A lengthy letter to a friend of mine:
JW wrote:
> Bob,
>
> This is my new e-mail address - the old one will go away in 2 weeks.
>
> I've been taking gas bigtime for the last 4 days - picked one helluva time
> to go short on the semi equipment stocks and then didn't set stops.....greed
> got in the way of rational judgement once again......still short however as
> nothing has fundamentally changed....this market is running on expectational
> adrenalin right now and is just primed for a single shot of bad news to send
> it reeling...in the meantime, one has to wait.....
F*ck Joe, tell me about it. This has been so goddamned demoralizing. I've been "fighting the Fed" for ***over
two years now***. I know it's the right thing to do. I know that, someday, financial wisdom will become
priceless. When the bubble finally bursts, the ignorant will be decimated, and only the most savvy contrarians
will be left standing. But in the mean time, it sure sucks to see the idiots, even the ignorant people around
me, holding out for top dollar on insanely overpriced pieces of paper, and then getting it. The Fed is doing
everything it can to support this ridiculous behavior. I know it will die one day, and probably soon. I just
never figured that it could go on so long.
We topped in Naz two years ago now. If you'd have told me that I could have waited two years *after* the top
of the Bubble and still patiently exercised all my options, for the same amount of money as toiling away at
the short side for two years, I'd have died laughing. Now it's not so funny. I'm only slightly ahead of where
I'd be had I just done what all the morons have done - held on. I can't believe the moral hazard hasn't gone
away. I should have listened to my own writings. I knew the Fed would do everything in its power to prevent
the free market response on this; it's the only thing he can do at this point. But the thing that keeps me
fighting is the incredible uncertainty. I know the Fed will fight the deflationary trend with every trick in
the book, but I don't know how long it will be before they fail. Could be five days, five weeks, five months,
or five years. I suspect it's in between five months and five years, but I thought that a couple of years ago
as well. The only certainty is that the Fed will ultimately fail to paper over the Bubble. The housing
bubble will burst, the dollar will collapse, transactional volume in our economy will decline for years to
come, and financial market returns - in real terms - will be negative for years. But with an idiot at the helm
trying to destroy the currency at every turn, I can't know whether it ends in a hyper inflation or deflation.
The dollars are ultimately just an accounting mechanism, just slips of paper. But if you hold assets
denominated in those dollars, the outcomes are very different between hyperinflation and deflation.
I guess
this slower route to resolution, while spreading the pain out over much longer time period and making life
more difficult for me, at least minimizes disruption to society and the ignorant/innocent
who were led blindly into this mess.
Maybe that's what this all comes down to. Maybe I should have just cashed out and ditched paper "assets"
entirely. Bought hard assets and sat on them because of the uncertainty. But what the hell can you buy? Real
estate is as risky as the stock market with all the ridiculous liquidity that's been diverted there. See Japan
for what can happen if you decide to secure your wealth in real estate. Gold? Maybe that's the ultimate
answer. Just buy a sh*tload of gold and wait it out. (I have started looking at foreign government bonds, as a
way to capture a coupon plus dollar depreciation when it happens. Just gotta find a convenient vehicle that
*hasn't* been currency hedged.)
I am 100% certain this is NOT a new bull market. Bull markets don't begin with everyone bullish, valuations in
the stratosphere, and Wall Street telling you to buy. They begin with everyone telling you to sell,
questioning how much lower things will go, and how much longer it'll be before the economy finally turns the
corner (see January 1991). The notion that the biggest financial bubble in history would be shrugged off with
a single quarter dip, and everyone questioning, "Gee, did we even really have a recession?" - it's ludicrous.
No way it happens that comfortably.
Somehow I think it all comes back to the almighty dollar. As long as foreigners are willing to give us the
money to finance our enormous trade deficit, the bubble can continue. They are helping to keep interest rates
artificially low here, as well as distorting our equity valuations - but that will not continue indefinitely.
I'm starting to see the endgame there right now. I suspect it's already underway, as people are starting to
lust after the returns from the Japanese market. Greed for higher returns elsewhere may be what finally tips
our house of paper over. As people trip over each other to buy the Nikkei, they will
be selling dollars and buying Yen. The BOJ may be able to intervene to keep their own currency down compared
to fair valuation with the prior flight of domestic capital, but if that reverses, they will be completely
buried underneath the flood of returning capital.
