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I Think, Therefore I am in Cash

Posted December 15, 2008

Topics: Geo-politics, Finance & Investing

Market Pulse: I got a raft of e-mails chastising me for being too bearish in last week’s newsletter after the market rallied on Monday. This is standard operating procedure for the Bulls with rose-colored glasses.

The problem with most traders is that they are far more susceptible to getting sucked in to the "the bottom billion" hype to buy on up days, and that partially accounts for the long side orientation of most traders. That kind of psychology is a ticket straight to the poor house. And by the way, if anybody noticed, the market did finish flat for last week after its early bounce.

What annoys me now is the talk of a Christmas rally -- or more politically correct, a year-end rally -- and such chatter is now even appearing in the bearish Barron's magazine. Well, maybe there will be a rally and maybe there won't. Betting on such a rally, however, is not smart trading but simply a role of the dice. That's gambling, not intelligent speculation.

What intelligent speculation tells us is that before the market finds its bottom, the economy is going to have to find its bottom. Both the data and anecdotal evidence tells me that the economy is still likely to get worse than better. I think, therefore I am in cash.

As for the anecdotal evidence, we all know that a lot of people have lost a lot of money in the stock market, and this will weigh down consumption for some years. We also know that a lot of people lost a lot of money in the housing market, and this negative wealth effect likewise weighs down the consumption component of the GDP equation.

There are also some people out there -- and I know at least one of them -- who decided not to put their money in the stock market but rather base their retirement portfolio on rental properties, typically a very safe and responsible that. Nonetheless, the recession has now gotten so bad that even these types of investors

Anecdotally, the story I heard from one poor soul is that three of four of his rental tenants are least three months in arrears on their rent, and this has put him in arrears on his mortgage payments. It would be a tragedy for someone like this to wind up in bankruptcy and without retirement money because of the ripple effects of this recession. I wonder why it is taking so long for the federal government to give relief to so many who are on the brink of foreclosure. We hear about all this money being thrown at the problem, but somehow none of that money seems to trickle down to Main Street -- or suburbia as the case may be.

The other thing that is becoming increasingly apparent to me is that this recession is hurting almost everybody. I live in Orange County, California, which is one of the richest counties in the nation. Despite this wealth, people are hurting. The prevailing joke now among a lot of the retirees I know goes something like this: "yesterday I was retired. Today I'm unemployed."

If things are bad here in Orange County, imagine how bad they must be in Michigan. What annoys the hell out of me here is that our government is willing to lavish tens and hundreds of billions of dollars from the likes of Citibank and an AIG but can't afford a paltry $15 billion to save US automakers and that significant portion of our manufacturing base that depends on Detroit. Of course, I can see a few of you out there reading this newsletter roll your eyes. Well, I do sympathize with the idea that we shouldn't be in the business of bailouts. But I am convinced that this crisis is not only worse than a lot of people imagine -- especially meathead politicians like Jim Bunning. I'm also convinced that once this recession is over, the US economy will continue to stagnate if it is unable to resuscitate its manufacturing base.

Turning to a more global perspective, Russia has now joined the ranks of those countries that have succumbed to recession. This, of course, is symptomatic of the collapse of the commodities bubble. Europe is still grappling with the idea of a fiscal stimulus -- Germany's prime minister fiddles while Rome literally burns. China's economy seems to have gone from fourth gear to second gear, with a lot of political grinding in-between. China's situation is reminiscent of the old theory out of the 60s by Walt Rostow about the "revolution of rising expectations." Millions of unemployed factory workers do not an harmonious society make. America will wind up paying the price for this because China will resort to an escalation of its unfair trade practices and classic beggar thy neighbor.

As a final holiday note, the family went out and got our Christmas tree last night. This late in the game it should have been slim pickings. But there was a surfeit of trees and few customers -- another sign of the recession's neutron bomb. Meanwhile Toys for Tots in Los Angeles ain't got no toys for any tots.

So here's my bottom line: it's too early in the game to go bottom fishing. The odds are better that we will retest lows then bounce off any established bottom. I'm willing to change my opinion on this at a moment's notice. For now, however, take care of your cash -- it will be very useful soon.

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