Monday, February 22, 2010

Eating Crow

Two weeks ago while the market was in a downward trajectory, I made the prediction that we were heading for a well needed 15%-20% correction and came up short. The market did correct, but only by 9% from peak to trough. Does this deter my long-term stance that we will be retesting the lows of March 2009? No. Absolutely not, although I'll probably be lambasted for being foolhardy until I meet that benchmark, or at least get close to it. In actuality, the mini-correction of a fortnight ago actually strengthened my resolve that the market will take a nosedive sometime in the next six months because it really hasn't had a healthy pullback in almost a year. November, December, January and February tend to be the four best months for the market. I'm just going to bide my time because we are almost through a seasonably advantageous time for stock prices.

Bill Clinton, Larry Summers, Alan Greenspan, Barton Biggs and Jean-Claude Trichet among a host of others all gave glowing praises to David Smick's The World is Curved: Hidden Dangers to the Global Economy and I really looked forward to reading it. If you have been following this blog, you know I try to review at least one book a week to inform readers about what is going on in the financial press and to buttress my conviction of more widespread panic in the market. Smick believes that the two decades before the sub-prime crisis were an anomaly of growth and that: "During this quarter-century, the Dow Jones Industrial Average climbed from 800 to 14,000, before the financial crisis hit. To match that stock market success in percentage terms over the next twenty-five years, the Dow would have to exceed 170,000.". So if you have a short-term time horizon and think you can keep racking up gains of 15% almost every year like we have from 1982 to at least until 2000, you are grossly mistaken.

The praise bestowed upon The World is Curved: Hidden Dangers to the Global Economy reminded me of the glowing recommendations for How Markets Fail by John Cassidy. With both books, I didn't see what all of the excitement was about. To be quite frank, reading Smick's book was quite a chore. Like with all economics books, I did get something out of it, such as the stance that China is in a bubble and that when it bursts, it will send share prices of securities from all over the globe cascading downward. This bubble could bust faster than you think because: "Most Western experts suggest that if the Chinese growth rate drops to below 7.5 percent, serious unemployment would set in, furthering political unrest and threatening the stability of the entire economic system. During 2009, the economy officially grew between 6 and 7 percent.". Smick is an experienced international financial consultant and feels China is another house of cards, just like our interconnected worldwide banking system, but only worse from its lack of transparency: "Compared to the Chinese banks, today's troubled, large American and European financial institutions look like paragons of financial purity.".

I got a lot out of Smick's chapter on China. While most soothsayers will tell you China is the engine that will drive the markets forward, he takes the opposite stance: :"...all but the most sophisticated media paint a picture of China as the great Asian Promised Land. Perhaps it will be. But in my view, China is attempting to accomplish something never achieved in the history of mankind - to marry a market economy with a Marxist political regime.". The World is Curved is a good book, but not a great book because as much as I learned about China, it wasn't enough information to warrant reading it in it's entirety. However, I did read it and it gave me added ammunition to remain in my short positions. I don't know if China will be the catalyst, but something is going to trigger another avalanche because there is just too much sovereign debt, especially in the United States. I was wrong two weeks ago and I could be wrong again, but I'll hold steady with my convictions until I see evidence that sways me in another direction.