Rocks Of Despair
Monday, May 11th, 2009
Ambrose Evans-Pritchard writes in the UK Telegraph that bear market rallies are not uncommon, and there are many reasons to believe that this one is not unlike those during Japan’s lost decade and the Great Depression.
Our delicious spring rally is nearing the limits. The 40pc rise on global bourses since March assumes that central banks have conjured away the debt overhang by slashing rates to zero and printing money. Nothing of the sort has occurred. Two thirds of the world economy will be in deflation by July.
Bear market rallies can be explosive. Japan had four violent spikes during its Lost Decade (33pc, 55pc, 44pc, and 79pc). Wall Street had seven during the Great Depression, lasting 40 days on average. The spring of 1931 was a corker.
James Montier at Société Générale said that even hard-bitten bears are starting to throw in the towel,
suspecting that we really are on the cusp of new boom. That is a tell-tale sign.
“Prolonged suckers’ rallies tend to be especially vicious as they force everyone back into the market before cruelly dashing them on the rocks of despair yet again,” he said. Genuine bottoms tend to be “quiet affairs”, carved slowly in a fog of investor gloom.
Another sign of fakery – apart from the implausible ‘V’ shape – is the “dash for trash” in this rally. The mostly heavily shorted stocks are up 70pc: the least shorted are up 21pc. Stocks with bad fundamentals in SocGen’s model (Anheuser-Busch, Cairn Energy, Ericsson) are up 60pc: the best are up 30pc.
Read the whole article here.
Doug Short, of dshort.com, produces charts showing markets over comparative periods. They’re worth a look. Here is the one that is relevant to the above story:
Click on the chart to enlarge to interactive version.
He provides the following accompanying note:
Here’s an update of the Mega-Bear Quartet. It’s especially relevant these days because of the frequent mention of L-shaped recoveries and references to the Japanese market after the 1989 bubble.
To see the mega-bear comparison more clearly, here’s musical analogy that allows you to view the similarities incrementally. Use the blue links to add the parts.
This latest update now includes an inflation-adjusted chart, which gives us a fascinating visualization of the impact of inflation on long-term market prices. The higher the rate of inflation during a bear market, the greater the real decline. Compare the peak of the Dow rally in year seven against the nominal chart. The difference is the result of deflation during the great depression.
It’s rather stunning to see the real (inflation-adjusted) decline of the Nikkei, 19 years after its crash. The current lows rival the traumatic Dow bottom in 1932, less than 3 years after its peak.
Over the past few decades, equity markets in the U.S. have had an extended bull run. These charts remind us that bear markets can last a long time. And it’s not necessary to go back to the Great Depression for an example.
Tags: Accompanying Note, Anheuser Busch, Bear Market, Bear Quartet, Cairn Energy, Central Banks, Corker, Debt Overhang, Fakery, Global Bourses, Great Depression, Interactive Version, James Montier, Japanese Market, Printing Money, Rocks Of Despair, Societe Generale, Spring Rally, Uk Telegraph, World Economy
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