Thursday, October 2, 2008

Has the sky fallen yet?

I view the financial markets in terms of which theory is accepted by market players and increasing or decreasing in truth (or verisimilitude). The current dominant theory can be labeled "the sky is falling." This theory and its effects will continue to increase in verisimilitude (degree of truth) in the days and weeks ahead. Short term reactions against the price trends that this theory has produced should continue to be seen as opportunities (ie: short term rallies in the stock market as opportunities to get short (or get out of long positions) - generally speaking).

Yes, things are ugly and about to get uglier before they begin to improve. The Fed is desperately trying to reinflate the economy but it will not work quite yet. Congress is only making it worse by giving billions of taxpayer dollars to special interests and not allowing market forces to clear all the malinvestments that have built up over the years. Ron Paul is right, bad Federal reserve policy and other gov't stupidity such as gov't sponsored entities (fannie mae, freddie mac) and all the other dumb policies, rules and laws that distort the market created this mess.

Don't be a victim, instead see it as opportunity and exploit the effects of the flawed institutions that create the boom bust cycles such as the one we are experiencing right now.

How? by understanding the effects and positioning yourself to profit from the price action.

An important value that must reside within your mental framework that you use to guide your decisionmaking should be the following:

"Maximize the utilization of the inefficiencies created by government policies"

As far as equities, short term rallies against the long term dominant trend should continue to be shorted.

Commodities are obviously in a very strong short and intermediate downtrend which will continue until we get through this most recent bust cycle, my guess is that it will last for another 6 months to one year. Over the very long term commodities are still in a secular bull market, and the federal reserve banks of the world are determined to reinflate the global economy.

In the short and intermediate term, we have deflation, in the long term we will once again have a major problem with inflation in the future given the lagged effects of the Fed's actions on the economy.

US Dollar - As stated here in June the EUR has become a "relatively more miserable currency." But the USD remains relative more miserable than the Asian currencies over the long term and the price action and trends will reflect that. -John Bardacino

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