Second crash imminent

By Hans Lysglimt

Second crash is imminent

I am now calling the second crash ripe. I personally am not shorting quite yet, but I am monitoring this hour by hour right now. The trigger will come.
The markets have rallied way too much, rest assure that the panic we saw September 2008 will be repeated in this next down leg.

The fundamentals are gruesome:
P/E ratios on the S&P 500 is at 59, it will be 10 or 20 before this is over.
And, profitability is plummeting.
We are standing on the edge of the financial Gran Canyon.
Massive losses in the financial sector are yet to arrive.
Unemployment in the USA is still rising sharply.
Credit contraction is still going on, strongly so.

The real economy is bound for a sharp contraction, we are talking depression levels, and the stock markets will follow.

The rally we have seen this spring has been a dead cat bounce. Some of the main reasons have been:
– A delayed Obama effect.
– Short covering.
– Shorting regulations.
– Reduced interest rates towards zero, that can’t go further down.
– A flight “away from” cash, into pretty much anything that is not cash.
– A self reinforcing sense of relief as the rally gained momentum.

These are one off dead cat bounce effects, it is not anything sustainable.

Rest assure that P/E ratios will come down to reasonable levels, soon enough.

What about the new money then? Some economists say the rally is from the new inflated money bringing the stock just nominally higher. I say this is a premature excitement. Yes, there is new money coming in – but this takes time. I keep repeating this, time is of the essence. And time is one of the least understood frontiers of economics. Some of my fellow economist scorns my focus on time, and especially that is physiological individual time relevance brought up to an aggregate level. I am not talking about supernatural “cycles”. Yet, I am talking about time and economics in the most straightforward way. I have yet to see good economic analysis of time aspects.

Yet, getting the time aspect right will be crucial.
How long will it take for the new money to ripple out into the economy?
Will it arrive in time to save the balance sheets of the millions out there?

My bet it that this will take too long to save millions of overstretched corporations. But when it finally catches up, a year or two too late – inflation will come roaring with a vengeance. The free market should theoretically be able to avoid this, to even out the bumps. But the free market is not what we currently have – we have fascism.

Hans Lysglimt
Oslo, Norway
May 15. 2009

Comments in the forum.

This entry was posted in Økonomi. Bookmark the permalink. Both comments and trackbacks are currently closed.