Bouncing anyway

The correction Friday through Monday ran just over 5% for both the TSX and the S&P. Today we had a “fugly” US ADP employment survey showing a big 742K decline in March and markets are rallying. But then we knew job losses were bad and will get worse still.
Clearly the primary trend of the stock market is still a bear, but we are presently in the midst of a significant rally which to month end managed to take the main indices up more than 13% from the March 9 low. Other US data this morning: planned lay offs, new home sales and the ISM Manufacturing Index, all timidly came in a little better than feared, with 3 month trends now slightly improving.
There have been a lot of developments in the first 60 days of Obama. Despite great challenges he is undoubtedly inspiring hope. The camel drivers in Giza were chanting “O-b-a-m-a” with a fist pump and a smile when we walked by a couple of weeks ago. Hope can be a powerful thing to lift human sentiment. And it is infectious. Right now hope and despair are wrestling it out every day all around the world.
My guess is that this rally may continue for some time although likely in a sloppy fashion. We could even see 10,000 again on the TSX and 1000 on the S&P before it hits significant resistance. And then… it’s impossible to say at this point. There is a reasonable chance that we have seen the market lows this cycle but that duration of this bear market may have further time to run. There is still a reasonable chance that a future retest may make a fresh low. Caution and vigilance are still key to a responsible approach.
A reader recently sent me a clip of Harry Dent Jr. on BNN March 31. I agree with some of his general comments about the time needed for bubbles to deflate and the reality that bubble prices do not tend to return for many years or decades. As I have said many times, I also agree that investors today have to be concerned about tactical and not passive exposure to equity markets. Buy and hold is a dinosaur idea and we should not be planning to flip housing any time soon. But beyond that I don’t agree with confident or extreme predictions about the future whether they are gloom or boom.
While it is common recently to sight Japan’s deflation as a template for where we are headed, the crucial distinction is clearly immigration policy. While Japan was isolationist, North America has been more open to immigrants throughout. Recent US proposals suggest increasing immigration further to those that can afford to buy a house upon arrival. These new consumers will help to soak up the housing inventory, and help to increase ambitious work ethic in a North American culture that has been too inclined to entitlements over the past few years.
This will be a baby steps recovery. It will take time and real work. But it will be a healthy wake up call. The tiny Island of Malta is one of many examples of this phenomenon. Malta was one of the most bombed countries of the Second World War. It was pummelled to rubble. A German blockade brought the people to the verge of starvation just days before the British navy came to their rescue.
When I was visiting Malta recently, I asked the local people about how the world credit crunch and downturn is affecting them and their economy. They noted that tourism was somewhat slower. But they said Maltese people had generally not been caught up in over-consumption and credit abuse the past few years, so they were not suffering the consequences of deleveraging now. When I asked why, they explained that the older generation in Malta had lived through the utter decimation of their Island in the war. They had lived through the life-altering experience of losing one’s wealth, property and loved ones. They had worked for the past 60 years rebuilding their country brick by brick. They had taught their children the importance of not wasting and not taking more than they need. They own houses, but not mansions and no one has a three car garage. They have no fresh water on the island. They developed the expensive process of desalination and now properly value clean water as the source of their life. They tend to walk and ride bikes, they drive smaller cars. Adversity brought a humility and wisdom to the Maltese people that has served them now for 2 generations.
Some of the solutions to coming problems have yet to be designed. But there is now great effort focused on getting the world back to growth and in the end, we will succeed. That said, those looking for a resumption of reckless consumer spending and bubble-like prices will no doubt be frustrated and disappointed, at least for some time. Dark as many now feel, there is strength in this experience and we will bounce.

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