Sunday, May 31, 2009

From Bull to Bear


As faithful readers know, I do not side with the current optomists who would have us believe the global economic crisis is ebbing and recovery is on the way.

Instead your dilligent scribe sides with the likes of longtime market analyst Bob Chapman who calls green shoots "Poison Ivy" and economist Nouriel Roubini who says those green shoots are "yellow weeds". Both these analysts insists there's lots more pain ahead.

To read the daily papers we have gone from the the worst financial crisis, economic crisis and recession since the Great Depression to a consensus that the outlook is now becoming optimistic again.

How can this be? The problems of the financial system are still severe and many US banks are still insolvent. Our goverments continue to pile public debt on top of private debt in an attempt to socialize the losses and unemployment is growing by leaps and bounds as government revenue from taxes contines to drop.

The reality is that at some point the government's balance sheet is going to break, and if that happens, it's going to be a disaster.

As for the recent stock market rise, how can it be anything but a Bear Market? As the US economy keeps contracting and the financial system suffers unexpected or manipulated shocks, the markets will surely crash again in a repeat of the 1929 - 1942 pattern.

Joining the chorus to offer warnings of what is to come is highly respected market analyst Louise Yamada. Yamada was top-ranked among her peers in 2001, 2002, 2003 and 2004 when she worked at Citigroup's Smith Barney division. Since 2005, she's headed her own independent research company. She penned the bullish tome Market Magic, Riding the Greatest Bull Market of the Century.

But as Randall Forsyth reported in the May 25 issue of Barron's Up and Down Wall Street column, Yamada bull ride has come to an end. She paints a picture of what is to come that is anything but bullish:

"It is almost uncanny the degree to which 2002-08 has tracked 1932-38", Yamada writes in her latest note to clients. She then offers her "Alternate Hypothesis" and compares this structural bear market to 1929-42:

  • the dot-com collapse parallels the Great Crash and its aftermath, followed by the 2003-07 recovery, similar to 1933-37;
  • then the late 2008 - early March 2009 collapse tracks a similar 1937-38 trajectory, after which a strong rally followed much like today;
  • then in November 1938, the market dropped 22% followed by a 26% rise and a series of further ups and downs - down 28%, up 23%, down 16%, up 13%, and a final 29% decline ending in 1942;
  • from the 1938 high (analogous to where we are now, she says), stock prices fell 41% to a final bottom.

Optomists claim we have already hit the final bottom to the market. Yamada disagrees. She says structural bear markets typically last 13 - 16 years so this one has a long way to go before "complet(ing) the repair process." She calls the current rebound "a bungee jump," very typical of bear markets. Numerous ones occurred during the Great Depression, 8 alone from 1929 - 1932, some deceptively strong.

It's yet another voice warning you, dear reader, to take care that you understand exactly what is going on around us.

Outstanding Video Clip for you:

Robert Rodriguez – Reflections & Outrage.
Some very rare truth telling in this five minute clip and a must see.


Click 'comments' below to contribute to this post.

No comments:

Post a Comment