominantly found in the Middle East. Or are great-grandparents for establishing the Federal Reserve and current banking system. We could blame our parents for well, everything from financial alchemy that enabled someone with no job and no money down to buy a two million dollar condo in Miami to electing George W. Bush for two terms. And surely we can blame ourselves for just being naïve, topical and downright spoiled. Step in Paris, Brittney and Lindsay. But in any case, all these problems and missteps were going to happen regardless of how the cards fell since the outcomes are inherently predetermined by our collective psychology and cognitive responses to these conditions, or simply, it's human nature. The crowd is the human equivalent of Mother Nature. You can try engineering controls (i.e. the Federal Reserve) to mitigate the punch and soften the blow, but like it or not the beast will walk and romp where it wants to.

Most people don’t realize that there have been many great depressions before The Great Depression. Interestingly, the time between the mid 1870’s to 1890 was referred to as the Great Depression. It took a few generations to build up the market psychology and greed of the 1920’s to outdo the generations gluttony before. If you ever hear someone say “It’s different this time!” run in the opposite direction.

Never a more fitting quote to the current times from arguably the most influential economist of the 20th century, John Maynard Keynes, “Markets can remain irrational longer than you can remain solvent”. It’s all a matter of one’s perspective and timing, sometimes guised as wisdom to the fool or as I like to call it, luck. I may have some insight here since I was trained as a geologist in my former profession. The geologist knows the arc of a certain process and understands time in the context of the universe. Take for example plate tectonics. Stress is placed between two colliding plates. Friction is the effect with conditions such as earthquakes, mountain building and volcanic eruptions. It’s not a probability, it is a certainty every time. For example, a geologist warnings of liaise faire building code enforcement in areas prone to seismic activity may not have been heeded for generations. The planning board chairman’s perspective of his own life extending some 60 years without incident is vastly different than the scientist’s perspective of geologic time or the historical record. The same goes for an economist warning of a global financial tsunami to a politician or worst yet, a stock broker. It all comes down to your own perspective.


Let's just get right down to things. You don't need me to tell you that the financial markets are broken. Just like Japan circa 1990 and the World circa 1930. Don't let anyone talk you down or sugar coat things with lists comparing why this time is different than the last great unwind. It isn't. In many ways it could be worst. I remember listening to CNBC's chief economist Steve Leisman proudly report in 2006 that all of the major 66 developed economies where enjoying parallel growth; and mind you not tepid growth, historic growth. I remember thinking, why is that good? In fact, I thought so much of the quote I wrote it down across the top of my white board in bold face. My concern was if we were all expanding at the same time there would be little to hold back the eventual contraction. And just as our collective expansion amplified our growth potential, the collective contraction would be equally magnified. These are the same principals taught in your high school physics class. When two waves of identical wavelength are in phase, they form a new wave with an amplitude equal to the sum of their individual amplitudes (constructive interference). My fear is the trough of this cycle could be a ways off, just as it was in the 1930's.

An interesting conversation keeps recurring to me. Friends and family inevitably talk about the financial crisis and why it appears overblown and even conspiratorial. Either, "the media is making people hysterical", "the bankers were corrupt" or "the government failed us". When I start rattling off why this situations closest historical equivalent is the 1930's, their eyes glaze over and you get the look of, "did this guy just say he was abducted by aliens?" In any case, today I got an email with Merrill's latest research on Bear Market's. It's take away:

"This is not 1929. The Great Depression was exaggerated by fiscal and
monetary policy mistakes.

• Global policy makers do not seem to be repeating them and that period
may be a poor comparison for today. "

My Brother-in-Law who had sent me the email had been attempting for several weeks to make the case of why this situation was not 1929. I found it quite funny when not a few hours went buy and I read the headlines from Merrill's own CEO, John Thain:

Financial Times- Merrill Chief sees severe global slowdown. Thain compares situation to 1929.

Mr. Thain went on to say, “Right now, the US economy is contracting very rapidly. We are looking at a period of global slowdown...This is not like 1987 or 1998 or 2001. The contraction going on is bigger than that. We will in fact look back to the 1929 period to see the kind of slow down we’re seeing now.”

Oops! Perhaps Mr. Thain is attempting to correct the irony of Merrill's own contradictory research. These are the same guys who told you why "it's different this time" on the way up in the Tech bubble, the housing bubble, the commodities bubble and now on the way down in the credit crisis. If this doesn't reinforce that it's just one giant ponzi scheme and these guys are the mother of all salesmen, yikes!

So where does that leave us today and what should I do with my money? I can't write this assuming individuals own risk tolerances and how they approach the market, but for me it's all about relative performance and perspective. Isn't that all we should care about in a deflationary environment? If the portfolios of my average countrymen are loosing 50% of their purchasing power and I only loose 25%, havn't I strengthen my relative purchasing power two times even though I lost 25%? The octogenarian investor Richard Russell once wisely described a bear market as a market environment where everyone looses, the winners are those who loose the least. This is the mentality to maintain in the current market environment, those who choose to be brave, ignorant or reckless will surely have their heads handed to them quicker than they can scream UNCLE.