Jim is a friend from high school, fifty years ago. We met again, after not seeing each other for decades, at a September reunion. Our relationship was unchanged, after all that time. We easily slipped into the banter we had honed years ago. It turns out Jim trades, I think heavily. We have struck up a long-distance relationship, he lives in San Diego and I live in coastal North Carolina.
Jim wrote to me over night. After debating if we are ever going to face inflation he wrote:………..”So when do you think the hemorrhaging will stop? It can’t continue at this rate. There won’t be any sellers left. And when the slaughter is done, will the market turn around and rally, or will it stay stagnant for awhile? And if so, how long? I would say this is NOT the stagnant 1930s. There are huge piles of cash out there and growing middle classes in China and India. And globalization ain’t going away. There was no cash on the sidelines in the 30s like there is today. So aren’t we at least due for a short rally? “Brutal” as the market is, the world is not ending.“
I have been suppressing similar emotions (I am itching to buy something, anything) and I have to remind myself that it is all about leverage. Brokerage firms, hedge funds, governments, Special Purpose Vehicles, indeed, almost every pool of money has been leveraged. Forty times was not uncommon. As underlying assets deteriorate and as clients demand payment the levered entities must sell to meet those demands, pressuring share prices. That is still going on. We will know it is over when it is over. And we won’t know the exact time. That is why Jim may be on to something; perhaps this is a good time to put some money to work. Bear market rallies can be fierce, and can sustain themselves for quite a while. As tempting as share prices are now I will wait for a sustained uptrend.
And Mish on inflation: CPI Drops Most On Record, What’s Ahead?
