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Where – and when – is this all going to end?
That's the question I'm asking myself.
We seem to be in full-blown capitulation mode. But capitulations do not last forever. Sooner or later – much like November 2008 or March 2009 – the prices on offer will be too compelling and buyers will come in.
But, again, the wretched question is when?
The US stock market looks ever more like Japan's
This has happened several times over the past few months. I look at a stock and think, 'ooh, actually, that's holding up quite well', so I don't sell it.
Then somebody else comes along, sees that same stock that's holding up well and thinks: 'Crikey. I better sell that while I can still get something for it'. So they do, it slides, and I've got one more dog in my portfolio.
And it's not just happening with individual companies. Gold, for example, was up on Monday and again yesterday morning, while broader stock markets were down. That's positive, I thought. Then along comes Mr Trader who thinks, 'Look, gold hasn't fallen, I'll sell that'. And the colour red spreads across my screen.
Anyway, moan over. Here are some thoughts on the current state of the market. There are so many interesting things going on from the stealth slide of the pound against the dollar (as predicted a few weeks back: What does the future hold for the pound? What a genius I am) from above $1.60 to $1.53, to the crumbling commodity markets. I should say I am getting a lot of conflicting signals, so some of my observations are bound to be contradictory.
The remarkable correlation between Japan's bear market, which began in 1990, and the US's, which began in 2000, continues. This chart shows the US since 1990 in green. In red, we have Japan since 1990, moved forward 11 years. Both are measured in US dollars so the unit of account is the same.
The green continues to follow the red. Japan has plotted the future for us. If we continue on this route – and the 'it-is-up-to-government-to-save-everyone' attitude of policy-makers is keeping us entrenched on it - this current bear phase is probably only 25% done in terms of duration and magnitude. What a horrible thought.
That said, I wouldn't be surprised to see at least some kind of relief rally, perhaps starting later in the month.
It should be noted that for all the carnage, US markets have held up comparatively well. We had the initial July to early August capitulation. Then a late August and September which saw some volatile range trading but no confirmed break in either direction.
The magic 1,100 mark on the S&P 500 – the August low – was briefly broken yesterday, but it rebounded and markets closed well above at 1,123. So, although we are near the lows of the year so far, we are still above the lows of 2010 (1,010).
It's certainly been rather more impressive than the once-stellar DAX of Germany. As well as suffering from the weakening euro, it is already below the lows of 2010 (5,500). But it too is just managing to stay above its August lows.
So here's the big question for all markets: are we going to break out of this range to the up or to the downside? Yesterday morning I would have said to the downside. By the evening I was a bit more positive. That's how flip-floppy I feel about the whole thing – and judging by the market action in general, I'm not alone in that.
Junior miners have been hammered
Now we consider Canada's CDNX, the composite of Toronto's main board and its Venture exchange: home to so many of my once-beloved, now-despised junior mining companies. Highly geared to metals and energy, when the CDNX rises, it soars. But when it falls, it plummets – and kicks you in the face on the way down. The August lows have decidedly not held and the 2010 lows were breached yesterday.
Our only hope for salvation is some support here and perhaps even the proverbial 'V' bottom. I'm not banking on it. But we need some relief pretty fast, otherwise we're going to be looking down the barrel of the 2008 lows before you know it.
There are some things to be positive about. Gold, for all the dismissals it has received, is still up $200 this year. (Silver is more or less flat). But the COT report for both – which shows the commitments of traders on the futures exchange – looks extremely bullish.
In the case of silver, it's as bullish as it's looked since 2009, in that the open interest is low. Broadly speaking, that means there are now plenty more potential buyers to come into this market. I even bought a small amount of silver last week, something I haven't done in a long time.
I don't go with the argument that gold was in a bubble. Overbought, yes, extended too. But bubble? No.
A bubble is uranium in 2007. Uranium was the silver bullet that was going to save us from our looming energy crisis. Every company that had even the vaguest association with uranium went skywards. That hasn't happened with gold. Not yet.
I still think we've got that ahead of us.
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Gold, guns, and nutters
Gold needs to become the currency of last resort. There are signs that it is trying to do this and decouple from the broader indices, but every time this happens it gets hammered. The currency of last resort remains, for now, the US dollar. That's where people are fleeing to.
Kyle Bass is the Texan investor who made a fortune in the sub-prime chaos. Now he's bet on the collapse of entire countries, having bought credit default swaps on Greece, Ireland, Italy, Spain, Portugal and, interestingly, Switzerland. In terms of macro calls, he's got the big ones very right. Describing him in the Sunday Times, Michael Lewis writes:
As he laid out his ideas, I had an experience I've often had while listening to people who seem perfectly certain about uncertain events. One part of me was swept away by his argument and began to worry the world was about to collapse; the other part suspected he might be nuts.
"That's great", I said, already thinking about the flight I needed to catch. "But even if you're right, what can any normal person do about it?"
He stared at me as if he'd just seen an interesting sight: the world's stupidest man.
"What do you tell your mother when she asks you where to put her money?" I asked.
"Guns and gold", he said simply. So he was nuts.
"But not gold futures", he said. "You need physical gold."
He opened his desk drawer, hauled out a giant gold brick and dropped it on the desk. "We've bought a lot of this stuff."
Now the above is quoted out of context – it's clear that Lewis regards Bass highly. But I'm glad I have Bass as company. And that we're both still seen as nuts.
My strategy remains to stick with gold, cash – and some ugly-looking gold stocks.
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