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Pastimes : Ask Mohan about the Market

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To: Jack Clarke who wrote (12908)	1/10/1998 11:44:00 AM
From: tekgk	Read Replies (5) of 18056

Jack, Be careful out there. I think that it's going to take more time to determine exactly what the next cycle will look like. Here's some text from and old post I made back in July of 97 for some context. At the end I'll add my current thinking. Begin old stuff - If you look at the following chart: cpcug.org then look at this one: cpcug.org You will notice that the loss in "value" from 1929-1950 was about the same as the loss in "value" from 1966-1982. In dollar terms the 1929-1950 period looks like a disaster while the 1965-1982 period looks flat, yet in "value" terms they were about the same (75%). What I think this shows is that the FRB can play currency games by "creating liquidity" making a correction look more or less flat in dollar terms. End Old stuff Why did I sell all of my long positions in June? Central bank purchase of US paper came to an abrupt halt. I reasoned (and posted) that the 600 billion per year of foreign investment (95-97) was by far the biggest single source of new money coming into the market. Mutual fund flows (which most people follow) were only about 1/3 of this number. Stock buy back programs were only about 30 billion per year more than IPO's which is noise level in this context. Direct stock purchases (according to a link I can't find any more) are actually falling because people are selling individual stocks and moving to mutual funds. I don't know how true this actually is but it makes sense for at least one segment of the population - the people who hit the stock options lottery do sell and then buy mutual funds with the proceeds. Pension money is very large but it grows slowly and is hard to gauge because of the private company scam effect (remember LTV). Markets are overvalued by all historical measures - the collapse of SEA has mostly killed the increadibly stupid new era argument. Markets require constant care and feeding. The current market is so large (over 110% of GDP - a record) that it take fresh outside money to maintain. The Fed has stepped in by pumping money at 70's rates to make up part of it and panicking foreigners are making up the rest. In another post (Sept. ?) I posted that private foreign panic funds would continue to flow for at least 6-9 months in two waves (Herds take a while to figure out that the lead animal has changed direction but since they can't actually think for themselves they always eventually follow). What I struggling with then was; what will the next 15 years look like - 29 or 66 period? My answer is neither (IMHO). History never repeats itself exactly. In 29 the gold standard prevented a 65 type of a scenario. In 65 America was at least 70% of the worlds economy and everybody had no choice but to live with the currency game to hide the market correction (remember guns and butter). Now that we are about 20% of the world economy the question is - Can the FRB get away with a repeat of the 65 performance? My answer today is - only as long as the panic money keeps flowing and then for only a few months more. I don't exactly how long, but 6-9 months was my gut feel. I now think that the flow won't stop until after the rest of the weak players like Brazil and Eastern Europe fall just like SEA. China may or may not join the crunch - they are totally bankrupt, but because of the isolation of their financial system may be able to hold things together. What am I doing now? Sitting in cash and muni's most of the time and catching some obvious down waves (made a few bucks this week with some spx puts). I never stay in for more than a few days or weeks at most. I spend lot's of time listening to guys like Sankar who monitor the dollar and money flows. What I am looking for is the collapse of the remaining weak players and a change in sentiment on the part of the panicking foreigners. Once I see this then I am going to start building a large short position in stock and a large long position in either currencies or gold (not sure about this one yet) because I think that the giant hedge boys will not let the currency game repeat 66-82. The US is no longer large enough to ensure a smooth devaluation. The 1.5 trillion dollars that slosh around the world daily plus the 60 billion in various derivative instruments will overwhelm the fed (IMHO) - until then be very, very careful out there (BWDIK). I don't like the idea of finding a large bull horn sticking through my ribs especially one belonging to a very old bull. -VBG- Take a close look at the up and down waves in the late 60's - surf's up. Think in decades but trade in a daily time frame for a while.

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