Back in Bear market rally on the works?, we explored the possibility of a stock market rally in the context of a bear market. We wrote,
At such extreme levels, it is very possible that we will see a counter-trend rally soon. But please note two things:
- It does not mean that prices cannot go down further in the short-term. Who knows, perhaps there will be more panic selling in the days to come, thus bringing the technical indicators into even more extreme levels?
More than a month had passed and everyone could see that the panic selling had intensified. It is only since a couple of days ago that there was some kind of bounce. Naturally, many investors are extremely wary of this. Many of them will take this opportunity to sell.
Interestingly, Marc Faber had this to say in this interview:
What you could see in the next three months is a very strong rebound in asset markets, in equities, followed by a selloff in bonds and eventually a sell-off in the dollar.
Why is the reasoning behind Marc Faber’s view?
Firstly, based on statistical probability, the market for stocks, non-government bonds and commodities are at a level that is even more oversold than the infamous 1987 crash. Therefore, based on history’s lessons, a rebound is likely to happen soon. As we mentioned before in Bear market rally on the works?, even during the infamous bear market of the Great Depression, there were many multi-month rebounds before stocks bottomed out in 1932. The only argument against this line of reasoning is the Black Swan argument (see Failure to understand Black Swan leads to fallacious thinking). Who knows, perhaps 2008 will go down in history as the worst ever bear market that is unprecedented in the entire history of human civilisation? In that case, as Marc Faber cautioned,
Statistically a rebound should happen, but if it doesn’t “the air is out” and the world faces an economy “worse than the depression of ’29 to ’32,” he said.
Next, the key to understand why a rebound can happen is that
But “I assure you if you throw enough money at the system, eventually you can reflate, especially in the United States,” Faber added.
What is happening is that despite the gigantic deflation in asset prices all over the world (around US$60 to $100 trillion of ‘value’ had gone up in smoke), governments are trying their hardest to pump liquidity (money and money substitutes) into the financial system and spending their way into budget deficits. Consequently, financial institutions are sitting on a huge pile of cash as they sell their assets and hoard it. The problem with ‘cash’ (the safest ‘cash’ is Treasury bills and government bonds) is that they have practically no return. Therefore, it is only a matter of time before the overwhelming volume of liquidity burst the seams and triggers a rally. As Marc Faber said,
If the market continues its sell-off, there will be more capital injections and more liquidity creation and one day it will trigger a huge rally where people rush out of cash into assets because they will become not concern about deflation but concern about the monetary impact of this liquidity injection on asset prices and so they rush in to hard assets whether it’s land or raw materials, in particular gold.
In such an environment, we will happen to the value investing philosophy? We will talk more about that soon.
In the mean time, what do you think will happen to the global equity market in 3 months time? Vote and express your thoughts here! (Today, we will do something a little different- we will close the comments for this post so that you can vote and comment here instead. You need to register first before you can comment and vote).
P.S. In 3 months time, we will re-visit this vote and see whether you, our dear readers, are right or not. 🙂 We will close the vote in 10 days time, so hurry with your votes.
Tags: bear market, deflation, Great Depression, inflation, liquidity, Marc Faber, rally
