Nature of this bear market rally

Nature of this bear market rally
By: Hans Lysglimt

Investors do not realize the severity of this depression. They do not see the losses ahead and the necessary readjustments needed. Many still think Obama will fix this and that everything will be all right. So they buy shares, fearing they will miss the next boom.
For the last generation the right thing to do has been to buy shares in the downturns, and then inflation would lift all boats. Shares always go up in the long run, just like houses right? – Yeah right.
People in Japan don’t think this way anymore; shares topped at 39000 in 1989 and have fallen since, today trading at 8900. US investors, as well as European will live to learn the same lesson soon enough.

You see, the momentum of this bear market rally is directly proportionate to most investors ignorance. Just make a few phone calls, talk to some investors – they will tell you that they see hope of a turnaround. They have faith in Obama. They have faith in the dollar, in the US consumer. All this will fade away, soon enough.
Yet the extent of the ignorance baffles us, and tells us that this rally might still have quite a ways to go. The entire physiology will have to go through a number of peculiar states. Rest assure that by next summer we have arrived full circle back into panic mode though. The final stage, at some future point, will be a total capitulation, by that time most investors have given up. By capitulation time you will have stopped reading this market comment column here in Farmann (not YOU of course, but statistically speaking Farmann will loose more than half of subscribers so “you” will statistically be gone).

We are right now in the capital depletion phase of the depression. This is still very very early. I do not see this discussed much in the media, even among contrarians. How long will the capital depletion phase last? Most companies and individuals have some form of capital, this capital is a buffer. When trouble arrives the buffer is used to take a hit. This capital is now being used up in various ways. Not just plain financial capital, also trust capital, social capital etc. All available capital resources are used up before other alternatives are politically possible. When all the capital is finally used up – bankruptcy. If this all started say in September 2007, and got really serous in September 2008 – that is less than eight months ago. Most businesses have cash for a few months, and then some inventory that can be sold, then some credit lines that can be maxed out, then some stuff that can be sold, then sell the property they own, then salary negotiations with employees, then a voluntary debt negotiation with suppliers, crisis meeting, cutback plans – THEN, when all that is done is the time for the final stage – bankruptcy. This takes time, eight months is way too short a time. Many, if not most doomed businesses can probably hustle about for a year, perhaps two before reality catches up with them.
Thus the huge tsunami of bankruptcies might not come until Q1 and Q2 in 2010 when the devastating numbers are brought out in daylight. Then people will understand that the game is over.

If we assume we are right at calling this a real depression we see that this will take years to play out. Massive bankruptcies in the first half of 2010. A renewed loss of confidence. Massive selling in the markets. Extensive turbulence eventually bringing the dollar down (that will require the entire world to readjust). Government countermeasures to the collapse of the dollar.

It takes time.

There is now no chance that things will get much better by Osama’s first term. The blame game election in 2012 will be nasty. God knows what the GOP will present as a solution candidate, I fear a militarist and a militaristic expansion.

Follow the mindset of the crowds. They are right now far far from getting the picture right and act accordingly.

Hans Lysglimt
Oslo, Norway
April 16. 2009

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