THE DOT - if this turns orange or red be alert

Monday, August 4, 2008

the basics of a real bottom

1. Almost no one should call it a bottom after a 20% drop, people are far too reluctant.

2. Valuations do not mark bottoms and if they are so steeply undervalued that is not a pathetic forward earnings of 14 times PE. Especially since that is based on analysts estimations, who as research found out, call it wrong at least 75% of the time.

3. We need capitulation all the life insurances, which have increased their stock exposure in 2007. They need to sell out like they marked the lows in 2003 – this has not happened at all.

Common sense – worst-case scenario is not here yet. We need the fundamentals second and third wave to get into the game. Credit card, consumer loan, and exposure of the banks still have to collapse. The bond bubble, which is now the outlet for inflationary investing (bubble) should burst as well - worldwide negative interest rates are a warning by itself and cannot cure severe structural problems. Take Japan. They have interest close to 0 for 18 years already, the index dropped in 19 years from 38000 to 8000 and is now at 13000.

The basic scenario in assets is deflation because banks destroyed trillions and the phony value of homes was taken away. In order to fight that Helicopter Bernie is working the money press 24/7 and inflating to counter that. At the same time, prices of commodities rose sharply for different reasons and, in 2009 going forward, they will be rising again due to different reasons (we will explore that another time). We have a conundrum of inflation and deflation forces but the bias is towards hyperinflation with the central banks trying to save the banks from the inevitable -- bankruptcy float.



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