Monday March 14, 2011
One of our themes in this letter is that we are half way through an 18 year cycle of economic uncertainty and zero growth. This parallels 1930-1948 and 1966-1982. But don’t take my word for it, here Harvard Professor of History Niall Ferguson lays it out.
http://www.businessinsider.com/niall-ferguson-obama-carter-2011-3
The indecision on the part of the administration in the Mid East reminds the Professor of Jimmy Carter and his Mid East difficulties. We have used that 1966-82 time frame frequently in this letter as a parallel.
In 1987 so called Portfolio Insurance worked in reverse to drive markets down faster than they would have fallen without insurance. Today we have all manner of ETFs, futures, options, and options on ETFs that will serve the same purpose. ETFs compound speculation on the way up in markets. The manager of the ETF has to buy more of the corresponding asset to link the investment to the underlying contract be it copper or Chile.
Now that ETF assets are over one trillion, this will work the other way round to compound the acceleration on the way down as ‘investors’ sell out. Managers will have to sell shares into an empty market driving the price down even faster.
http://www.marketwatch.com/story/copper-slump-hits-materials-chile-etfs-2011-03-13?link=kiosk
This is already reflected in the charts of Copper and Chile ECH.
Last week we recommended exiting all stock positions if you had not already. The reasons were that the risk reward is fading and there is an increasing chance of another April 2010 Flash Crash. Everyone thinks they can get out in time. But the charts of Japan ishares argue otherwise. What happened in Japan last week is the perfect look ahead at what will be happening across multiple asset classes around the world as investors realize decreased demand and production will lower commodity prices. It does not matter WHAT caused a Flash Crash in Japan, it happened. If one was long Japan, one was hurt. This is our point in recommending all stock positions be exited in our update one weekend ago.
Stock markets are quite oversold short term. The fact that TLT has two lower highs suggests a lack of fear, if the markets were really scared there would be two higher highs. This suggests TLT will fall back on a stock rally. I suspect the Goldman FED machine will leap into action this week, taking TLT lower into a more favorable buy level.
Can you see it all falling into place now? Stock market peaks are often accompanied by natural disasters. The disaster slows the economy and demand. We certainly have that now with the devastation in Japan. Emerging markets, muni-bonds, and now commodities. Most investors of course will write this weakness off to the one time event in Japan. However this is not the case, the bear market is underway.
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