The Invisible Hourglass
By Paul Lamont
May 1, 2009
"...if a prince bases himself entirely on Fortune, he will fall when she varies. I also believe that a ruler will be successful who adapts his mode of procedure to the quality of the times, and likewise that he will be unsuccessful if the times are out of accord with his procedure...since Fortune is variable and men are set in their ways, they are successful when they are in harmony with Fortune and unsuccessful when they disagree with her." - Niccolò Machiavelli
Emotion is the timepiece of Fortune. Like sand in an hourglass, fear slowly and almost imperceptibly falls away in a rising market. As apprehension dissipates, the glass of hope begins to fill. Eventually no anxiety exists, the market is hopeful and prices peak. The invisible hourglass turns upside-down. And gravity performs its solemn duty. Desire sinks into despair and prices cascade lower. When the last grain of hope has finally dropped, the hourglass inverts again. Fearful markets climb upwards once more.
Market timers must be able to discern market emotion, a very difficult task with an invisible hourglass of undetermined size. But it is what we must do, if we are to be in harmony with Fortune.
Last month, we described The Suitcase Farmer who profited after the Dust Bowl, a "drought of epic proportions." It would have taken a lot of courage to continue farming during the mess depicted below. Instead, many just gave up and moved to California.
Dust storm approaching Stratford, Texas. Dust Bowl Surveying in Texas. 1935 Wikimedia Commons.
No one said it was going to be easy. As we stated in September of last year in Crash Opportunities, Part One, "we believe livestock could rise during the next few years." We even included a picture of our hogs in the Report. Interestingly enough, during the Avian Flu outbreak of 2003-2004 chicken prices roughly doubled.
"When the investment community is fascinated by a major investment theme outstanding opportunities arise elsewhere." - Dr. Marc Faber, Tomorrow's Gold, 2002.
The Birth of A Taiwan Bull?
In Crash Opportunities, Part Two, we described another undervalued market: Taiwan. Taiwan shares have been in a bear market for roughly two decades. But since its November low, Taiwan is up roughly 50%. So was that the bottom? A two decade long sandglass has been accurate in the equity markets before. The Dow Jones Industrial Average when adjusted for inflation has recently swung in 4 roughly twenty year durations (1929-1948, 1948-1966, 1966-1982, 1982-2000). It will also be interesting if the Nikkei (which topped out in 1990) bottoms in 2010. We will see.
"One need not be a devotee of astrology or sunspot theories to recognize that certain rhythms seem to exist in our history. Many different types of business cycles have been traced over the years. During the nineteenth century, for example, major economic slumps occurred with disturbing regularity: 1819, 1837, 1857, 1873, 1893. Another economic collapse was beginning 'on schedule' in 1914, when the outbreak of war in Europe revived the American economy. Less universally accepted, but hard to deny when our history is viewed in its entirety, are periodic swings of mood, opinion and values among the American people."- Robert S. McElvaine. The Great Depression, 1984.
Wealth preservation should be the goal of every
successful investor. By retiring from trends early,
being patient and seeking investments that have gone through long periods of
malaise, investors can significantly limit risk. When the cycle is ready to turn, the
news will follow.
"...throughout history, the center of the world has shifted to where the capital is, where the assets are." - Jim Rogers
Left with Debts with Only the
Government to Save U.S.
The widespread hope that the U.S. government has fixed the economy should blossom as the temporary bounce continues. But as mentioned in February, banks are lending less. And according to the Christian Science Monitor (see below), the government is even a day late and a dollar short on its bailout.
But aren't these big banks so politically connected that the politicians won't let them fail?
"On Thursday 18 September 1873, Jay Cooke was entertaining President Grant at Ogontz, his lavish mansion in Pennsylvania. That afternoon at half past two, it was announced on the New York Stock Exchange that Jay Cooke & Co. had failed (unable to sell its railroad bonds, the bank had lost the confidence of its creditors). The initial reaction to the collapse of America's leading bank was disbelief: in Pittsburgh a paper boy was arrested for shouting out the news. Incredulity soon gave way to panic, as the stock market collapsed and daily call rates rose to 5 percent. The next day, crowds thronged the financial district to witness the unraveling of the speculative drama that had entranced the nation for the past decade and a half."- Devil Take the Hindmost. Edward Chancellor, 1999.
And while we may continue upwards ‘more rapidly than normal’, the ‘most dramatic landscape’ could occur afterward:
"Although the pace of the October decline was unprecedented, the scale was not exceptional. While the decline in prices had been unusually rapid, there was soon evidence the recovery might also occur more quickly than usual. By 17 April 1930, the market had recovered 52% of the decline and was back where it was at the beginning of 1929. The market was now just 23% below its high of 3 September 1929. The magnitude of the decline had not been abnormal and the rebound had been more rapid than normal. While the suddenness of the decline in prices in October 1929 plays some role in the historical legacy of 'The Great Crash,' it is events after April 1930 that are primarily responsible for this period of financial-market history looming so large in the psyche of investors today. Investors unfortunate enough to believe the market recovery was on firm footing and who bought equities on 17 April 1930 saw the DJIA dive again, losing 86% of its value before it bottomed in July 1932. Thus the most dramatic landscape on the road to July 1932 came after April 1930. If there is one key difference between other 20th Century bear markets and what happened in 1929-32, it is the collapse of the banking system."- Russell Napier. Anatomy of A Bear, 2005.
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