Waiting for the tide to turn

What day will reality catch up new money euphoria? Today, tomorrow, the day after. We have waited since the rally began in March. Safely in gold, on the sideline we have watched as the markets have rallied with amazing strength. And the rally seems to continue, we are awaiting the moment to go short – it has still not arrived, but it can be long now. This rally has more rally behind it than in front.

See, the rally is based on new money, and optimism on new money. The new money is real, check for that – the optimism surrounding it we are not so sure. The money is reaching the financial industry, check. The crisis made main street do deep cost cuttings, that show up as profits in the latest few quarters. But are people and corporations actually buying, are they expanding? If you feel you have the definitive answer to this, if you somehow sit on data that puts you in the know one way or the other – you are way ahead.

We are still of the belief that this is not your regular recession, and recession recovery. People and investors were spooked for real in 2008 – the rara times, the credit expansion that lasted from 1945 to 2007 will not come back the way it was. The economy demands to be restructured, the painful process of creative destruction. But the politicians do not want pain, it does not buy votes. So they treat the symptoms of the pain, they treat the actual pain – but they do not treat the source of the pain – the painfully needed readjustment process.

Sooner or later, and actually already much later than we had thought, the reality of the situation will catch up with Wall Street. Main street is not getting money as the financial industry is getting. Maybe the rally in the banks is justified, maybe, but that does not mean the rally in everything else is justified. Car rental corporations have rallied 30 times, 30 times! since March.

We believe 2009-2015 will be a period of financial consolidation. People will keep their old car, they will fix that broken sink, they will vacation locally, they will plant that garden, they will save. And corporations to, they will brace for hard times in the future.

Profits will go down, stabilize on a radically different and lower level.

Painful readjustments will have to be made.

And don’t even get me started on the currencies and government borrowing. Sooner or later confidence will run out, inflation will pick up and interest rates begin to rise to compensate for all this. This will put downward pressure on equities across the board.

Ok, this does not mean that money can not be made in this time frame. It simply points out the difference of making money as the tide comes in towards making money as the tide runs out.

Making money this time around will have to be done differently. More mindfully.

Yours from still sunny Oslo.
October 19. 2009
Hans J Lysglimt

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