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  • Beware Relief Rallies - Eric Janszen

    Beware Relief Rallies

    We’re not out of the woods. In fact, we’re flying into them.

    If the world economy is a passenger jet, its engines are economic surplus, its fuel human creativity, energy, and credit, and among its passengers investors in global stock, bond, and commodity markets.

    Earlier this year, the credit fuel was mostly cut off and the engines shut down. The sound that followed is the one you never want to hear when you are an airplane passenger–of rushing wind and nothing more. The passengers noticed and sent markets down in a wave of panic selling.

    The response is similar on an actual aircraft under those circumstances. I know because it happened to me on a flight during a business trip to Asia. The engines shut down briefly mid-flight, we were never told why, and then restarted.

    I'll try to convey the sensation. There you are on an aircraft packed with strangers 20,000 feet over the Yamanashi forest in southern Japan when silence replaces the drone of jet engines. At first no one noticed. Then one by one the passengers looked at each other and began to ask, What is that? What is going on? There is no engine noise. Why aren’t the engines running?

    The aircraft slowed and began to descend. The passengers looked out the windows and down at the lush woods below. We extrapolated our collective prospects. In an instant your body heats up, as if overtaken by fever, a flight response to danger except there is nowhere to go. As panic began to reverberate around the cabin, the engines restarted. Just as quickly as the panic set in it vanished. My fellow passengers and I returned to reading books, hammering out spreadsheets and presentations on laptops, or whatever we were doing before the terrifying event occurred.

    The desire for a return to normalcy is a powerful human drive.

    The rally we are seeing in the markets now is largely driven by that impulse, the overwhelming desire for normalcy, the return of the familiar roar of engines from a surge of cheap credit. The response was elicited by the election of a new president who promises change. Perhaps, the passengers think, as part of the promised change this president can get the cheap credit fuel flowing and the engines running again. He has promised massive injections of government credit fuel, and that is certainly the legacy of the political party he represents. What can a Democratic president combined with a Democratic Congress possibly mean but the passing of orders for trillions of gallons of credit fuel from the latter to the former with little chance of veto? All credit fuel orders shall be filled and injected in-flight.

    This longing for normalcy is causing passengers to err in their assessment of medium term future conditions as the forest floor approaches. An economic aircraft so gravely impaired and sinking through thousands of feet of clouds and air toward the woods cannot respond so quickly to promises or even the fact of fiscal stimulus. The engines are still not providing enough thrust to slow the decent. Now the wings are clipping the tops of the trees.
    GM's October sales plunged 45%, Ford Motor Co. (F) recorded a 30% drop and Toyota Motor Corp. (TM) reported a 23% decline.
    US Oct Auto Sales Slump; GM Sales Down 45%, CNN, October 2008

    Hammered by an economy in which consumer spending is coming to a screeching halt, credit is hard to get and competition is heightening, Circuit City said Monday that it is closing 155 stores (33% nationally), 10 of them in the Bay Area. The closures could put as many as 7,300 employees out of work in what is becoming one of the worst of times.
    Circuit City closing 155 stores, SFGate, October 2008

    The [Baltic Dry Goods index] has dropped 89 percent this year, driving down the combined market capitalization of the 12- company Bloomberg Dry Ships Index, led by Athens-based Diana Shipping Inc., to $5.5 billion from $32 billion a year ago.
    Baltic Dry Index Drops Below 1,000 for First Time in Six Years, Bloomberg, October 2008

    The official Xinhua News Agency reported this week that 3,631 toy exporters -- 52.7 percent of the industry's enterprises -- went out of business in 2008.
    Factory closure in China a sign of global woes, CNN, October 2008

    Japan's economy has joined much of the developed world in a recession, economists polled by Reuters say, with GDP seen contracting for a second consecutive quarter as the financial crisis hits exports and capital investment.
    The Economic Times, October 2008

    The global financial crisis is pushing the whole European Union into recession, official forecasts said on Monday, as South Korea unveiled its own 8.5 billion dollar stimulus package against the turmoil.
    AFP, October 2008
    Once the din of cheers over the hopes for a quick injection of credit subsides, the passengers will turn their focus to the banging and crunching of the economy trimming the tree tops.

