The Shit Is Damn Near The Fan

We’ve been hearing all about the possibility of a Double Dip Recession and all the rhetoric about what governments are doing to navigate their way to a soft landing.

Now how about the truth … how about acknowledging that most countries are already in Recession and that we’re only a few steps away from Depression. After all, back in 2008, most governments delayed their official acknowledgement of a Recession until 6 months after the fact and America delayed theirs by a whole year.

We’re, and I mean the whole global community, already in a global recession and several countries are on the verge of a Depression. This is the beginning of one of the worst financial failures in post-war history.

Consider the facts – according to Wikipedia …

In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way. Production, as measured by gross domestic product (GDP), employment, investment spending, capacity utilization, household incomes, business profits, and inflation all fall, while bankruptcies and the unemployment rate rise.

Recessions generally occur when there is a widespread drop in spending, often following an adverse supply shock or the bursting of an economic bubble. Governments usually respond to recessions by adopting expansionary macroeconomic policies, such as increasing money supply, increasing government spending and decreasing taxation.

Now there is no doubt that over the last four years dating back to August 2007, the situation described above has not been out of place. Unemployment has stayed high and intolerable all over the world especially in the developed countries and key developing economies (emerging markets). We did have a bubble of sorts and some countries are still living in those bubbles as we speak – an Asset Bubble – and they’ve been popping and deflating over the last year as expected.

Money supply is out of control with the US clearly out of options and the European economy clearly out of cash as both sides of the pond increase spending and keep taxation down. Macroeconomic indicators have been supportive of an ongoing recession for the longest time – we’ve just been distracted by no-so-bad data that we think its all good. Now that GDPs have been contracting all over the world, we cannot continue living in denial that all is well and that this correction is short-lived and irrational.

Consider another fact – according to Wikipedia …

In economics, a depression is a sustained, long-term downturn in economic activity in one or more economies. It is a more severe downturn than a recession, which is seen by some economists as part of the modern business cycle.

Considered, by some economists, a rare and extreme form of recession, a depression is characterized by its length, by abnormally large increases in unemployment, falls in the availability of credit— often due to some kind of banking or financial crisis, shrinking output—as buyers dry up and suppliers cut back on production, and investment, large number of bankruptcies—including sovereign debt defaults, significantly reduced amounts of trade and commerce—especially international, as well as highly volatile relative currency value fluctuations—most often due to devaluations. Price deflation, financial crises and bank failures are also common elements of a depression that are not normally a part of a recession.

Read that again and tell me we’re not in a Depression. Remember that we don’t have to be in a Recession to get promoted to a Depression.

Rather than categorically classify the current situation as a Depression too soon, I would rather call it a period of Economic Failure. I mentioned this in the previous posting when I illustrated the 4-year Rececession Cycle, the Market’s 20-year Cycle and the 40-year Economic Failure Cycle. And if you consider that the market has been generally sideways since 2000, there is little to deny that we are right in the middle of an economic failure with the last period of failure being the 1970s, 40 years ago.

The Dow Jones Industrial Average over the last 11 years.

Now here’s something else to consider. Take a look at the two previous periods of failure and take note of the yellow highlighted period …

Dow 1905 to 1925

Dow 1965 to 1985

Those major dips happened right in the middle of the 20-year consolidation. Now take a look at this …

If you consider that the current consolidation started in 1999, then that would put the Sub-Prime crash right in the middle of this 20-year cycle. Or did the consolidation start in 2002 with the Dot.com debacle? Depending on how you look at it, we’re either done with the “big one” or the “big one” is due soon. Either way, we’re going to be volatile and sideways for a long time to come. And given the state of affairs around the world, I reckon this sideways and volatile mess is justified.

Here are some of the scary facts from Europe after Monday 5 September 2011;

With the US government crucifying 17 of the major banks this week, this could be the catalyst for a financial meltdown. The bond trade seems to be supporting this theory as is the rise of gold to a new record high today at $1,923.70. Yields across the US treasuries have all fallen below par and the yield curve is quickly flattening to the downside – something that has not happened in history.

Based on my Rotation Models, we should be “officially” in Recession by October or November this year and the market will become an officially bearish one by the end of this month. I made a similar call in August 2007 and no one took me seriously. I am making that call again now. The only difference is that this time, it is more obvious that it will inevitably happen.

So now the question begs – is anyone taking my call for a Depression seriously?

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Comments

Thanks! Very insightful.

According to many analysts, they said the stock valuation is very very very ‘cheap’, what is your opinion on this?
How ‘dynamic’ can the ‘cheap valuation’ go?
Meaning, the ‘cheapness’ can be adjusted based on the economic outlook, and later become ‘not so cheap’ as it ‘was’ forecast.

Why don’t you ask those analysts? I am not an investor like them so my version of cheap is not the same thing. In any case, those are the very analysts that got all their calls wrong leading into the last four months. Now they’re calling Buys on Agriculture and Defense. Of course, they would – they have a vested interested!

Hi alvin,

I read your books n find it to be very useful. What is the best solution now? Do u see a massive bear rally coming?

And when do u for see the market to do a massive slide again?

Cheers

Dear KS,

As you can imagine, I get a lot of queries like yours but sadly, I am no magician, soothsayer or fortune teller.

As your question suggests, “do u see …” – I wish I could so that I would know what to do so that I could make a lot of money from such a gift. But alas, I am just a man, an ordinary person like you with no gift of foresight.

All I do is analyze the current situation so that I can make a bet on the future and in that future, I will check to see if that bet has paid off. For now, I am betting, as my articles have suggested, that things will get worse before they get better.

Rather than ask for such opinions, why don’t you learn how to make such analyses for yourself? Depending on others’ opinions has never been a good idea in the history of bad ideas. Do it yourself so that you have control over your own situation. If not, don’t do anything at all.

Hi Conrad,

Thanks for putting most things into perspective.

Understood the big picture you’re illustrating. The world is in a great mess!

The only perceived ’safe’ bet at this juncture would be gold and silver. However, looking back into 2008, at max. market fear, gold and silver were hit real badly whereas USD skyrocketed. I owned gold then. Not significant. But have held it since. However, the recent craze has made me decided to switch half to silver instead. Somehow, it reminded me of how crude oil was perceived to hit $200.

What are your views on gold and silver at this volatile market? Am I doing the right thing at this juncture?

Another strong reason for me to decide to switch is also due to the historical low of USD. I’ve spoken to a few investors and bankers, everyone was asking me to abandon the dollar while I was looking to buy. All were 100% bearish on the once perceived, “safest” currency.

I’ve been watching dollar index since just to see how I’ve passed on my feel. Recently, the USD is indeed looking interesting based on my limited TA knowledge.

However, this move at this time puzzled me. Why now? During a possible QE3?

If there’s really a confirmed trend reversal of USD, how would it impact the World at this already messy situation and the asset classes? Would this be one of the signs for your conviction of a depression?

Do you mind to enlighten my ignorance of macroeconomics please?

Deeply appreciated!

ling

Firstly, you need to know this (click here) so that you know where I am coming from when I say I don’t know about gold and silver.

As far the the USD goes, I found it tempting too but now is not the time if you don’t have holding power. Bernanke already said that he wouldn’t be raising rates will 2013. That will confirm that the dollar stays low. It has nothing to do with technicals. You really need to wrap your head around macroeconomics or get someone to teach you this stuff. Its not a subject that can be taught over a blog chat. And I swear once you know it, trading and investing will take on a brand new light.

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