Taking the bear market rally for granted

By: Hans Lysglimt

Missing the rally are you?
Feel the itch to buy shares are you?
Great. The stronger your itch to buy, the stronger the reason not to.
This rally is driven by itches, just like yours.
But, you have to keep your head cool to see this.
The cheep are now being herded back into the markets, to be slaughtered.

Today, Monday, seems to become another bull day. Asian markets are up, 2-3-4+ percent. It seems investors a breathing a sight of relief, the worst is over. As this sense of relief spreads we thus see even stronger momentum in the upward moves. Statistics show that short positions are being covered, short positions now at significantly lower levels than during this winters turbulence. Gold has fallen back again, trading at 892 this morning. In essence, when the markets rally 4+% the mood is greed.

All this tells us that the next dramatic reversal downwards is closing in. Fear will be back, with a vengeance. The time to prepare for this is now. The momentum downwards, once it gets going will be dramatic. We will in the matter of days go from this almost euphoric “it’s over” greed mass-psychology, to realizing that “it’s even worse than we thought”, primordial fear plummeting the indexes back to new lows.

Trading this is naturally a question of timing. And as several Farmann viewers have rightly pointed out; short term trading is inherently unpredictable, the shorter – the more unpredictable, until at the very margin it becomes a random walk.

Our own short term trading has not fared well, some of our put positions went to zero, some longer ones are obliterated. We thought we were so smart, we were not. Fortunately our positions are mostly in gold, silver and cash – and this has saved our day, again. You see the advantage of gold, silver (and to some extent cash) is that it’s dumb. It protects you from dumbness, most importantly your own. There is only so much gold to go around, but there is a fool born every day – including the day I was born and your birthday, dear reader.
So gold will protect you from dumbness, the dumbness of the politicians, the central bankers and the generals of the world, and your own. The most lethal combination is that of the politicians trying to outsmart you, you trying to outsmart them, and the central banks outsmarting you both, Goldman Sachs directing the whole thing, while the generals want war. Gold protects you from that lethal cocktail; this is why we like gold.

So we will, as we should, lift our head towards the horizon, where it actually is possible to make sensible predictions.

The epic fight of deflation against inflation is still going on; the bear market rally has just temporarily taken our eyes off it. In the long run, we can rest assure that inflation will win. Our times are over politicized, they will attempt to print their way out of it, and the money will reach out and drive up prices. In the meantime, as everyone scrambles for capital, we have deflation, at least in asset values. Take note that consumer prices are not falling as assets prices are.

The world is in need of extreme amounts of capital. This capital is just not there, someone will have to take a hit. The solution they will come up with is to just print it, so at least the books will apparently be fixed.

In order to print and provide all this money they need to break through enormous amounts of resistance. They have to break their inflation targeting, countries have to accept down ratings on their debt, civil unrest as prices go up and promises go down.

This is what we have in sight for the next 1-5 years. Markets will not like it. Trading it will expose you to the greatest of follies, that the masses know best, the essence of the modern liberal democracy.

In the bigger picture this financial crisis is the epic fight of the survival of our modern liberal democracy. This is how we see it. Modern liberal democracy, with it’s propensity to move problems into the future, and to institutionalize this through fiat money has come to the end of the road. When it finally collapses, the whole scaffolding will come down with it.

Protect yourself, from yourself, by buying gold.

May 4th. 2009
Oslo, Norway – Hans Lysglimt

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