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Deja Vu - All Over Again

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September 30, 2009

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Are we experiencing again the fall of 2008?  Like some groundhog movie are we going to have to endure the same commodity sell off, equity collapse and bankruptcies that we saw last year, or will it be different this time?

Don't you just love that phrase: But it's different this time!?  Yea, the dot come bubble was different than the housing bubble, which is again different from the debt bubble.  Yet, all bubbles have a tendency to pop so the end result may not be much different - a mess.

Back to the main idea:

Since 2008, we have managed to add on enormous amount of government debt, raise the unemployment rate about 5%, and eliminate 2 of the three US car companies as well as a boatload of banks.  The states haven't done much better, but most have not declared bankruptcy yet.

For some good news, the war in Iraq appears to be winding down, we have more free time as a consequence of higher unemployment and of course we still have our health.

But will the fall of 2009 be the same as 2008?  We did see that gold, metals, mining and the market in general sell off steadily over this last week.  But was this normal profit taking and market consolidation prior to a rise up toward the end of the year.  I don't know but Monday may give us a clue.

The dollar index has bounced off its bottom at 76, but not much off its bottom.  There is a growing belief that the US dollar will rebound up like the market did in March, based purely on the belief that the dollar was over sold.   Although this may be correct in the short-term, there is not much hope that the US dollar will hold it value in the long run with all the QE that the government has embarked on.  Although it is possible that the government may reverse this action in the future, it is very unlikely given the actions of our government in the recent past.  We have not seen real leadership since John Kennedy and Abraham Lincoln, which imply that the course we are on now, will not change for the better.  It may change for the worse as political solutions to problems do have a tendency to make matters worse.

If the belief in the US dollars real strength is a short-term illusion, then the US dollar index will likely be volatile over the next few months as investors move quickly in and out of the dollar to other asset classes, which they would view as a safer store of real value.  The dollar becomes the hot potato in the market, which investor need to hold temporarily, but only out of necessity.

Gold speculation versus the Treasury bond trap, pick your poison.

There appears to be gold speculation by individuals and probable market manipulation in the short term by the IMF and other deep pockets, but this may be less of a problem in the future as China becomes a bigger player, buffering the volatility of gold prices and stabilizing demand.

The US government bond market is a trap, ready to snap.  Like the Hayward fault near the San Francisco bay area, there is certainty that major destruction will eventually happen the question is when.  The bond market's trap is that the government is artificially keeping bond rates low, so any current buyers of these bonds will suffer major losses when the government can no longer control this rate.  Unfortunately for the US government and its bondholders, the real power lies in the foreign governments, which continue to buy our debt, since without them we couldn't fund our government expansion without seeing a dramatic rise in interest rates.

So if the fall in the market continues, then will the flight to safety be to US dollars and Treasuries or will gold and commodities rebound?  What may be a little different than last year is that investors probably still remember the losses from 2008 and are hedging their bets.  We probably do not have as much leverage in the market and there is still some money on the sidelines looking for a pull back to invest.  So the current correction that began last week is likely real, but with buyers looking for a deal there may be some buying on way down, making the slide less steep.  The more interesting question is how long will the slide last?  Even a dripping faucet can flood a house, so a steady decline in the market for over a year will likely erase the gains since March.  The real economic news, unemployment, debt, real estate and profits make the possibility for a steady decline real.

Since we live a world economy, there may be opportunities in food commodities plus metals, mining, energy and technology, which have real value unlike banking and finance.  Another potentially new area of investment may come from investments in water, which may eventually become a food equivalent commodity.  As noted in a recent Marc Faber's Gloom Doom and Boom report, there is already a water equivalent table measuring the amount of water it takes to produce a meat or agricultural product like rice.  Instead of worrying about CO2, maybe the US and the world might want to consider H2O.  We need water to live and CO2 is just not that important.

So I believe that the market will repeat the fall of 2008, in that retail, airlines, real estate and financial may get hurt again, but like last year there may be buying opportunities in commodity stocks and energy, which may get sold off with the rest of the market.  It appears wise to have some cash now to take advantage of the potential buys in the next few months, but holding US Treasuries long term is like living in San Francisco without an escape plan.  I suspect that one day there will be far more value in water than the US Dollar.  Just ask the residents of the central valley of California, without water there is not much economy and the wealth of the community is quickly evaporating away.