New liquidity? – Mother of all bulls? – We don’t buy it

The DOW went up 5.8% yesterday, Nasdaq 7% the S&P 6.4%.
Gold fell to below USD 900 yesterday, USD 890 even. Or, as we like to put it; the dollar strengthened to 900.
Currencies of smaller countries that have seen their money hammered strengthened.
A surge of new confidence.

The most direct explanation for this bull run was a note from Citigroup reporting two good months, a statement that has not been scrutinized.

Some have suggested that this is due to all the new liquidity inputs from governments. Some even suggest this is the mother of all bull runs based on new liquidity.

Mother of all bulls?
We don’t buy it.
We still see a down market, and are steadfast in our sight.
Yet, our bearish positions took a serious beating yesterday, we deserved a bit of a humbling experience from the solid profits we have made and partly taken out in our short positions lately. We actually feel re freshened from this hit, like after a good fight.

Firstly, the question of oversold. Some say the markets were so oversold there had to be a technical reaction back. We are always suspicious of technical claims, as you can claim anything technically. But the recent down leg was strong, there might have been some irrational exuberance to the downside. So sure, some rationale for a swing back from “overselling” might be justified.

Secondly, new liquidity. Yes, governments have committed new liquidity. But this liquidity has hardly reached the markets yet, only a sliver is so far actually available to be pushed into the markets through buy orders. The money will go out into the economy through the banks and public spending, this takes time – serious time. We are talking months, quarters, years before this money reaches out. The money going to the banks suffer from the pushing on a string syndrome, banks are hoarding rather than lending. Government spending has to be ordered, done, then billed, then paid – takes time.

So, to the extent new money is playing in here it is not actual new money but rather the EXPECTATION of new money – this is something else. This exuberance of expectation of new money will soon be caught up by the reality that this is still the beginning of the greater depression.

More banks will fail.
Banks will be nationalized.
Europe will tremble to the core.
Civil unrest.
Governments will be overthrown.
Corporate profits will go way way down.
Massive liquidations.
Massive capital requirements from institutions that will drastically cut offering prices to “force” liquidity their way.

What we see is an abyss, not a bull rally in a bear market.

So this will not last, it will at most last for a few days, not even weeks. As this is not chased by actual new liquidity it will soon exhaust it’s bullish potential. The rally fed on itself yesterday. Investors can still draw on potential gearing and liquidity reserves, but they will soon be fully exhausted, and they will again stand face to face with the risk and fear – they will not be able to stare down that fear, they will hit the sell button.

The 5-6-7% bull run, plus perhaps another day or two of gentler gains is about what this exuberance can muster up.

What should go up on the expectation of new liquidity is gold. The new liquidity will arrive, and push us into mass inflation and gold should reflect this. Instead investors are mislead into believing that the new liquidity will lubricate the system back to the boom we came from – it won’t happen. I have called this, this is the real deal, this is the greater depression, it won’t turn around from new paper money.

People still have confidence in Washington, this rally is proof they do. This confidence will erode this time.

This rally is among the last false bursts of confidence that the folks in Washington can whip up.

The confidence is unjustified.
The rally is false.
Markets are going down.

Reposition yourself in short positions as the strength in the market vanes, take your time.
Gold at below USD 900 right now is a true bargain, we are buying more.

Oslo, Norway.
March 11. 2009
Hans Lysglimt


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