Two sides to a market

There are always two sides to a market, that’s why there is a market. To keep sane you have to stick with your fundamental understanding of the market, and cancel out the noise. Because there are endless ways to fundamentally see the market, there are endless ways to position oneself.
A long term pension fund manager sees the market very differently from a daytrader doing split second trades based on advanced mathematical modeling – they see the market very differently. So working on cancelling out the noise is essential.

The strength of the rally keeps surprising us, but then again – it fits with our thesis that market movements mostly go to excess. We are now clearly in the excess phase of the market bounce.
We find it interesting to observe that while the market has rallied 50%, gold is still trading at about all time high levels at USD 950. Gold has fallen some 6% from it’s all time high, and the denominating dollar has taken a plunge. But still, one would assume that if the danger was really over that gold would fall somewhat in proportion to the rise in confidence seen in equities.

Our fundamental view is that this correction is a depression – a fundamental readjustment of the market structure. We are only in the very first phase of this. The readjustment will have consequences for all levels of society. The process will take time, we are talking years 1,2,5,10 or more. Within this period the depression will catch up with the unfunded liabilities of governments to pensions, medical treatment and serving of debt. This depression will be prolonged and demand structural change. This depression is the end game of the Keynesian illusions of the 20th century. The consequences are daunting, no one has really adjusted themselves to the new reality as it is still unclear what this is.

The newfound optimism, now turning into euphoria is therefore misplaced. Extreme caution should be the name of the game. Yet investors are throwing themselves into the game with more and more confidence, it is a repetition of the 2001-2007 boom all over again but fast forward.

The fundamentals of the economy is still weak and getting weaker, as seen by the new numbers coming out. We are now in the eye of the storm, some of the tide has been held up by government dam building. But the water keeps pounding, the dams will break again.

It’s better to head for higher ground (gold), and wait this out.

I am still watching carefully for the moment to short the markets. It has not yet happened, but it is closing in now. I am confident that the correction will come this winter, so long put options with maturity of 9 months+ should already be a safe bet. I will let you know when I think you should short.

Hans Lysglimt
August 25. 2009
Oslo, Norway.

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