Hi I2, I'll throw in my (scariest) version of the future...
Before the December expiration, we get the big Kahuna. Dow
gets down to 5700. Afterwards, the short covering / dipster
rally takes it back up to almost 7000, but it never quite manages
to get over the hump.
At this point, people like myself, who prefer to go long, will begin
to find the first real bargains. We quit shorting the market, and
get out of derivatives. In addition, the fools who are currently
buying the SPX on 3% margin have been wiped out, and the
total quantity of derivatives trading begins to decrease. Another
way of saying this, is that the fundamental buyers and sellers
come back into the long side of the market. Right now, a
significant fraction of the fundamental traders are going short,
and bears always have a short-term time horizon. That is, to
a fundamental turned short bear, the question is what will
a stock sell for over the next few weeks. The reason for
this short term horizon is that going short has carrying costs
that going long does not. The long player can put those
certificates into the roll-top desk and wait 10 years for the
market to catch up to him.
So the return of fundamental players to the long side eventually
reduces the volatility to amounts surprisingly low, and more like
historical average volatility. High multiple volatile stocks will be
the ones that end up being taken out and shot, and with their
return to rational pricing, the market's volatility reduces
considerably. This reduces returns to the day traders, who will
then be forced out by small movements relative to spreads.
(During the transition, the smarter (surviving) day traders will
have switched from trading long to trading short, so most of
them will clock a lot of dollars.) After the market stabilizes
(with a generally downward bias as more industries get
reduced, and expectations of earnings growth get repeatedly
reduced), the day traders will be out of the market, and back
in the work force, unless they manage to make enough to
retire (and a lot of them will).
If this is just a 50% bear market, it will be over within a year,
possibly even 6 months. The thing to watch in the US will
be the unemployment rate. It will rise. If it goes over 8%,
watch out below, we could do the long slide into global
financial melt-down. If the Fed manages to keep unemployment
below 6%, the bull comes back in 1998, getting back to 8000
in 1999. The crash is put off to 2001 or even later, depending
on how irrational the investing public remains.
If the constellation of economic forces prevents the Fed from
keeping the dipsters employed, the world as a whole slides into
global financial and economic melt-down. Unemployment rises
in pretty much every country of the world, even those that it
is already quite high in. Political pressure then forces countries
to ignore the IMF in their necessity of providing work. Borders
become restrictive to the import of goods as countries regretfully,
but necessarily repeat their actions of the 1930s. But it isn't
as bad in most countries as Albania recently suffered.
The countries that have only a short history of democracy end
up with very dissatisfied populations that demand solutions.
Those solutions hark back to regimes of the past that we had
thought were defeated and dead forever. Even the industrialized
democracies become much more authoritarian as citizens demand
solutions at any cost, and listen to leaders who promise easy
cures. War becomes increasingly more common, but the more
destructive modern weapons remain unused. Instead, countries
effectively use warfare to give their citizens something to bring
them together in self-sacrifice. But leaders remain rational
enough not to begin actions that would result in their immediate
immolation. (Even Hitler took 6 years to kill himself, rather than
40 minutes. :) But you can certainly expect governments to reduce
your civil rights if they can justify it for the general welfare.
In particular, marginal taxes on the rich in the US return
to 90%, as the rest of the population punishes them for speculating
in stocks and destroying the economy.
The world economy bottoms out in 2001-2002, with incredible
amounts of suffering, but not nearly as bad as the 1929-1945
debacle. But the return of good times is not obvious to the
people until around 2010. Sometime around 2020, the next
long boom begins, this time the new industry is biotechnology.
Bilow retools his skill set to silvicultural genetic engineering.
-- Carl |
