Balance Sheet Recession Looms Ahead : Horrible Times Ahead

We’ve come to Zurich to attend a special conference on the future of the world. Nassim Taleb, author of ‘The Black Swan,’ is giving the keynote address.

We’ll let you know tomorrow what we find out.

As you know, the stock market is said to “look ahead.” Sometimes it doesn’t bother to look very far ahead. And sometimes it seems completely. Instead, it goes along at full speed without noticing that the bridge has been washed away! And when it finally puts on the brakes, it’s too late.

At least now, the stock market’s eyes are open. But what godawful thing does it see? On Friday, the Dow bounced a bit – up 494 points. But the collapse since Labor Day has been breathtaking. Even Warren Buffett’s stock – Berkshire Hathaway -- has been cut in half.

What does the stock market see that would make it want to treat the Sage of Omaha so roughly? What evil omen has the market noticed? What devil-on-the-loose does it fear? What plague, what war, what depression, what bankruptcy, what hyperinflation...

...did we say ‘hyperinflation’?

Wait a minute. We’re getting ahead of ourselves.

Whatever the world’s stock markets see – it must be a damnable mess...as if the world didn’t have a future.

So far...all we’re sure of is that there is a “balance sheet recession” setting in. And maybe it will turn into a balance sheet depression. Asset prices are falling. People are cutting back. Companies, individuals and investors are all desperately trying to rebuild their balance sheets – by getting rid of debt. We’re all Japanese now, in other words.

There will be Hell to pay...but it’s not the end of the world. Stocks will come back...buyers will get out their wallets again...life will go on as before. Won’t it?

Colleague Porter Stansberry thinks so:

“Today....I bought a broad range of stocks with the intention of holding on to them for the very long term.

“Today I very deliberately put about 25% of my cash savings into ten stocks, in equal amounts. Although this is a significant amount of money, it's not so much that, if I were to lose it all, I couldn't survive comfortably. The ten stocks I bought this afternoon are: Amazon, Bank of America, Berkshire Hathaway, Campbell's Soup, Ebay, Google, Harley Davidson, Intel, Coke and ExxonMobile. I plan to invest another 25% of my cash savings over the next six months, buying on days, like today, when the market is falling. After I become fully invested, I will use trailing stop losses to prevent any catastrophic loss. When I am fully invested this stock portfolio will represent about 20% of my net worth. Like I said, this a significant investment for me, but nothing I couldn't live happily without.

“Why am I buying...?

“I greatly admire these businesses. These companies (with the exception of the two financial stocks) have been able to earn double digit returns on their assets for many years -- a rare accomplishment in business. I expect that will continue to be the case, even if the economy weakens considerably. The current prices of these stocks are, in most cases, as cheap as they have ever been, measured against their earnings. While these companies’ earnings will surely drop significantly in the near term, in the long term these companies will earn many multiples of their current prices. Thirty years from now, when I am ready to retire, I believe I will still greatly admire these companies and the investment I'm making today will produce a substantial income for me in the form of dividends. I am very confident the intrinsic value of these companies will greatly increase over time, far outpacing inflation and the return available to me through safer investments, like bonds.

“The last two months have been grueling for me. It is very difficult to watch stock prices fall. I know many of my subscribers will lose interest in the stock market. I know the next few years are likely to be very tough on my business. I'm worried about the financial security of my family and my friends.

“I can't recall a more difficult time -- financially -- in my entire life. “Ironically and paradoxically, these emotions that I'm feeling now -- the anxiety, the sadness -- are how I know it is time to make long term investments. Without these emotional difficulties and the huge amount of uncertainty in the markets, these stocks would not be available to me at any reasonable price.

“None of us know the future, but my bet is that the world doesn't come to an end.”

*** Porter is right; the world isn’t coming to an end.

But our guess is that some things ARE coming to an end. The myths of Wall Street – “stocks for the long run”... “buy and hold”...hedge funds that don’t hedge...derivatives derived from nothing...millions in ‘incentive’ bonuses for executives. Or maybe the whole dollar-based world monetary system is going away? Keynesianism? Monetarism? The Efficient Market Hypothesis? Surely these silly theories have to go sometime too.