    We’re not out of the woods yet. In fact, we’re flying into them. We see this understandable relief rally, driven by a mass craving for normalcy, as an opportunity to build cash and to calibrate for a new, post cheap credit world. If “normal” means a steady flow of credit fuel from foreign creditors and financially engineered credit products, the economy and markets will never be “normal” again. As for the government credit injections, they are coming but with the unintended consequences, a topic for another day.

    iTulip Select: The Investment Thesis for the Next Cycle™
    __________________________________________________

    To receive the iTulip Newsletter or iTulip Alerts, Join our FREE Email Mailing List

    Copyright © iTulip, Inc. 1998 - 2007 All Rights Reserved

    All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Nothing appearing on this website should be considered a recommendation to buy or to sell any security or related financial instrument. iTulip, Inc. is not liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. Full Disclaimer
    Last edited by FRED; 11-05-08, 12:59 PM.

  • #2
    Re: Beware Relief Rallies

    Right on schedule, the first jumbo air refueling tanker has been sighted.

    "This could turn out to be the most direct, long-lasting stimulus plan ever concocted. When you give all those who are over-leveraged and are defaulting on their mortgage no monthly payment for three-years, what will they do with the money? Right - they will go spend every penny pumping the sectors of the economy that were so hot during the housing bubble years. They may also use some to pay down other debt, which of course helps the banks. The government is the strongest creditor out there so the banks are sure to get their payment every month. Hey, maybe the government can pay all three years up front so the banks can book it all at once and spike their earnings report."

    http://mrmortgage.ml-implode.com/200...dy-to-default/

    Comment


    • #3
      Re: Beware Relief Rallies

      It strikes me that the discussion is so focused on stocks. I am interested in protecting and creating wealth, but I am more concerned with keeping my lively hood and business going. No investment has performed better than putting my capital into my business. So stocks are a concern but macroeconomics are paramount.

      My desire for normalcy is enormous.

      I hope the worst predictions of these forums are at least a little wrong. I have to believe that even though mistakes have been made and markets over reach, human beings have an ability to adapt and change course.

      I'll keep my "go bag" packed just in case you are right... again.

      Comment


      • #4
        Re: Beware Relief Rallies

        Originally posted by goadam1 View Post
        It strikes me that the discussion is so focused on stocks. I am interested in protecting and creating wealth, but I am more concerned with keeping my lively hood and business going. No investment has performed better than putting my capital into my business. So stocks are a concern but macroeconomics are paramount.

        My desire for normalcy is enormous.

        I hope the worst predictions of these forums are at least a little wrong. I have to believe that even though mistakes have been made and markets over reach, human beings have an ability to adapt and change course.

        I'll keep my "go bag" packed just in case you are right... again.
        the message for entrepreneurs i hear is... survive.

        cut expenses & assume rising costs or rising faster than unit sales prices.

        assume less access to credit.

        the conundrum is 'cash is king' but also 'cash depreciates'

        i'd like a simple 'how to survive' manual for small businesses.

        Comment


        • #5
          Re: Beware Relief Rallies

          Interesting. Love the analogy though I am biased as an aero engineer.

          Incidentally, here are Don Coxe's recently published requirements for the end of this down cycle:

          "All-Clear for Bulls: Requirements

          We have been discussing the special characteristics of this Mama Bear market with clients and have been outlining the conditions for the next bull market.

          A Mama Bear market is a plunge approximating 50%, (or more, as in 1929), and this one qualifies because of +40% drops across the world.

          To confirm that this Mama has done her worst, the signs will be:

          1. A TED Spread reading of 1ess than 150 on a sustained basis.
          2. A VIX reading of less than 30 on a sustained basis.
          3. A pullback in the Dollar Index (DXY) to 80 or less.
          4. A pullback in the yen to below par.
          5. A contained rally in gold (not a leap to $1,200 or some such number).
          6. A BKX reading above 50—and preferably above 60."
          --ST (aka steveaustin2006)

          Comment


          • #6
            Re: Beware Relief Rallies

            Here is my small business rule: take in more money than you put out. I only borrow for equipment that has a lease length that matches the depreciation. I only buy when I absolutely have to. But people are expensive. I assume that I will have a period in the next year when I am paying minimum payroll and rent. I am not buying or borrowing.

            Comment


            • #7
              Re: Beware Relief Rallies

              thanks for this.
              raising cash is great, but if nominal prices of financial assets resume their climb, because not only of a want of return to normalcy, but also due to global gov intervention, what's to make it resume the downtrend, except of course another panic (and what's to cause this)? After all, pumping $3T into the markets and promising to do more like lend to any large struggling business, take gov equity stakes directly in the finance sector, backstop everything in sight - virtually anything to support financial markets can make folks feel optimistic. As long as confidence remains (i.e., that the gov will make everyone whole - however absurd and impossible that may be), what will cause the panic into the abyss?

              what I'm struggling with is that it seems that this time it does seem to be "different this time" as our "free" markets evolve into some weird gov funded and controlled casino where the message is either buy drinks or bet, just don't save. Why isn't it reasonable to expect, in a year, the DJIA to be at 15k, oil at $120, gold at $1000 and the USD index at 70?

