The Great Redo
As the credit crisis comes to a close with massive government action, we can now look forward to a better brighter day. Or can we? What exactly are we in for over the next few years? Well, here are a few predictions. I'd say take them to the bank, but I think we are all still a bit concerned about that, so put these under the mattress and we'll check back periodically.
Sir John Templeton said a long time ago that "the words 'this time it's different' are the four most dangerous words in investment." I think there is today a pervailing attitude that things are different this time. That this crisis won't really be as severe as others of its magnitude. That we will be able to make up losses simply by government intervention and a little bit of time. I believe that many people are under the impression that what has transpired is a short term problem- like the correction of 1999-2002- that will be made up in just a few years. Today's 900 plus point farcical rally screams to me run away.
Today's rally was a very disappointing thing to me-although you can see I bought ahead of it in a big way. I had thought that the equity markets had found a nice floor Friday, now I'm not so sure. Actually, I am sure, we are heading lower soon. Today's rally is so out of line that I'm almost ready to go double short again (dang seven day rules). It's almost heart-breaking. The people who bought today were mostly institutions, brokers and traders. But the people buying tomorrow, those will be ma and pa, and they are going to lose again. Folks, don't jump in. It's another set up.
What most people still do not grasp is that we are in the grip of a secular bear market in equity investments that will last another three to five years. Granted there will be great trade opportunities short run and giant opportunities to establish two decade positions soon, but nonetheless, we are in the tenth year of what promises to be a twelve to fifteen year bear market. People are also still largely in the dark about who and what caused all of this havoc, and that those people are still after every dime they can smell.
So, where are we headed? Well first up is the second half of the housing crash. Home prices, depending on locale will lose another 20-40% in real value over the next two years. It's practically mandated given the particulars of the Paulson Plan that home prices will continue to fall relative to wages. This outcome is completely unbelieved by the general population. Everybody I talk to believes we are about at the bottom of the housing market. People are not adjusting for pending inflation and further deterioration of wages- real buying power. So tell me, who is going to buy the inventory of homes. Who? Not me. You?
Who has the money to bail out the economy? Real Wages have been falling precipitously since 2002. Standard of living increases have been an illusion born of bad credit policy from the top down. The health of the nation is in fact very ill and requires not only strong medication, but an extended period of rehab. I suppose we could ask for the $300b in Wall Street bonuses paid from 2002-2007 back, maybe that would help things.
Dow 6000? Probably.
Folks, what is the Great Redo per my title? Ladies and Gentlemen, let me welcome you back to the 1970s. Stagflation is knocking on the door. There is only one fix. Luckily President Obama (yeah, that's a prediction too) is on to it. He will enact a massive infrastructure and alternative energy program which will pull us out of the depths of a recession which will not only be fairly severe, but very long lived. Hopefully we at least get music better than Disco while we float along gasping for financial air.