Today, Australia joins 36 other countries in the bearish stock market club. Since its peak in November 2007, the Australian stock market fell 23.3%. Including today’s hefty fall of more than 7%, all of the gains of 2007 and some of the gains of 2006 were wiped out. Indeed, it is a day of fear and panic in the global stock market.
We look at this unfolding drama with a yawn.
Our long time readers should not be surprised at this development. We have been sounding the alarm from as early as 2006 when this publication begins. Our latest warning was in December last year (see Why some believe a crash is imminent). Also in that same month last year, in Outlook 2008, we had already highlighted such a risk:
Further corrections in the global stock markets We had explained our reasons for this in Marc Faber on why further correction is coming?Part 2. The credit crunch is one of the manifestations of the liquidity contraction in that article.
What should be investors’ next step?
We cannot give specific advice for the answer to this question. Therefore, we will stick to the generalities in order for you to find your own answer:
- The first step is to keep your cool. Nothing can be more detrimental to your wealth than falling into investment irrationality. At the depths of any stock market panic, naked fear reigns, which by definition is not rational. It is this same fear that leads to the dumping of all stocks, both good and bad. It is fear that exaggerates and magnifies bad news and ignore good news.
- What if you have already ‘missed’ the selling boat and is now sitting on a substantial loss? Well, it may be too late now. But look at the big picture. In all down-trends (or up-trends), there are always sub-trends working in the opposite direction of the main trend, whether you are a long-term investor or a short-term day trader. This is true even for the the bleakest of all bear markets, the Great Depression of the 1930s (see Second lesson of ?29 crash?bear rebound). Remember this- all trends eventually stops. It cannot go on forever and ever.
- Of course, it is better to avoid being caught out in the first place. In fact, to be a good investor, you need to be prepared for all kinds of scenarios you can think of. This means coming up with drills to be executed when the situation warrants. But for those who are caught out, we know it is too late now. Therefore, we shall not continue along this line.
What will happen next? We do not have crystal balls to tell us the future. But we do have some pointers for you to think about.
Right now, the majority opinion believes that the US will enter a technical recession soon or is already in one (again, we would like to stress that we are “more concerned about being vaguely right [accurate] on where we are in the business cycle then to be precise on which side of the artificial recession line we are in”- see Example of precisely inaccurate information). There are some who are still not ready to make such a recession pronouncement. Yet, there are a few holdouts that still believe that it is unlikely for the US to enter a technical recession.
But for those in the recession camp, the vast minority majority still do not envisage a severe recession or depression. In fact, the majority within that camp still believe that the US recession will be relatively mild, short, quick, shallow or something to that effect. Hence, the vast majority believes that global economic growth will slow down i.e. still growing, albeit at a slowing pace. This belief makes the Chinese de-coupling theory sound very plausible (see Is Chinese growth ?de-coupled? from the US economy?). Under such a scenario, we can easily imagine the global stock market staging a comeback to a certain extent, though not returning to the same frothy heyday as before.
But what if this majority opinion is wrong?
If the world economy is heading towards a depression (i.e. deflation), then today’s bear market will be a piece of cake. That is, there will be more hell to pay. This is the bad news. The good news is that such a scenario will probably take quite a while to work out, as the wheels of the mighty global economy gradually turns. In that case, if you believe that we are due for a Greater Depression, there may still be time to sell in the coming weeks and months. Of course, if any unexpected Black Swan event occurs, all bets are off.
Now, we would like to add in another complication. Severe deflation is the greatest threat right now (see Are we heading for a deflationary type of recession?). We are sure that Ben Bernanke and George Bush is painfully aware of that. Therefore, there is now political pressure for them to fight deflation. If the US government, in conjunction with the Federal Reserve, decide to fight deflation till the bitter end, till the last drop of blood from their last soldier, then the war is very likely to end with hyperinflation (see Recipe for hyperinflation). As we said before in The crowd understands gold not…, when we have a financial system that makes ‘money’ as elastic as rubber bands, derangement in economic calculation will occur, bringing about widespread confusion. Already, the preceding boom in the US (and Australia, UK and even China) is infused with illusions of wealth through twang money (see Mainstream & politician?s nonsense on asset-driven ?wealth?). In the same way, we will get to see that many people will mistake rising prices as signs of economic ‘cure,’ ‘recovery’ or hope.
Therefore, do not be fooled.
