This chart makes it clear that the bubble still has a lot of air left. The 2009 lows were well above those of 2002/3, and now stocks are back into boom-time 2006 valuations, as if the credit collapse and associated declines in earnings and dividends had never happened. This year demonstrates better than any other in modern times that stock market action has very little to do with economic reality.
Graphite here. I remain an ardent deflationist and continue to see strong risks of a continued collapse in asset values in world real estate and equity markets. That said, one key practice in speculation, no matter how strong one’s conviction in a particular trade, is to understand the other side of that trade and how the market could move against your position.
This can sometimes present a challenge for deflationists because so much of the opposing camp is composed of die-hard Panglossian buy-and-holders betting on a V-shaped recovery, rounded out with a few gold bugs who present little or no argument other than that the Bernanke Fed will embark on a suicidal campaign of massive money printing.
Although Marc Faber has issued calls for hyperinflation before, the discussion in the video below represents a much more measured discussion of a serious alternative to the near-term bearish case for stocks and the economy:
“My sense is that — here I’m talking about the economy — that the economy, near term, can recover, and maybe the recovery will be somewhat lengthier than expected a crack-up boom, because the first stimulus package in the U.S. probably will be followed by a second one, and money printing will lead to even more money printing next year. So it can last, say, 12 to 18 months, and then we will get another set of problems ….”
Faber goes on to recommend buying financial stocks, on the expectation that the banks will continue to get free money from the government and parlay that largess into significant profits. His long-term view remains as bearish as ever, but he presents an important alternative perspective on how soon the economic calamity will arrive and what form it will take.
That said, I think Faber is wrong that the market will continue to enthusiastically take up the Fed’s offers of liquidity and use them to fuel speculation for very much longer. No one is laboring under the delusion that the garbage stocks like AIG, FNM, and FRE which have led this last leg upward are worth anything more than zero — and while from a contrarian perspective that could indicate that there is room remaining for investors to develop an even more desperate belief in a new bull market, I think it is much more likely a manifestation of the new trend toward skepticism which will come to permeate the entire market as the bear runs its course.
Whatever your perspective, it’s always fun to see Marc Faber’s characteristic chuckle at the suggestion that our wise overseers will competently steer us through the crisis.
Philadelphia Gold and SIlver Index (XAU), back at ’06-’08 commodities bubble levels:
Argentina’s Merval Index:
Pakistan’s Karachi 100 (look at the flat line where the govt suspended trading last fall — worked wonders, didn’t it? This market is up a lot less than most others — maybe people don’t trust it as much anymore, since they can’t be sure they’ll be able to sell when they want):
Bet you didn’t know Mongolia had a stock market. Looks like a one hit wonder:
Austrian economics has the answers to all your boom-bust questions (and can make you money — try that with Keynesianism or whatever they are calling today’s brand of socialist economics).
I am just going to quote the incomparable Murray Rothbard here (source):
“We can only sum up the correct answer to the problem of the business cycle. We have already seen a hint of the solution: that inflation and the inflationary boom are caused by bank credit expansion generated by governments. In fact, government’s central banking system provides the key causal element for all business cycles, a cause exogenous to the market economy. Continuing government intervention sets in motion business cycles by generating inflationary booms. Because these booms distort the signals of the market place in interest rates and in relative prices they bring about grave distortions of production and prices, which must be corrected by recessions and depressions.
In short, government intervention cripples the market economy, and recession or depression is the painful but necessary adjustment by which the market reasserts itself, and liquidates the distortions committed by the government’s inflationary boom. After each depression, the government generates inflation once again, because it is the government’s natural tendency to inflate. Why? Quite simply, whoever is granted a monopoly of printing money (e.g., the Fed, the Bank of England) will use that monopoly and print – to finance government deficits, or to subsidize favored economic groups. Power will tend to be used, and the power to create money out of thin air is no exception to the rule.
And so we see – and this is the great insight of the “Austrian” theory of the trade cycle – that micro and macro economics are in harmony after all. The free market does tend to adjust harmoniously without boom and bust, without incurring clusters of severe business losses. It is government intervention in the market that creates the business cycle, and unfortunately makes the corrective adjustment of recessions necessary. The cause of the boom-bust cycle is not some mystical periodic Force to which man must bend his will; the fault, dear Brutus, is not in our stars but in ourselves, that we are underlings.”
Murray was a fearless enemy of the state and prolific writer. You can find tons of good stuff from him here on LewRockwell.com.