Thursday, October 9, 2008

Best of the Net - Thursday October 9, 2008

I sit silenced by the ruthlessness of the market like most of you I'm sure. It's one thing to expect stock prices to fall, another to watch the utter destruction of our capital markets day after day with no sign of abating. Quite often I don't know whether to laugh or cry. And now that I'm firmly sitting in cash, having taken all profits possible from my short positions, I'm hardly consoled by the knowledge that I am a lucky unemotional spectator to this carnage.

As the last days have unfolded I can't seem to shake the notion that what we are witnessing is a once in a century event in slow motion. An inherent characteristic of most of these major panics of the past has been that the market systems malfunction due to the increasing volumes. During the Crash of '29 the ticker didn't finish printing trades for hours after the market had closed. People had very little idea where their stocks were trading throughout the day. The South Sea Crash and Tulip Bubble were rife with examples of mass confusion and misinformation. Additionally, most of these panics were accompanied by market closures. We have been seeing these elsewhere in the world, like Russia and Iceland, to absolute disastrous consequences, but not yet in Europe or North America. What this usually causes is a psychological fear of "not being able to get out." So instead of the enormous declines of 15-20% in a day, we're getting the Chinese Water Torture of 4-7% declines daily. For that we should be belatedly grateful.

The biggest problem I have with the way things are unfolding involve the perpetually terrible advice being trumpeted for the last year by our major media outlets. All along they have been telling the average person that they should be buying for the long-term, even as the economic data were pointing toward far more troubling times. It was entirely predictable. But I suppose that is the nature of the psychological beast we call our capital markets. Chris Puplava had a good chart showcasing one analysts terrible calls over the last year. It is truly amazing. See it here.

Another thought I can't seem to shake is that the Chinese have been sitting quite patiently with their massive reserves, and I think the possibility of them doing something crazy have heightened since I wrote about it in early July. I moved a portion of my cash position to the Chinese Renminbi currency ETF (CYB) in anticipation of a revaluation scheme of some sort.

But I'm still very careful about trying to pick up bargains here. It has become quite apparent that this is a beast that cares not about historical extremes. For days now, I've had some of the best technical traders in the world showing me examples of "something that has never happened before." Oversold extremes that have not happened since the statistics started being compiled (usually the early 60's). I've always held that saying, "it's different this time" is one of the most dangerous statements an investor can make. The probabilities of any event being completely different from a fair number of previous data inputs is indeed small.

But quite apparently, it's different this time.


Doomed said...

I read books all the way back to the 60's that the current crisis would unfold but it never did but now it has finally happening.

The timing of events were a bit off to say the least including the Kondraeiff long wave theory and it's time line.

Those that think the economy and life will continue on in prosperity as it has been are in denial.

One point I disagree with is the comment about the slow unfolding of the crash of the financial markets and the economy.

We are in the "QUICKENING" and events are unfolding faster than even government leaders can react.

If this quickening continues at its present pace and I don't see any reason why it won't, both governments and individuals are going to have to move fast and a paradigm shift of thinking is the call for the day.

The big question is how to prepare for the coming drastic changes in the economy and our lives when wealth destruction is occurring at light speed?

Will owning gold save you? I doubt it as the price of gold probably won't rise fast enough to keep up with the devaluation of everything else we own.

Will the currencies survive or be replaced? I tend to think the world currencies are at peril along with the banking systems as they are apart of the system.

Individuals will need to be in something that will go parabolic.
What will that be?

Matt Stiles said...

That's a good question.

I've always been of the belief that as cycles come and go, it's not absolute wealth that is important, it's relative wealth.

There will be a recovery. Whether it happens in 2 years, 10 years or somewhere in between I don't know. But I want to make sure my balance sheet is in better order than 90% of other people when it happens. How can I do that? Debt reduction, capital preservation and financial literacy.

I'm investing in my own education (of which writing this blog is a part) and making sure I don't waste any of my precious capital in trying to find a short term bottom.

As far as what goes parabolic? Nothing in my opinion. I'm working on finding some of the better corners of the world to invest (and I'll have a post on that shortly) where the returns will be better, but I don't plan on becoming a millionaire anytime soon.

The era of instant gratification is over, IMO.

Thanks for dropping by.

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