Where are we headed?

Yesterday was another 90% down volume day. That makes twelve 90% down days so far. This is just an incredible amount of selling. I continue to believe that this is trying to tell us one thing and one thing only. The next depression is heading our way.

But things aren’t that bad you say. Sure you probably can’t sell your house but we don’t have 20% unemployment and we don’t have bread lines…yet.

However, the extreme left translation of the current 4 year cycle is suggesting that we will. We simply cannot create the largest credit bubble the world has ever seen and expect to escape unscathed. (I tend to believe we can’t escape without a train wreck). Depressions aren’t created overnight. I suspect by this time next year we will have at least 10-15% unemployment.

Here’s the thing though. I hear some talk about a depression in the media and from the average American but at this point I don’t think anyone really believes it can happen. I get the sense that everyone thinks we learned our lesson in the 30’s and we will never make those kinds of mistakes again.

Here’s the problem as I see it. It appears that everyone thinks the depression was caused by the Fed’s actions after the credit bubble started to deflate. Namely reducing the money supply, protectionism and raising taxes. However, in my opinion the actions leading up to the depression are what caused the hard times and no action by the Fed after the fact was going to stop or help the situation. Maybe we won’t make those mistakes this time around, although I think the government is probably going to resort to protectionism and higher taxes. I get the feeling the powers that be, namely Bernanke, believe that as long as he expands money supply we won’t go down the deflationary path that we did in the 30’s.

What I don’t see is any one acknowledging that we already have gone down the same path that created the depression in the first place. Namely, we created another huge credit bubble. That’s what caused the depression in the first place and we obviously weren’t smart enough to avoid that mistake all over again. Instead of Bernanke studying the 30’s maybe he should of studied the 20’s. If Greenspan and Bernanke had paid more attention to what caused the Great Depression in the first place - instead of the measures used to try and fix the problem - we might not be in this mess.

Actually I suspect we would anyway. Why you ask? Because human nature never changes. I can tell you that pretty much every human being on the planet who sees how well two aspirins work is going to automatically assume that four aspirins will work twice as well. That my friends is the exact mentality that got us into this fiasco. Greenspan saw how well printing and cutting rates worked in '87 and decided that since it worked then it would also work in 90, 94, 98 and 2000. Then Bernanke came along and when things started to crumble in 06 he decided that if 2 aspirin had worked in the past then 100 aspirin should work marvelously now. Unfortunately 100 aspirin will only kill the patient just like the Fed’s credit bubble has now killed the global financial system with the global economy following close behind.

Despite all that I think, until conditions get truly desperate people will continue to delude themselves that this is just a recession like many others. As such we should be approaching the end soon, right? Well if this is a run of the mill recession then I would agree and expect the market to bottom soon and start discounting better times ahead. However, as I’ve pointed out many times in the past, the extreme left translation of the current 4 year cycle is saying that this is anything but a run of the mill recession. We’ve never seen a 4 year cycle roll over this fast. Not even in the 30’s. What the market is trying to tell us, in my opinion, is that we are now facing Kondratieff winter .

Historically, Kondratieff winter (a depression) happens about once every 70 years. It takes about that long for the market to forget what caused the last bust. Of course what caused it was rampant credit growth. As credit starts to expand exponentially it eventually leads to a deflationary bust as the market cleanses debt from the system through massive defaults and bankruptcies.

That my friends, is exactly what we are experiencing right now. So it doesn’t matter what tactics Bernanke, Paulson, Obama or anyone else use, we’ve already made the mistakes that allowed the credit bubble to form. Once that happened there was, and is, nothing that’s going to fix or stop the collapse of that bubble.

Back to my earlier thought that people are probably expecting the recession to end soon. I think we will need to see that kind of mentality in order for any rally to take hold. Granted it will start simply because selling pressure will eventually exhaust itself, it may already have. Once the rally gets started in earnest, investors will convince themselves that the market is discounting the end of the recession....more in last nights update.