Friday, October 24, 2008

Great Depression v2.0: Missing Piece Of The Puzzle

I mused about possibility of repeat of Great Depression here almost a year ago. I thought that we have only two crises of three: financial and real estate, but I couldn't find structural crisis. It just hit me: we have a huge structural crisis now, caused by globalization. And, just as an icing on a cake, we also have the Internet, which destroyed a lot of old forms of money making and will destroy even more. So we have all three components, the only question is: can Fed print money fast enough? Because our only hope is to inflate our way out of GD v2.0. It doesn't even matter anymore if we have big inflation as a result. Who cares! It's still better than deflation.

I'm also afraid that governments might try to roll globalization back. That cure would be much worse than disease. Of course, nobody can kill the Internet right now, it's here to stay.

Today action on the market was strange, to say the least. Futures stopped at limit before opening, I expected capitulation, was ready with trading screen open and finger on the mouse... And... nothing. Of course, almost everything went down (with exception of UUP, I'm still congratulating myself with that bright idea). But not enough. And it was obvious from the action that buyers were ready, sometimes with limit orders in the system. Once prices went down to some level, buyers took everything and then some. My only buy for today was Altria (MO), I increased my position. At price under 19, dividend rate is over 6.7%, that's incredible. And company just increased dividend, no way it's a dividend trap. Who needs bonds if you can hold Altria! The fact that it's an ultimate recession-proof company doesn't hurt.

I think market is going lower. Sellers are not done yet, we need to see big capitulation.

Full disclosure: at the time of publication author had long positions in MO and UUP and no positions in other stocks mentioned. Positions can change any time.

Disclaimer: This article is not intended as an investment advice. Every person should make her/his own investment decisions based on all available information and advice from her/his own financial advisor.


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Sergey said...

Hi! Good post. You may be interested to know that Mikhail Hazin (Михаил Хазин) has also predicted and analyzed structural crisis in the US economy back in 2000-2003:

Muddling Investor said...


I took a look at Hazin's articles. Didn't read them in full, sorry, don't have that much time. There is a little bit of mistake in his analysis: IT (information technology) revolution was not enough to cause structural crisis. It was long, relatively slow process until 1994, when Web emerged. And even Web alone was not enough. The main hit cam from globalization combined with Web.

There is an even bigger mistake in Hazin's analysis. Current structure of West (not US only) economy isn't bad per se. Countries can and do live with huge external debt and huge imbalances of trade. That's because money flows are not restricted and a lot of trade is not reflected in statistics. For example, when US buys tens of thousands of computers from China, it's in statistics. When US (Microsoft) sells tens of thousands of Windows licenses for said computers, it's not in statistics (not "real" goods). As a result, you can't trust external trade statistics at all.

Of course, the biggest problem of mentioned articles is complete absence of any real economic data in them. And a lot of factual mistakes. Main thesis "investment into new economy caused underinvestment into old one" is not even laughable. It's just ridiculous.