When will the de-leveraging bust resume?
When we stop worrying about it.
This afternoon, we realized that deep down, our feelings had changed: we had stopped worrying about a resumption of the bear market.
Not that we’ve stopped thinking about it. We think about it every day. And we’re sure it’s coming. But we have stopped worrying. No matter what we think, we feel that somehow this will work out okay…we’ll be all right. We’ll stumble along…
Thinking and worrying are two very different things.
Thinking is purely superficial. It’s the worrying that counts. When you’re worried about a financial crisis, you sell out your risky positions and hunker down with cash. When you’re not worried, you’re happy to float along… You’ll change course when the danger becomes more imminent, you tell yourself.
But don’t forget:
This is a Great Correction. It began almost exactly three years ago, when New Century Financial – the second largest subprime mortgage company in the US – filed for bankruptcy. It will continue until debt levels in the private sector have worked themselves down to more reasonable levels.
How long will that take? Maybe 5 years. Maybe 20.
Meanwhile, you can’t expect much from this economy. Businesses are not going to add jobs. Consumers are not going to shop.
Is that all there is to it? No, there’s a lot more. That’s why it’s a Great Correction and not just an ordinary run-of-the-mill correction.
..there’s the correction of the huge the expansion of credit
..there’s also the correction of the stock market
..and the correction of the real estate bubble
..and the correction of the world economy and its dollar-based monetary system
Here’s what to expect:
..US stocks will begin falling again
..foreclosures, already running at twice their normal level, will increase
..bankruptcies, now at record levels, will go up too
..bonds will eventually collapse (but may turn out to be decent investments for a while longer…as the de-leveraging continues)
..the dollar too could go up when the crisis feeling returns; over the longer run it will be dangerous to hold it
..China will go through a financial crisis (potentially ‘Dubai times 1,000.’ As Jim Chanos puts it)
..states, cities, and entire countries will declare bankruptcy…
Those things don’t seem like threats to you? Well, they don’t feel like threats to us either. But that’s what makes them so dangerous…
..we’ve stopped worrying about them.
And more thoughts…
– We’re headed up into the mountains today to check on our high altitude beef. We’ll write when we can.
– “I came here because I felt that my children would have a better future here than in Britain,” said a colleague at lunch yesterday.
“It’s very hard to live well in Britain; the country is too crowded. And things are too expensive. If you want a decent house at a decent price, you have to go way out of London. Even then, they’re not easy to find. And then, you spend half your life traveling back and forth to work.
“But there’s something else. I think Britain’s glory days are past. The economy might grow in absolute terms. I hope so. But it is unlikely to grow as fast as Argentina or Brazil or any one of dozens of overseas economies.
“That’s true for America too. I don’t think the US is finished, by any means. But if you want to give your children the best combination of lifestyle and economic opportunity, there are better places to live.”
Few people would bet on Argentina’s financial future. The country is a serial inflator…prone to self-inflicted financial wounds. It has shot itself in the foot so often, it hardly has any feet left!
Most people would say that investing in Argentina is ‘too risky.’
But that just goes to show that people don’t understand risk. They look at the past and use it to measure the future. What they don’t realize is that risk in financial markets is not like rainfall or earthquakes.
Earthquakes are completely indifferent to what we think about them. But the financial markets are more sensitive than a poet. People who’ve lived through financial crises don’t want to see another one. Or, to put it more specifically, if you’ve just been through a bear market you’re not likely to pay too much for stocks. You’ll think it’s “too risky” to buy expensive stocks. So, stocks will not become expensive. The risk of another crash will be low.
Germans lived through a period of hyperinflation in the ’20s. To this day, they are deathly afraid of rising consumer prices.
People who are accustomed to stable prices…and a rising stock market…have a different attitude. Analysts look at their history and pronounce the market “safe.” But it’s actually very risky…because prices are high and investors are complacent.
The riskiest markets are probably those judged safest by the analysts. The safest are those thought to be risky.
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