As Japanese savers see themselves no longer gaining 10% per year on the
dollar-yen deal, coupled with rising interest rates that nail US bonds, they are faced with the prospect of
losing 15%/year on their US bond holdings, while watching the Nikkei soar. Do you realize this - that the only
way all that Japanese savings has been able to find any return at all has been to place it in a dollar-
denominated security? What the hell else do you do when your bubble bursts, your government insists on jamming
interest rates to zero, and supports an ever-weakening Yen? It's the only logical conclusion - to buy
US assets - until the yen-dollar imbalance becomes so stretched that it begins reversing, and the returns
domestically all of a sudden begin looking interesting again. Perhaps Japanese stocks have deteriorated far
enough to actually present some measure of value. How long will Japanese savers
finance our trade imbalance in that environment? When that source of demand for US paper disappears, the
dollar will weaken, interest rates will rise, and we will have to come up with our own domestic source of
savings. Either we'll have to stop consuming, or the dollar will collapse, or both. There is no happy ending
to this story.
Regarding the immediate market:
it's recently occurred to me that you have to view this whole thing like an upside-down version of all our
personal market experiences. We are used to gradually rolling higher in the bull market, punctuated by sharp,
quick, mini-panics that served as excellent buying opportunities. We now have a secular bear. Time scales are
slightly compressed, but you basically have long, rolling declines punctuated by panics *UP*. Yes, that's
right - the panics happen UP in a secular bear, not down. The occasional mini-bull
will occur - the inverse
of the 6-18 month "bear markets" that Wall Street has convinced the gullible are all you have to worry about.
The first complete leg of this bear ran around 18 months, depending upon where you date the start, and ending
September, 2001. That compares to the typical bull cycle that runs three up years/ one down year - a time
compression of 2:1. The mini-bulls I think will last 3-9 months. We are now in month 6 of this mini-bull;
it is getting quite long in the tooth.
Well, I'm lightening up now. Many of the guys I talk Elliot wave with believe that the current leg up in the
market is the brother leg to the rally off the 9/11 lows, and should be similar in time and price. I review
$SOX as the best indicator of sentiment, so I count the rally as taking 43 trading days. The January high was
a headfake and part of the corrective process. The latest leg up is 32 days old. While the price movement
should be comparable, many things should limit that. Sentiment is ridiculously bullish, complacency
is everywhere, and there just isn't much money running around to drive it much higher. I favor this leg being
62% of the previous leg, similar time scale though. So I believe we are very near the top of this move, we
pause for a couple of weeks, and then have one last panic shot higher. It will produce the shorting
opportunity of a lifetime, as the next leg down will *finally* be the leg that takes out the institutional
darlings, ridiculously overpriced crap like EBAY, as well as overpriced giga-caps like GE. I count 26 days to
the Dow's rally, so I can easily see another 20 trading days in the process. If this leg is 62% on the Dow, it
would top just over 11000, like 11030. Since the prior leg came off a sentiment trough, I think it's
reasonable to expect this leg to be shorter in price. By that time, you're into Q2, which is when the economy
should feel like somebody pulled the rug out from underneath it. At the point in the business cycle where the
positive feedback usually kicks in to the upside and the economy takes care of itself, it will fail due
to the debt and capacity box we're in. The weather-induced construction boom will
start to suck wind, and higher mortgage rates should start to bite, too. With the manufacturers having
cleaned out the inventory that they wanted to ditch at the continued expense of consumer balance sheets,
the inventory restock that is taking place now done, and the Fed stepping out of the interest rate picture,
you have the perfect setup
for the double-dip, and the entry into the depression.
Maybe all this struggle isn't for naught after all. Perhaps it truly is a gift, permitting those of us
with enough insight, individuality, and resolve to get positioned in the best possible fashion going into
the downturn of a lifetime. I used to complain that I started shorting too early, in October 1999. But I've
since found that the troubles I endured shorting in the final days of the bull were invaluable lessons for
the days to come. Life has always been good about timing things *just* right for me that way...
Good luck, Joe.
Bob |
