Oct

12

V N1. Of the 100 biggest markets around the world, almost all are down 40- 60% in dollar terms with the exceptions' being Tunisia and Botswana. The impact of the decline this week, unless rapidly reversed, is going to be very severe on purchases. The previous 20% caused great angst; imagine what this decline will do to those who rely on retirements. The positive feedback of the decline in a negative direction also impacts the election results with every market decline making it more likely the Republicans will be blamed for the situation.

2. The worst aspect of the decline this week from a health point of view was that fixed income around the world cratered, thereby reducing world wealth by a good 15% as opposed to the normal situation where the equities go down 10% and the fixed incomes go up 8% leaving total wealth down only a little. And the people that talked about how bearish it was for stocks because commodities were up would never say that it's bullish now because commodities are down 40% over the past four months.

3. A new word should enter the market vocabulary, a waterboarding decline, being a decline that seems to have a breath of life at the open before going into a death spiral.

4. Because of the decline in all sectors, the wealth/price ratio has stayed relatively constant with corn, copper, soybeans, wheat and oil down 40- 50% since June 30, thereby keeping the number of bushels and barrels we can buy with one DJIA relatively constant, making the number of ounces of gold you can buy with the Dow less than 10 for the first time in a googol, and looking like a bargain for the Dow.

Paolo Pezzutti writes:

In other crises you could see the flow of money from bear markets to more promising assets. From equities to bonds, from equities to housing, from technology to defensive, and so forth. You could see investors moving away from the "bad" returns toward the "new" vein of expected future returns. This time it is a simultaneous meltdown and loss of money everywhere. Only cash has been a safe haven in each country. At least until some of the currencies initiate a fast devaluation path on lack of trust not only of the banking system but also of a country's ability to navigate these stormy waters. Only a few months ago I was confident to see the financial system, at least in the US, finding a good base and start recovering. After all the financial system of the US could not simply collapse! I was not expecting this could go so far. There were many predicting a financial armageddon but I did not pay too much attention. Catastrophists have always been around. The fact that money is simply being burned actually makes it quite difficult to have a complete recovery. I am afraid it will take many years. Because in this case, simply, the flow of investments cannot return to equities. This time there is not enough money to move away from some other asset. What I am really afraid of, and I go back to a previous post I wrote about the end of the US dominance era, is the following: this crisis signals the transition to a new balance of power in the world. I learned at my expense that systems and large organizations continue to act ignoring that they are moving at the edge of an abyss. Factors for a change of balance accumulate but they are ignored. Suddenly they ignite rapid and impressive changes with an avalanche effect (black swans?). It seems that these transitions cannot occur smoothly or gradually. Awareness does not grow gradually. People live in a dream until they are brought abruptly to reality. The reality is that the US and Europe have lived a number of years spending and consuming more than they could afford. Continuously growing current account deficit and immense flows of money out of our countries did not ring the bell. Now, whatever the specific cause that started the crisis we are brought to reality. More regulations vs less regulations, more government vs less government are the discussions we hear in order to try and find a solution. The problem lies in the fact that our societies consume and spend more than they earn accumulating debts that eventually nobody will be able to pay. This has to be changed somehow. And hopefully not through increased presence of the governments in the economy or, even worse, through protectionism. Of course emerging markets are suffering a lot in this crisis. We are the main source of income for them and we finance their surpluses. Moreover, we will not be able to go back soon to previous levels of demand. However, the relative weight of some of these countries will increase as their internal demand will pick up to fuel their growth while we lick our wounds. And demography explains the dynamics of aging western societies. We need to be aware that this historical shift is developing and accelerating. I do not think we will be able to go back to "business as usual". This will have effects in the long term, in my opinion, also in the strategic posture of the US and Europe and in their role in the world governance. There are already signs of increased weakness from the military and political perspective. More in general, we need to understand the possible answers to this crisis. And the implications. This phase, however, if my analysis is correct, could be an opportunity to invest in those emerging markets that will grow faster than we will be able to do (provided that one still has the liquidity to do it).

Steve Leslie remarks:

If it were not enough for ACORN to help destroy the housing market in Florida by being the pointpersons for loans to unqualified buyers, now it seems they wish to start another stain on the Sunshine State with voter fraud. It seems that Mickey Mouse tried to register to vote in the state of Florida at the behest of the political action group. They are currently under investingation in 13 states for voter fraud. My one question would be how in the world did Mickey fill out the application and sign it with those huge hands? And if Mickey Mouse is registered will the other Disney characters soon follow?


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