The Great Comparison
By Paul Lamont
June 30, 2009
"Cash was, is, and always will be - king. Always have cash in reserve. Cash is the ammunition in your gun. My biggest mistake was not in following this rule more often. Time is not money because there may be times when your money should be inactive... Often money that is just sitting can be later moved into the right situation and make a fortune. Patience-Patience-Patience. Patience was the key to success - Don't be in a hurry." - Jesse Livermore. How To Trade In Stocks, 1940.
The Great Comparison
Two years ago, we began to note similarities to the beginnings of the Great Depression. Our thesis was built on financial history and circumstantial evidence. But now we can make a more substantial comparison with economic data. As you can see below, (from VOXEU.org) the world economy is either performing closely to or worse than the 1930s. For instance, the contraction in world industrial output is very similar.
And world stock markets are deflating faster.
Progress Thus Far
All assets go down in price when
deflationary fear takes hold. This obviously occurred in 2008. But right now we
are currently in the reflationary bounce which we forecast at the end of February. As
we stated: "We expect an intense selling Panic in March, much like
September’s action. The sell-off should end with the failure of a
significant institution. This temporary bottom will support a sharp bounce into
the fall." While we didn't have the institutional failure at the bottom
(we aren't perfect), we did get the sharp bounce. It could continue into the
Using the 1929-1933 Dow Jones Industrial Average chart below, we have indicated our position in this bear market rally.
It is hard to ignore the next major move on that chart-which is down in a big way. After this rally peaks, we expect a replay of the credit crisis. Except this time it will be permanent. Option Arm mortgage recasts are arriving on schedule. We recommend Dr. Housing Bubble’s explanation of these truly insane loans. They are as hopeful as subprime mortgages. Our Credit Collapse chart, which assisted us in warning of the credit crisis, is updated below.
In addition to Option Arms, banks will also need to refinance over $1Trillion in commercial mortgages (see chart below). Banks don’t have the capital or the stomach for more losses. Without more loans, defaults occur, prices fall and the downward spiral is reinforced.
Planning for Drought
Farmers have recently made it through an extended bear market. Their experience may be useful to stock market investors who are just entering one:
"One thing we can count in agriculture is the unpredictability of the weather. Although we use weather trends for our planning, abnormal weather happens more often than average weather, despite the fact that most management plans hinge on the average year...Usually, when farmers are caught without a drought plan, they fail to destock early, which leads to financial ruin as their starved cattle become worthless in the forced destocking frenzy that sends market values falling through the basement...Your CGD (Ed Note: cow grazing day) calculations will warn you of feed shortages that could lead to a drought long before the easily recognizable signs of a drought become apparent, allowing you to sell before the market rush starts, before you start rationing your animals, and before they begin losing weight. You want a premium for them, and you will get it only by offering fat animals for sale before the emaciated animals begin flooding the market. By selling your animals early, you'll have money in the bank as a financial drought reserve allowing you to restock your herd at the end of the drought while prices are still low. Destocking early is the key to saving your land from overgrazing and abuse so it can recover quickly after the drought and so your financial situation can remain as stable as possible." - Julius Ruechel. Grass-Fed Cattle, 2006.
Cow grazing day calculations can be figured in the stock market as well. Bullish investments are fed by fear. Bearish positions eat hope. When these two run out of their feed, it is time to destock.
Over the next couple of weeks, we expect a return of fear. This correction will refuel the current bear market rally. We look forward to selling near the next bear market rally peak. Contact us if you would like us to update you during this critical juncture.
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***No graph, chart, formula or other device offered can in and of itself be used to make trading decisions. This newsletter should not be construed as personal investment advice. It is for informational purposes only.
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