Juggling Dynamite

The credit mess building was clear and present danger for the past several years. Any advisors or experts who did not see and prepare for its coming should be avoided now.
Most financial experts and media are paid to sell people products, not see risks. That is the bias which makes most financial commentators and “advisors” utterly useless to us. My Irish father has an appropriate saying for this, “you're a nice fella', but you're no use”.
The past 10 years have been one of the most high risk, high leverage periods in human history. Mindless, reckless speculation was widely touted as intelligent investing. The web of participants complicit in this demise, were virtually all inclusive: banks, investment firms, mortgage brokerages, real estate brokers, marketing firms, hedge funds, media and governments.
Human behaviour fulfilled its epic precedent of herd mentality and reckless deployment of easy credit.
In order to now repair the damage done and avoid making these same mistakes again, at least in our own lives, we need to study the evolution of the present mess and recognize the thinking or lack of thought that brought us here.
This documentary done by ABC's (Australian Broadcasting Company) investigation show “Four Corners: Mortgage Meltdown” is an excellent piece. It aired in Australia more than a year ago and a few months later on CBC's the Passionate Eye in Canada. It has interviews with Robert Schiller and Satyajit Das, warning viewers over a year ago that the world economy was going to have a meltdown.
Remember as you watch this, that the segment was done more than a year ago. Notice with interest the JP Morgan Economist (think chief sales guy) interviewed near the end of the piece acknowledging the mounting risks in 2007 and yet downplaying the need to be defensive or take steps to protect your capital.
Anyone who acknowledged the risks but did not recommend practical, defensive steps, like people selling assets and parking in cash like deposits was remiss, wilfully blind, deluded or dumb. In any event they should find a new job. They have no business giving people financial advice. They are just simply no use. Worse than netural they are actually harmful as they use their apparent “knowledge” to talk people into harm's way.

Watching world markets implode this past year has been a strange experience. On the one hand it has been gratifying to finally see proof positive that we were founded in our concern and assessment that market risks were off the charts 2005 to 2007. Turns out, it wasn't just our imagination, things had gone crazy. After smouldering ominously for a couple of years, the structure finally did burst into flames last fall and has been burning up capital ever since. The hard part has been watching so many people stay inside while the fire envelops them.
With the incredible volatility and losses of the past few weeks, a period of at least an interim rally should be in the cards. Market indices have been so deeply pummelled that a rebound of up to 20% would not even reverse the down trend at this point. We recall the three separate 20% rallies during the bad bear of 2000-2002. For those that have remained improperly structured and over-exposed to equities throughout this bear market to date, strong clearing rallies would present another opportunity to downsize their risk.
Meanwhile we are watching carefully for a final bottom or at least a tradable bottom should markets rebound and rally for more than a few weeks. Belief and then panic have surged through the world the past several days. The pessimism has gone mainstream. Global fear is palpable.
A few things make me doubt though that we have yet found “the” final bottom this cycle. One reason is that despite losses of more than 30%, US markets we are still some 25% above the past cycle low in 2002. In Canada we are still some 38% above the ’02 low. We have always acknowledged that the horror of each cyclical bear within past secular bear markets was that at the end of each business cycle, the stock market came back to re-test its prior cycle low. We know that cyclical bears in secular bear markets tend to last longer and fall deeper than the average bear.
Another point of historic reference, is that total market losses during past recessions have been more of the -45% variety than the -25% to-30% variety we often see in less serious contractions. The tech wreck 2000-2002 triggered a very short recession and yet we still saw total losses of -45% on broad markets. We also have a much more vulnerable global economy now than in 2000, with multi-faceted problems of debt, low savings, imploding credit markets and almost unprecedented carnage in real estate. So it makes some sense to me that total market losses this time could be of the worst-historic-range variety.
Presently still elevated margin rates at brokerage firms are another harbinger of further selling to come. A report this morning confirmed that margin levels are still some 25% above where they are likely to bottom this cycle. The inevitable unravelling of this margin generally creates a self-fulfilling cycle of selling begetting lower prices and further selling. In past bear markets, margin levels have typically declined in lock-step with the stock market. So while margin levels have declined with the market some 25% from this cycle’s peak, a further decline of 25% in margin use, suggests a further potential decline of another 25% for the market from here.
These are all just some of the macro trends we are following to gage this decline.
For now we must wait, watch and measure some more. Our technical work still give us the best overall measure of where things are at.
We are glad to be out of the heat, but sad to see so many people still helplessly waiting inside.

Paul Grignon's 47-minute animated presentation of “Money as Debt” tells in very simple and effective, graphic terms what money is and how it is being created. Thanks to a reader for bringing it to my attention. Presentations that give us an historical perspective on how we got to where we are today are useful.