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Time to buy or time to sell?
Are we heading for a year-end rally?
Typically late October and November – i.e. now - is a good time of year to buy stocks and most commodities, while April-May is a good time to sell. But I wonder if, in this by no means typical year, things will follow the script.
Let's have a look at a typical crash and bear market pattern …
Are we getting close to a tradable bottom?
This is usually a decent time of year to buy stocks. The sequence some of the smarter traders have been looking for is:
1. Big declines into October and an October low. We got that. As I have said before, October is the Stock Market Crash's month of choice.
2. Then a violent bounce. We got that in the run-up to the US election.
3. A November re-test of the lows. We seem close to 'enjoying' that now.
4. A nice tradable rally which would take us into the spring.
5.Then the bear market resumes its suffocating grip.
I must say it's the pattern I'm now looking for. But the problem I have with it is this: who is going to do the buying? Where is the stimulus going to come from?
This has been a traders' market and the old-fashioned investor has been hammered. Why would he deploy any capital now? Indeed, who has any money? Any purchases you make may yield a quick profit, but you have had to sell double-quick - like a day or two later - before that profit becomes a loss.
It's possible that government and central banks' reflationary efforts will finally boost prices. Falling Libor rates suggest that some liquidity is returning to the system. Markets may suspend reality and believe that Barack Obama will save them.
But this environment is so profoundly deflationary, I find it quite unlikely. Many of us saw major problems coming from as far back as 2005; the problem is some, myself included, thought it would manifest itself as an inflationary, not deflationary, collapse. But we have learned, as Bob Hoye of Institutional Advisors puts it: "Mr Margin packs a far greater punch than Mrs Money Printer." In other words, the deflationary impact of deleveraging far outweighs government attempts to reflate – so far at least.
I was thrashing all this out with someone yesterday, and we both realised we felt rather despondent and depressed. It was then that the famous 'cycle of emotions' came to mind.
As far as that chart is concerned, we are very much in the despondency/depression phase. So it could be that we are getting close to a tradable bottom. I'm not sure we're there yet, but we're close.
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How inflation could make a comeback in the UK
On the inflation debate, Mike Shedlock of globaleconomicanalysis.blogspot.com had these wonderful lines: "You would think that inflationistas would have caught on. But they haven't. Nor will they. And articles about shrinking day care, collapsing retail sales, rising unemployment, record foreclosures, massive credit card defaults, bankrupt insurers, collapsing auto sales, sinking commercial real estate, plunging commodity prices, and dozens of other things will not change their minds either, including an implosion in China."
He's right. But, if this decline in the pound doesn't turn back up soon, inflation could still hit the UK in the same way it has Iceland – which is simultaneously experiencing both a deflationary bust and somewhere between 16% and 25% inflation, depending on who you ask.
Mr Brown was asked in the House of Commons last week if he would resign should he have to go to the IMF for a bail-out. Instead of answering the question he chose to rant about the Tories in 1993.
However, such an event is not at all beyond possibility. Hugh Hendry of Eclectica calls the pound 'the currency of hedge funds'. And we all know what is happening to them.
I wouldn't wish an Icelandic collapse on anyone – and you can bet that anyone there who bought gold is glad they did - but you can't help thinking some good will come of it. There will be a return to sensible values, to producing goods and services they can sell. Investment will be cautious and careful again, and mal-investment on a grand scale will not be possible. In other words, a necessary cull has taken place, the system will be purged and out of the bust should come a competitive, functioning economy. That won't happen here until we stop bailing out bad bets - or Mother Nature forces us to do so through a currency collapse.
Why China can't save the global economy
Many say that China will be to the 21st Century what the US was to the 20th. It's very possible, but with the Chinese stock market down over 70% from its highs, they are currently where the US was in late 1929. This week I had this (very pessimistic) email from a fellow investor who is investigating a very exciting renewable energy play.
I arrived in Shanghai two days ago, and this time has been enough to tell me that the idea that China and its GDP growth and consumption will somehow make up for the slump in the US and Europe and eventually replace these economies is ridiculous.
Recent worldwide events seem to have hit nowhere harder than in China. The people I have been speaking to report massive redundancies. Many companies are laying off 50% of their staff. The Chinese middle class has been practically wiped out financially, as EVERYBODY was up to their eyeballs invested in stocks, often with leverage. EVERYBODY I speak to and ALL of their friends/relatives have lost ALL their savings in the recent crash of the Shanghai market. Some people are committing suicide. Taxi drivers, the good old reliable unofficial economic barometer, are constantly moaning about lack of business. This is a sign of economic downturn and is deflationary. I cannot believe that people are still talking about the Chinese economy growing albeit at a reduced rate. The Chinese economy will soon shrink.
Prices here in Shanghai for everything have been in the stratosphere: property, dining, entertainment, clothing. These will come crashing down as the middle classes, who have lost their money in the stock market, stop spending. China will be hit 10 times as hard by the coming depression than the US and Europe.
It's a very pessimistic picture. In fact he sounded both despondent and depressed. But isn't that the 'point of maximum financial opportunity'?
In short, I think we could be getting set for a tradable bounce into the spring, before Mr Bear sharpens his claws again. But, beware, attempting to trade such a bounce is not investing, but speculating – so only use money you can afford to lose. Come April, as the advert used to say, it will once again be, 'Follow the bear'.
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Dominic Frisby
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