(One thing we know that is not going to disappear is the idea that you can get something for nothing. If people ever come to believe that they can’t get something for nothing, democratic government will disappear. Why bother going to the polls if you can’t get anything out of it?)

We’ll take some further guesses about what is ahead as Mr Market reveals his intentions.

But let’s take a quick look at gold. Doesn’t gold look ahead too? What does it see?

Judging from the evidence, gold sees a slump too – but a slump that won’t be nearly as bad for the yellow metal as for other metals...and equities. Stocks are down nearly 50% worldwide. Gold is down only about half that much.

What else does gold see?

Our Oracle on gold is our old friend, Issy Bacher. Issy wrote a few months ago and warned that gold was going down. Friday morning Issy sent this note:

“I am sending you a graph of the Gold Price at yesterdays closing fix of $ 738.

The bottom cycle graph clearly shows that the cycle has bottomed and is rising in the future zone.

The top line graph shows that the gold price did find support just below $ 738

Conclusion is that for the immediate future the gold price is now in an upward trend.

By the way the DOW has very strong support round the 7500 level and the cycles are bottoming.”

We don’t know what kind of “cycles” Issy is looking at, but by the end of the day the Dow had gained nearly 500 points and gold was up 50 bucks, rubbing up against $800 an ounce. [Ed note: to find out what cycles Issy sees ahead, follow this link]

As we know, dear reader, it’s deflation now...inflation later. It’s Japan now...Argentina in the future. Gold may be looking further ahead...to the pampas. Or else, inflation may be coming sooner than we think.

*** A news report on Friday afternoon: “Somali Pirates in Bid to Buy Citigroup.”

“We need a bank to keep our ransom money,” said the Pirates’ leader.

*** “Matthias, are you by yourself?”

The boy was about 8 or 9 years old. He had come in the bar by himself and told the woman he wanted to have lunch.

“Why are you here alone? Where’s your mother?”

“She’s at home...but she’s having some trouble with Dad.”

The scene took place in a little town in rural France this weekend. We had gone out to work on our house – redoing the cement joints between the walls and the new windows. On our own for lunch, we went to the local bar, which offers a handy restaurant in the back room. A complete meal for only 10 euros, it advertises. In this time of financial crisis, it seemed like a good deal.

While we were finishing our entrée, Matthias came in...a good-looking kid with the well-defined head of a 12-year old and the body of a younger boy.

“Go take a seat,” said the woman behind the bar.

After the boy had sat down, she turned to a man also working behind the bar. Both were in their mid-40s...the kind of people who run small businesses in France. Pleasant. Hard working.

“This is terrible. We can’t let him eat lunch alone.”

“What do you mean? His mother sent him here. It’s none of our business.”

“Well, it’s not right. He shouldn’t have to eat lunch by himself. The poor little fellow...”

“It’s not our problem...”

“But it’s our restaurant...and we don’t want a lot of sad, lonely people eating here...especially, children.”

Your editor tried to look cheerful.

“Go get Georges.... He can eat with Matthias.”

“He’s already eaten.”

“Well, he can eat again. He won’t have any trouble.”

A couple of minutes later, a big boy with a big grin came from upstairs. He appeared to be about the same age, but twice the size. He sat down opposite Matthias.

“Hey...how you doing?”

“Okay...”

“You eating by yourself?”

“Yeah...”

“Mom wanted me to join you. She said she’d pay for both of us.”

“Oh...good...”

A minute later, the two boys were talking happily about TV shows...or video games.

Your editor finished his cheese...and left. P.S. If you enjoyed this article then we encourage you to sign up for the free Fleet Street Daily eletter. Learn what you can expect from today's markets -- and how to prosper in the face of uncertainty. You won't find more thought provoking writing anywhere on the Internet.

^ Back to top

BlinkList
Del.icio.us
Digg
Facebook
Google Bookmarks
Livejournal
Newsvine
Reddit
StumbleUpon
Yahoo! My Web

Balance Sheet Recession Looms Ahead : Horrible Times Ahead

RELATED ARTICLES

FLEET STREET LETTER

SMART COMMODITIES UK

PROFIT HUNTER

ZURICH CLUB

Horrible Times Ahead