The Sunday, November 30th Los Angeles Times’ front page headline boldly reads “BAILOUT: PAY NOW, WORRY LATER”
Those five words say it all. As we have expected for years, the crisis has developed. As we have assured readers for years, no major bank will be allowed to fail. Instead, after $8.5 Trillion in commitments by the U.S. and other governments, we now find ourselves about one third of the way through the crisis. We anticipate that the final bill worldwide will be between $20 and $40 trillion. Wow!
THE CURRENT BIG MISTAKE…assuming that Deflation lies ahead
There is a mistake currently being made by many short term oriented economists and market strategists. In the current case, the mistake is extrapolating the short term decline in the rate of inflation (due in part to lower oil prices) into the future, as if all prices will continue to fall. Many analysts have concluded that the problem ahead of us is deflation.
For over four decades, we have analyzed economic models, and in that period we have made many economic models of our own projecting economic events. One thing has become very obvious in our analysis. The most common mistake in economic analysis and modeling future events, relates to the human tendency to extrapolate the current trend into the future. I will go further, and say this does not only apply to economic modeling, but to all human predictive activity. There exists a human tendency to extrapolate the current trends into the future.
In our opinion, this is a patently incorrect analysis. In it most rudimentary form, such analysis is simply assuming that the recent past will repeat itself…and then grabbing the select data points, to support this point of view. We do not mean to impugn the work of a few very competent economists and analysts, who hold this view due to economic trends that they foresee. In our opinion, the majority of those subscribing to this view are simply extrapolating the recent past into the future.
OUR VIEW…One should ignore the recent past.
1. Inflation is the big problem looming in the future. Deflation will not be the problem.
2. The recent past has witnessed a brutal decline in global stocks. Our outlook for the coming days (and possibly weeks) is a continuation of the rally off of the October/November lows in world stock markets. It would not surprise us to see a stock market rally of one third or more of the recent decline. While a big rally continues to be a possibility, market volatility is at all time highs…so expect a wild ride.
3. Gold and commodities have been under pressure. In our opinion, gold is a good long term purchase on any sizeable decline. We believe that most other metals commodities will start to rally by mid 2009. The rally in all of these areas will be large.
4. Oil prices are under pressure, and will likely fall below $50 per barrel, but oil will not fall in price for a prolonged period of time. In our opinion, oil prices will bottom, probably in the $40’s per barrel and begin to rise.
5. In our opinion, the big long term risk is being short commodities. The decline in some commodities prices may last longer, but we are much closer to the end of that decline, than to the beginning.
6. The U.S. dollar has continued to hold its recent rally, even after the announcement of astounding amounts of capital that will be invested in, guaranteed, or loaned to financial enterprises. Thus far, the amounts total about $8.5 trillion globally. We anticipate that the bailout is only about one third completed. We believe that before it is over, the U.S. will be forced to increase their share of the pledges to about $25 trillion. Longer term, this spells disaster for the value of the U.S. dollar.
7. The world economy continues to slip deeper into negative growth, and the economic news will continue to get worse for months. As our readers know, we have believed that the U.S. recession/depression began in late 2007 or early 2008. Today, our views were corroborated by the prestigious National Bureau of Economic Research. They state that the recession began in December 2007. Their data is completely contrary to the erroneous data which was presented by the U.S.
Government before the presidential election.
8. We continue to hold the view that the economies of the U.S. and of the world, will be under pressure throughout 2009, and into 2010.
WHAT TO DO?
Most stock markets are base-building and searching for a bottom. Some markets have begun a rally. Enjoy the stock market rallies worldwide, but beware of volatility and keep an eye on the exit.
Remember that commodities and inflation are not dead; they are only feigning death, much like a marsupial known in North America as an opossum. As soon as you turn your back, the opossum jumps up and runs away. In our opinion, inflation itself may be playing dead, imitating the opossum.
Thanks for listening.
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