… is exactly where the market was back in March when the S&P 500 hit 666. Everyone thought the world was coming unhinged, and well it was and still is. However, not everything comes tumbling down instantly.
With every play there are acts, and at some point the climax. Without the climax how can we have resolution? They are conditions dependant upon eachother unless we are speaking of the experimental genre. With our money supply and government expendatures into the stratosphere we may be in the experimental, however let’s stick to the traditional for our discussion.
As this drama plays out I think we will have the main plot divided by smaller and yet smaller sub-plots each with their own climax and resolution.
While the market tops and is due for a correction we are jumping for joy at watching green shoots emerge from the abyss. The media and figureheads talk about these shoots sprouting from here and there, but I don’t seem them. Withered shoots perhaps.
Let’s introduce the buildup to the climax, and considering the climax euphoric the buildup sets the stage for euphoria. In our case hope. Beyond oversold conditions that we reaached in March we also had hit a stage of dénouement (catastrophy). However, this was only a subplot as if it had been the true bottom we would not have seen a short rebound in prices that have taken us up over 35%. We needed complete disgust with the markets and an unwillingness to jump back in, which we didn’t see.
Instead will we go from Climax (the present) to catastrophe and back again I imagine a few more times before this is over. We are fairily resiliant beings and can stand being pushed, pulled, and battered a bit before we completely throw in the towel.
We are now starting a push into anxiety as the green shoot euphoria wears off.
Where are we going?
If the past is able to predicate the future, and if we are playing out subplots within the overall plot that leaves us with a theme of euphoria, despondency, optimisim and so on. With despondency we will need to see disguist, lack of conviction in the government, and a swearing off the the financial markets. We aren’t even close.
Meanwhile as we go through these girations, while the Alt-A mortgages readjust, and commercial real estate weakens I’m expecting to see price fluxuations, and gyrations that flow with human emotion. After all with so many players the markets are more emotion driven than anything else.
If the markets weren’t emotion driven then how can we explain people buying equities when the P/E ratio of the S&P500 is over 100, or how technical traders use patterns to profit? After all we humans tend to do the same thing over and over again. History repeats whether we like it or not. The Romans clipped gold coins to fund increasing government expenditures, and in the modern era we print. Nothing has changed except the means in which it is accomplished with the same outcome.
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Short-Term:
A recovery in the dollar based on nothing more than everyone else is hurting perhaps worse than us, and it is very oversold. Bernake and co might pull-in some liquidity to lessen foreigner’s fear of a devaluing dollar to support our debt markets. This however, will undoubetly cause a collapse in the equity markets, commodities, and precious metals, while the dollar will rally as will bonds.
Winners: The US Dollar, Bonds
Losers: Everything else — Note: I’m cautious in shorting commodities due to when the next scenario will hit.
Intermediate-Term:
As liquidity is reduced Bernake will realize if he hasn’t already that there is no way out and that we will never be able to repay our debt. The only way out will be a default via inflation, but that will prove futile once inflation hits 20%. Wages will not rise and people will protest. A depression will follow.
Winners: Precious Metals, Raw Commodities, Real Estate
Losers: Everything else
Longer-Term:
We will survive, and I hope we will change our ways to more responsible Americans. The case for responsibility is huge as it has gone by the way side. Instead of takeing care of ourselves, we look to others to make our decisions, pay for our health-care, take care of us in retirement, and essentially wipe our asses. Fiscal responsibility needs… needs to happen. No longer can we live off of debt that has we have no way of repaying. I’m sorry, but a hummer purchased via your HELOC adds no value to your income. Hence it is a poor investment and you must increase your earnings in other areas (no, housing doesn’t go up forever).
And here is our reset. The New American emerging from the ashes. This is a ways out in time so we will revisit it as the cycle ticks on.
