Thursday, July 3, 2008

Financial bear market

As everyone knows by now I think we are in a secular bear market for paper assets. Look at the chart above. This is the financial sector. It also is now in a secular bear market. I can tell you without a shadow of a doubt that when something like this happens it's not going to get "fixed" quickly. This is going to be a multi year process. I can also tell you that the Fed and government will only prolong the process by trying to band aid over the problems.

The financials are trying to cleanse themselves right now. Unfortunately cleansing is going to require that a lot of banks go bankrupt. The powers that be should just resign themselves to the fact that its going to happen no matter what and get it over with. If they do we will get through this much faster and come out the other side much stronger.

Now do I think they are going to do that? No way in hell. We're going to do the exact same thing Japan did when their banking system imploded. We're going to do everything possible to try to "repair" the problem. We're also going to end up with the same result as Japan. A long drawn out bear market. Only this time its much worse than what Japan had to go through because we've entered a commodity bull market. Trying to repair the problem entails printing money. The ole something for nothing cure. For the next 5-10 years that cure just isn't going to work. We've just witnessed the end result of the initial attempts to fix the banking system. A 200% spike in energy prices and an economy that got pushed over the edge into recession by the energy shock.

Don't underestimate the governments penchant for stupidity though. I can almost guarantee they will continue down this same path like a rat stuck in a maze for years to come yet. The question is whether this just leads to a series of vicious recessions or a hyper inflationary depression.