Market Becalmed

“As a wave increases in height, its mass increases exponentially, as does the energy released when it breaks.”
–Jon Krakauer, in Mark Foo’s Last Ride

Big wave surfers could be said to be certifiably insane. They purposely paddle into huge waves for a  terrifying ride that will kill at least one of their number every season. But they know this, and they travel the world in search of the biggest, hairiest waves because, for them, the thrill of putting themselves to the test outweighs the risk.

Today’s investors, on the other hand, paddle around in a grossly overvalued stock market as though they were floating in the shallow end of the kiddie pool, fully expecting that the market’s wave will defy gravity and carry them up. At least surfers know what direction they will be traveling.

                              Dow Jones Industrial Average
                                                    Monthly

In his most recent report, Robert Prechter cited eight measures of the market’s internal strength. All of them were comparable to their levels in the summer of 2007, just prior to the two year crash that took  the market down 52%. He said, “… I am not sure I have ever seen the technical condition of the market look this immediately bearish.”

Observations

My view is that the crushing debt overhang that pervades the entire financial system is the biggest inhibitor of serious economic growth. Unwinding debt of this magnitude will be painful but, sooner or later, it will have to happen. If the Republicans win in November and have their way  in Congress,  dealing with the government portion of the debt will be sooner rather than later. Given that government spending is 36% of GDP, anyone who imagines that drastically cutting services–laying off thousands of government workers and eliminating or reducing entitlements–will be bullish for the economy or the market over the next few years has to, indeed, be certifiably insane.

Cheers,

Rod

No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.

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