              Comment


              • #8
                Re: Beware Relief Rallies

                Totally agree with EJ's comment. On the emotion sine wave of fear and greed (everyone's seen it by now) we are barely into fear! The feelings of desperation, panic, capitulation, and despondency are a long way away.

                Many of the people who chided me for selling real estate and buying gold are now bullish on real estate again!!! I can't believe it... one of the largest panics in US history just took place and they got BULLISH. My neighbors just bought a resort property with gas station and food mart on 7 acres up in the mountains thinking we are out of the woods! Nope... they're in the woods again in more ways than one:eek::eek::eek:

                Comment


                • #9
                  Re: Beware Relief Rallies

                  I also agree with EJ. This time it's different because for a number of reasons:
                  1. baby boomers demographics (many people forget it was also Japan's problem in 1990s)
                  2. financial WMDs lurking everywhere in economy
                  3. the secular bear did not reach it's nadir yet
                  4. excessive credit not destroyed yet
                  5. resources crunch (peak oil being one) if the above factors don't shot the global economy

                  I'm becoming more and more pessimistic though that one cannot make or preserve wealth in this environment, short of daytrading.
                  There are strong deflatiotional and inflational forces. Unfortunately, the inflation will not cancel neatly the deflation. Instead, we will have multiple dips into inflation and deflation. We just had one cycle, more to come.
                  Last edited by friendly_jacek; 11-05-08, 03:09 PM. Reason: added more reasons

                  Comment


                  • #10
                    Re: Beware Relief Rallies

                    Originally posted by Charles Mackay View Post
                    Totally agree with EJ's comment. On the emotion sine wave of fear and greed (everyone's seen it by now) we are barely into fear! The feelings of desperation, panic, capitulation, and despondency are a long way away.

                    Many of the people who chided me for selling real estate and buying gold are now bullish on real estate again!!! I can't believe it... one of the largest panics in US history just took place and they got BULLISH. My neighbors just bought a resort property with gas station and food mart on 7 acres up in the mountains thinking we are out of the woods! Nope... they're in the woods again in more ways than one:eek::eek::eek:
                    Well at least there is one happy person out there. He was trying to sell a resort property with gas station and food mart on 7 acres up in the mountains. Then one day the turnip truck pulled up with your neighbors...

                    Comment


                    • #11
                      Re: Beware Relief Rallies

                      Originally posted by metalman View Post
                      the message for entrepreneurs i hear is... survive.

                      cut expenses & assume rising costs or rising faster than unit sales prices.

                      assume less access to credit.

                      the conundrum is 'cash is king' but also 'cash depreciates'

                      i'd like a simple 'how to survive' manual for small businesses.
                      What would happen if some small merchants said "cash only"?

                      Comment


                      • #12
                        Re: Beware Relief Rallies

                        Great post EJ

                        You have my curiosity meter reading 110%
                        What unintended consequences are there other than those previously covered on itulip and the announced POOM ?

                        Looking foward to read this other day topic soon

                        Comment


                        • #13
                          Re: Beware Relief Rallies

                          Again EJ, you reached me, so full specrum covered, Well Done!
                          Mike

                          Comment


                          • #14
                            Re: Beware Relief Rallies

                            Originally posted by tree View Post
                            What would happen if some small merchants said "cash only"?
                            To me it depends on the cost of the item and how available it is at a competitive store. If it's pricey I don't want to hear 'cash only'. I rarely use cash for anything over $20 anymore and even then I often use credit for anything over $10. (gotta earn those perk points!)

                            Other than giving up the processing fees to the credit card companies, aren't businesses pretty much insulated from credit card deadbeats? Maybe they stop taking Amex given their extra high fees.

                            Comment


                            • #15
                              Re: Beware Relief Rallies

                              Originally posted by EJ View Post
                              Beware Relief Rallies

                              We’re not out of the woods. In fact, we’re flying into them.

                              If the world economy is a passenger jet, its engines are economic surplus, its fuel human creativity, energy, and credit, and among its passengers investors in global stock, bond, and commodity markets.

                              Earlier this year, the credit fuel was mostly cut off and the engines shut down. The sound that followed is the one you never want to hear when you are an airplane passenger–of rushing wind and nothing more. The passengers noticed and sent markets down in a wave of panic selling.

                              The response is similar on an actual aircraft under those circumstances. I know because it happened to me on a flight during a business trip to Asia. The engines shut down briefly mid-flight, we were never told why, and then restarted.

