Juggling Dynamite

Markets rallied strongly yesterday over the news of more horrible job losses. This was a positive sign. Politicians everywhere are depressed, talking about “depressions”. I am reminded of the old adage from Fred Schewd Jr. that when the politicians are all wringing their hands in depression over the recession it is time to start taking your money out of Tbills and start buying equities. “But Danielle the sky is falling. The world is bankrupt. The free world is over.” Maybe. But more likely, not. How long will this “bounce” last? No way to know. Given the price thumping of the past 14 months, a retracement rally of 25-30% from here would just get us back to the 200 day moving average on major indices. 25-30% would be good. On top of the now reasonable probabilities for a retracement bounce, yields here are worth holding. A little reward for our risk is always appreciated.
Are the troubles over? Is the coast clear? No. Realists know that the coast is never clear. All we have are relative probabilities. Relative probabilities are starting to favour some risk taking again. Could markets break down again in 2009? Absolutely, the November 2008 lows are the low water mark we will be watching.
From a reader: “I wonder if you would mind posting your thoughts on how the race by governments to deficit spending might impact yields on interest bearing investments over the next 5 years.”
5 years from now, I think there will be inflation. In the meantime, there is no demand. There are falling prices and falling wage pressures. There is no inflation. The problem with people is they try and dress today for how they guess the weather will be five years from now. Truthfully, it is pretty much impossible to guess that far in advance. That is why we must always focus on what is now and what we can reasonably guess about the near future.
This means autopilot passive, asset allocations are generally a disaster. Even though that is the commonly recommended approach. The conventional wisdom is lazy. We have to think and assess every day. We can't fall asleep at the wheel. Ever.
Its rather like when people start on a new diet or exercise plan, and they ask, “How long do I have to keep this up?” The truth if you want a lifelong benefit? “For the rest of your life!”

Economist Martin Wolfe was warning of the credit crash before it happened. He recently returned from the World Economic Conference in Davos. He talks with Charlie Rose on the state of the world economy, some of the rescue plans underway by governments, and realism about our long, slow recovery back to a new normal. The new normal of the future is back to our grandparents' habits where consumers spend less and save more. But there will be many casualties of the new normal. Lenders, retailers and many other industries and services must adjust to the new normal. Those that have been reliant on over-spending of discretionary income will change course or go bust. We cannot go back to the old ways that blew us up. We not doubt will go back to the old ways eventually but that will be a future generation who will not remember the pain of this time. Our generation is likely to be marked by this experience for a long time. Advance the play guide to 2:26 to start the interview on this clip:

Ms. Park was a guest this morning, February 3 on BNN, The Street with Micheal Kane at 8:30am. You can watch the clip here.