Monday, August 30, 2010

Is Main St "Walking Away" From Wall St.?

The stock "strike" continued today after a 1 day hiatus as investors piled back into bonds.

There was no real catalyst catalyst today.  I think it's important to note that the volume was very light.  One must take into account that Wall St may decide to take advantage of the last weekend of the summer and head to the beach.  Not sure I buy that(more later).

I find it ironic that a Category 3 Hurricane now looks to potentially threaten New York City this Labor Day weekend as we get prepared to change seasons.

I say this because Wall St will most assuredly face it's own hurricane this fall  as the economy appears to be coming to a standstill. 

I think what few investors that are left in the stock market realized on Friday that Ben Bernanke is pretty much out of bullets at this point.  The markets were hoping for a Bazooka and Bernanke showed up holding a squirt gun.  Stocks liked it but t bonds sure didn't.

Let's remember:

Stocks rallied 70% last year thinking that "the worst was behind us". 

Main St appears to be catching on that this isn't the case. 

They are slowly learning that they were sold a bunch of goods as a combination of fuzzy math from the government, fraudulent "mark to myth" accounting standards, and front running robotic traders all combined to create an economic recovery that turned out to be about as real as Santa Claus. 

Main St increasingly now believes  that "the worst is most assuredly ahead of us".

They have responded to this by running for cover and piling into treasuries as they prepare for the Economic Storm of the Century.

Wall St has responded like they always do:  They have have cranked up the PR machine to full throttle as they toss their puppets back onto the financial media in an attempt to suck Main St back into stocks.

To date it hasn't worked.  Treasuries continue to soar as Main St wakes up to the fact that they have "been had".  Main St's confidence in Wall St is now all but lost as a result of all of the constant games and misinformation. 

Main St's confidence in the government has also collapsed to an all time low.  When you see GDP revisions of 33% like we did last month can you blame them?

Main St. is now aware that the dreams they were sold by Wall St. have turned into a nightmare.

The public now resembles a group heroine addicts that are trying to face reality after coming off their most intense high. 

The reality they are facing is not pretty: 

-  Their homes have dropped in half is some cases. 
-  20% now find themselves jobless. 
-  Most have also seen their life savings drop by 50% twice in the past decade, and they are now petrified that it might happen a third time as the market threatens to drop below 10,000 once again.

As a result of all of this pain its becoming more and more evident that Main St has come to the conclusion that they have had enough of the stock market.

Wall St tells Main St to buy stocks because their money is earning zero in treasuries.  Main St now responds by saying "No thanks.  At least I know it's there". 

Main St has learned some hard lessons during this historic downturn.  They now understand that there is risk in buying stocks just like they learned that there is risk when you buy a house.  No investment is guaranteed to go up.  Anyone that tells you so is likely selling you some type of Ponzi scheme.

The habit of buying and holding stocks was an extremely hard habit to break because it worked so well the past 30 years.  Millions of baby boomers made fortunes along the way as the economy flourished based on the strong tailwinds of a flourishing financial industry, technology, and an unprecedented housing boom.

It becomes very difficult to "walk away" from old investment habits that brought this country the longest period of prosperity in history.

The problem is the world changes no matter how much we don't want it to.  Economic history is is nothing but a series of booms and busts.  The longer the boom, the more powerful the denial of the bust when it inevitably arrives.

The problem is when the bust comes it cannot be avoided.   Eventually the reality of the bust is accepted but history has shown us the music can go on for a couple of years before we all succumb to it. 

The last period of exuberance that we saw like this was in the 1920's.  The collapse hit in 1929.  As you can see by this great graph that's updated daily by Doug Short, stocks didn't bottom from the 1929 crash until 34 months later:

As you can see above, we have managed to hold this bounce a lot longer this go around thanks to a generous Fed.  However, despite their heroics(or stupidity as I like to say), the market still remains 30% below the lows.

Let's also not forget the psychology involved here as well. As I said above, the longer the boom the more powerful the denial of the bust.   We just completed a 25-30 year boom whereas the 1920's boom only lasted for about 8 years.

Therefore, the acceptance of the bust will become that much tougher for people to realize.   As a result, finding the lows of this depression should take longer to reach than the 1930's.  We shouldn't be surprised at the stubborn resilience that we have seen in the stock market.

The Bottom Line:

I think Main St. has finally realized the magnitude of the nightmare we find ourselves in.  The flight to bonds over the past several weeks was the first clear symptom of panic that I have seen since the rally.

I also get concerned when you start seeing selling on days like today where there is no bad news to speak of.  You tend to see days like this in downtrends.  I remember seeing weeks like this when the tech bubble burst.

Let me once again repeat and put today into perspective:  The volume was anemic so you can't read to much into it. 

The question that needs to be asked is why has the volume been so low recently?  Is it because Wall St is vacationing in the Haptons OR has Main St decided to "walk away" from stocks?

This week it's probably a little bit of both.  If we see the trend continue after Labor Day then it's time to really get worried.

The hurricane that approaches New York next weekend will pale in comparison to the economic "Katrina" that we will likely see this fall.

In the meantime, while we wait, one thing is pretty clear:  Main St has lost confidence in Wall St.  It remains to be seen if they can ever get it back in our lifetimes.

Disclosure:  Sold part of my PTTRX position.


getyourselfconnected said...

Well I will take full responsibility for silver tanking as I opened a sizeable paper position today! If people keep staying away from stocks the only metric anyone can point to for a recovery (higher indices) will matter even less to most that it already does.

Jeff said...


I like silver here.

If you look at 1932 stocks and bonds sold off.

The lack of follow through today didn't surprise me. I thought the rally was weak on Friday.

Money ran back into bonds today.

The big money is still scared. MArket looks really unhealthy.

Wouldn't be surprised to see a lot of volatility heading into the jobs number.

Hold on tight!