                              I'll try to convey the sensation. There you are on an aircraft packed with strangers 20,000 feet over the Yamanashi forest in southern Japan when silence replaces the drone of jet engines. At first no one noticed. Then one by one the passengers looked at each other and began to ask, What is that? What is going on? There is no engine noise. Why aren’t the engines running?

                              The aircraft slowed and began to descend. The passengers looked out the windows and down at the lush woods below. We extrapolated our collective prospects. In an instant your body heats up, as if overtaken by fever, a flight response to danger except there is nowhere to go. As panic began to reverberate around the cabin, the engines restarted. Just as quickly as the panic set in it vanished. My fellow passengers and I returned to reading books, hammering out spreadsheets and presentations on laptops, or whatever we were doing before the terrifying event occurred.

                              The desire for a return to normalcy is a powerful human drive.

                              The rally we are seeing in the markets now is largely driven by that impulse, the overwhelming desire for normalcy, the return of the familiar roar of engines from a surge of cheap credit. The response was elicited by the election of a new president who promises change. Perhaps, the passengers think, as part of the promised change this president can get the cheap credit fuel flowing and the engines running again. He has promised massive injections of government credit fuel, and that is certainly the legacy of the political party he represents. What can a Democratic president combined with a Democratic Congress possibly mean but the passing of orders for trillions of gallons of credit fuel from the latter to the former with little chance of veto? All credit fuel orders shall be filled and injected in-flight.

                              This longing for normalcy is causing passengers to err in their assessment of medium term future conditions as the forest floor approaches. An economic aircraft so gravely impaired and sinking through thousands of feet of clouds and air toward the woods cannot respond so quickly to promises or even the fact of fiscal stimulus. The engines are still not providing enough thrust to slow the decent. Now the wings are clipping the tops of the trees.
                              GM's October sales plunged 45%, Ford Motor Co. (F) recorded a 30% drop and Toyota Motor Corp. (TM) reported a 23% decline.
                              US Oct Auto Sales Slump; GM Sales Down 45%, CNN, October 2008

                              Hammered by an economy in which consumer spending is coming to a screeching halt, credit is hard to get and competition is heightening, Circuit City said Monday that it is closing 155 stores (33% nationally), 10 of them in the Bay Area. The closures could put as many as 7,300 employees out of work in what is becoming one of the worst of times.
                              Circuit City closing 155 stores, SFGate, October 2008

                              The [Baltic Dry Goods index] has dropped 89 percent this year, driving down the combined market capitalization of the 12- company Bloomberg Dry Ships Index, led by Athens-based Diana Shipping Inc., to $5.5 billion from $32 billion a year ago.
                              Baltic Dry Index Drops Below 1,000 for First Time in Six Years, Bloomberg, October 2008

                              The official Xinhua News Agency reported this week that 3,631 toy exporters -- 52.7 percent of the industry's enterprises -- went out of business in 2008.
                              Factory closure in China a sign of global woes, CNN, October 2008

                              Japan's economy has joined much of the developed world in a recession, economists polled by Reuters say, with GDP seen contracting for a second consecutive quarter as the financial crisis hits exports and capital investment.
                              The Economic Times, October 2008

                              The global financial crisis is pushing the whole European Union into recession, official forecasts said on Monday, as South Korea unveiled its own 8.5 billion dollar stimulus package against the turmoil.
                              AFP, October 2008
                              Once the din of cheers over the hopes for a quick injection of credit subsides, the passengers will turn their focus to the banging and crunching of the economy trimming the tree tops.

                              We’re not out of the woods yet. In fact, we’re flying into them. We see this understandable relief rally, driven by a mass craving for normalcy, as an opportunity to build cash and to calibrate for a new, post cheap credit world. If “normal” means a steady flow of credit fuel from foreign creditors and financially engineered credit products, the economy and markets will never be “normal” again. As for the government credit injections, they are coming but with the unintended consequences, a topic for another day.

                              iTulip Select: The Investment Thesis for the Next Cycle™
                              __________________________________________________

                              To receive the iTulip Newsletter or iTulip Alerts, Join our FREE Email Mailing List

                              Copyright © iTulip, Inc. 1998 - 2007 All Rights Reserved

                              All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Nothing appearing on this website should be considered a recommendation to buy or to sell any security or related financial instrument. iTulip, Inc. is not liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. Full Disclaimer

                              If there's a lesson to be learned, it's that the Truth is in the credit markets more than equity markets.

                              Credit markets are still a disaster => keep away.

                              LIBOR is a fraud.

                              Comment

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