Monday 19 January 2009
Smart Money Should Wait for Wall Street to Fully Capitulate
As a result, the smart thing to do is stay away from stocks until the ranks of optimists thin significantly, the ranks of pessimists swell appreciably, and above all, much clearer signs of capitulation appear - especially in the US, because it can only be a matter of time before this occurs.
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Smart Money Should Wait for Wall Street to Fully Capitulate
By R SIVANITHY
19 January 2009
It’s actually quite funny when you really think about it - the US’s printing of money to bail out a sinking ship that was inflated by the printing of money that led to a massive debt and property bubble in the first place.
Of course, with millions of jobs on the line, few people would see the humour in the US’s present plight. But neutrals who have observed the goings-on of the past 15 months would surely appreciate the irony of the present, constant plugging of holes in the US with ever-larger cash injections that so far, have seemed to wield little effect.
Optimists - and these ranks would be heavily populated by brokers and investment bankers - might believe that with so much money being flung at the problem (latest estimates are that the US rescue bill is closing in on US$1 trillion) things must improve, maybe even as early as the second half of 2009. If so, then now is the time to buy.
Pessimists would counter that when a bubble economy collapses, it usually enters a long period of stagnation and possibly depression. (We are reminded here of Ronald Reagan’s famous declaration that ‘a recession is when your neighbour loses his job; a depression is when you lose your job’.)
A case in point is Japan, whose property bubble burst in 1990, leading to a stock market crash. Its government eventually cut interest rates to zero (as has the US Federal Reserve now) and expanded its budget deficit sharply (as the US government already has). These actions did manage to avoid an economic collapse but there has been no recovery - Japan has had five recessions in 18 years and the latest looks like the worst. After repeated failed bear rallies, its stock market is still more than 70 per cent down from its all-time high.
A neutral, in the meantime, might say the jury is still out on whether simple money printing and expansion of the budget deficit will work, because a heavily indebted consumer who has no job cannot help to drive the economy out of its mess by spending. As such, scepticism should be the order of the day - until clear signs to the contrary emerge.
Optimists might argue that with so much volatility, it’s best that investors shorten their horizons and if so, the impending inauguration of President Barack Obama in the US on Tuesday, the Singapore government’s impending Budget announcement on Thursday, and Chinese New Year soon after might mean now is a good time to buy because there could be a ‘Chinese New Year rally’.
Pessimists would say that any such rally would be largely through short-covering and would be temporary at best, and that if one does occur, investors should continue to sell into strength since by the government’s own admission, conditions have actually worsened since the start of the year.
A neutral would reply that cash is king and nobody knows where the bottom is. But they would note that all urgings to buy have come from brokers and investment bankers who were painfully wrong last year and should therefore be afforded minimal credibility in the investment advice stakes.
Optimists would reply that 15 months into the bear market may be sufficiently long for the market to fully discount all the bad news, so present prices probably already reflect the worst.
Pessimists would point out that prices are only being kept afloat by the US government’s bailout money and that if these efforts fail, the downside can be massive. US stocks are only at their lowest in 10 years, which does not gel with an economy mired in the worst depression in 70 years.
A neutral would observe that the market has demonstrated huge inefficiencies over the past few years, failing to recognise risks when they were staring everyone in the face and instead believing the now-discredited mantra that ‘this time is different’.
As a result, the smart thing to do is stay away from stocks until the ranks of optimists thin significantly, the ranks of pessimists swell appreciably, and above all, much clearer signs of capitulation appear - especially in the US, because it can only be a matter of time before this occurs.
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