Mini-Me Market

A clone again, naturally

The situation as it stands in the Financial Markets right now is very much comparable to 2007; the two market environments are certainly kin. Are they cousins?—At least. Are they twins?—No, but the two timeframes and their conditions might be Doctor Evil and Mini-Me. The problem is to figure out which is which. Yes, the great collapse of 2008-9 appears to be the dominant (evil) event here, but that’s not to say that what follows will not, in the end, be more insidious.

The DNA that marks these two timeframes as kin are:

  • Negative Real Interest Rates
  • Rapid increases in commodities prices and stocks
  • Increases in M&A activity

The distinguishing characteristics are:

  • The first event took place in the context of a healthier economy (employment), while the second event exhibits high unemployment and little or no wage growth spending/consumption
  • The first event included robust government spending (not including responses) while the second event will have to contend with contractions in spending at all government levels.
  • The first was about massive increases in leverage, while the second shows some deleveraging (a good thing), though at the cost of consumption

So while it’s hard to say that the second event could compare in terms of force and magnitude with the first, the real question is whether or not we will ultimately be weaker than we were two years ago and whether the indexes will put in new low levels.

The answer won’t be found in current economic statistics or projections; every idiot with access to a data base will try to prove to you that we are in a solid recovery. The answer comes in common sense. We were weakened terribly by over-borrowing against the future and now that the future is here, we somehow expect it to be good (to begin with) and then good enough to make up for the excesses of the past as well.

Upshot: The rising prices will ultimately cause a tipping point as they did in 2006-7 and the lack of government spending and stimulus will cause a slowdown. We will have few, if any, tools left to fix it with, and the indexes will drop at least ten percent from here. That loss in value will trigger a loss of confidence and the following year will be worse: 2012 might turn out to be an ominous year after all…

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Investment Advisor Rep
w [dot] hecht [at] cox [dot] net ()
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