Still not convinced? Green shoots are sprouting into a jungle around the world. Consider a few of the economic indicators published in the past two weeks: British house prices have risen in two of the past three months. Japan has experienced its biggest monthly increase in industrial production since the Fifties. Consumer and business sentiment are rising strongly in the United States and Britain and are even showing some signs of life in Europe. In America, where all the trouble started, unemployment claims have fallen, durable goods orders and property sales have bounced back and house prices have stabilised, although not yet in the 20 boom-bust cities sampled by the Case-Shiller index, which the markets, in their wisdom, have chosen to emphasise.
The list of bullish statistics could go on, but it can be best be summarised in the market’s own judgment world share prices have enjoyed a three-month rally, led by commodities, retailers and financials, capital markets have re-opened, with record issuance of equities and corporate bonds, credit spreads have narrowed and government bond prices have fallen in exactly the way they did at the start of the recovery in 2003.
Yet most economic commentators have remained sceptical or even contemptuous of all this evidence….
I respect Kaletsky a great deal, yet disagree with him in this case. We are in a balance-sheet adjustment, and all such previous periods have come to be called depressions.
We have yet to see the full-on collapse of European banks that lent heavily into eastern Europe — they will. We have yet to see the immense threat the PIGS pose to the Euro; PIGS, as in Portugal, Italy, Greece, and Spain, all of which are already under great pressure and may well withdraw from the Euro. We have yet to see the collapse of US commercial real estate — it is just beginning. We have yet to see the explosion of defaults on Alt-A and other such mortgages, due to reset in 2010-11. We have yet to see the soaring interest rates likely as a consequence of mind-boggling deficits in Washington, more in the first year of Obama’s reign than in the eight years of a notoriously profligate Mr. Bush.
In short: in common with many similar rallies during a depression, the current rally can be ‘rented,’ but I would not advise attempting to ‘own’ the thing.
Use trailing stops and limits. If you’re stopped out of a stock do [i]not[/i] use the proceeds to purchase another equity for at least six months. If comfortable with the process, consider writing covered calls on longstanding blue chips like Proctor & Gamble, but never on small or mid-cap issues. Again … think about [i]renting[/i] this rally in the equities; have a well-considered exit strategy, then sit things out until you can rent another mid-depression rally.
First, we were never headed for a full-out Depression. All the MSM pundits crying aobut a recession two years ago was ‘henny-penny’ politics, that, unfortunately, the politicians bought into and pushed us into where we are now. It was effective, however, the MSM can be credited for getting rid of a Republican majority in Congress, and then putting in an American Idol President.
2nd. Even if what they said was true, we were closer to the recession of the 70’s (re: Jimmy Carter) than we were to the collapse of ’29. Yet the MSM is STILL saying “the worst since the Great Depression”.
Jim … I disagree. Balance-sheet adjustments have come historically to be called depressions, as compared to your garden-variety inventory-adjustment recessions. Once an economy recognises the reality of bad debts the de-leveraging continues until all the bad debt is wrung out of the economy; [i]all[/i] of it. We are not there yet. Not even close.
I’m not saying we’ll see 25% unemployment, for as Kaletsky pointed out in ‘Our Brave New World’ most of the manufacturing jobs — high volatility and low margins — have been shipped overseas. Each depression is different from the others, with one exception — people deal with debt (by default or repayment).
Until all bad debts are cleared away, one way or another, and until no more than two ounces of gold would ‘purchase’ the entire Dow Jones average … we are not done.