Friday, October 31, 2008

A different ballgame

I'm starting to hear talk in the media that the recession is probably nearing an end. If this was a normal recession I might tend to agree as most recessions only last 9 months to a year. I know this is going to be used as the excuse for why the market is going to rally. I'm pretty sure the rally will have everything to do with relieving oversold conditions and nothing to do with an improving economy.

I also know a great many investors are now positioning for a 70's style stagflation or hyper inflation based on the incredible amounts of paper currency being printed by the central banks of the world. I suspect most of these investors are expecting a return to that kind of investing climate. I was expecting that myself until recently.

I don't think we are moving towards that kind of scenario anymore, at least not for a while. I think what we are seeing unfold is something none of us has ever seen before. A whole different ballgame. Consequently I doubt that very few investors are going to be prepared to survive what's coming much less make money.

I'll start off by saying that I don't think this is a "normal" recession. Definitely not a mild recession like Abbey Joseph Cohen and many in the media want us to believe. No this is something much more dangerous. What we are heading into is a massive purging of all the excess debt built up over many years.

For all practical purposes our economy for the last few years has been built on a foundation of debt instead of real productivity. What does it say to you that 70% of GDP is consumer spending? A good portion of that spending was coming from inflating housing prices or credit cards.

As this debt bubble implodes the powers that be, who also have never seen this before, are taking the exact wrong course of action to try and "fix" the problem. I've got news for them, there is no way to fix this. It certainly can't be fixed by continuing to add more debt. Unfortunately that's exactly what is happening. Every week we get another billion dollar bailout. All of these bailouts are only adding more and more debt that will need to be either repaid or defaulted on. I'm pretty confident the ultimate path for a big part will be default.

So the more the governments of the world try to use the remedy that worked for the last 30 years the bigger the problem actually gets. It's exactly because we did go down the debt expansion road for so many years that we are in the mess we're in.

This is why on average the world experiences a depression every 70 years. The new generation never experienced the ravages of an imploding debt bubble so we take the good times as a sign of never ending happiness. Believe me an expanding debt bubble can be very pleasurable. I can say that quite a few people have been living high on the hog for a long time based purely on nothing more than ever larger debt. Unfortunately I'm afraid that almost no one foresaw the ultimate outcome of this false prosperity.

That outcome isn't going to be pretty and it certainly doesn't lead to a "typical" or even mild recession. What it does lead to are hard times the like of which probably none of us have ever experienced.

So when I hear the talking heads on CNBC calling for a mild recession and the end of the bear market I have serious doubts. Very serious doubts!