Trapped in No Man’s Land before a Huge Rebound

Where are we?

The ‘bombing’ has passed, but the occasional sounds of machineguns and explosions tend to be continuing.

Today’s stock market is a warzone. Investors are shell-shocked and afraid.

Stuck in the trench we’ve dug for ourselves, we’ve no choice but to carry onto dear life as the bullets fly over us. No one dares to stick their head up right now.

Markets are down as well as news is grim. A boost in interest rate from the Federal Reserve is extremely likely. Will it be the start of an even more severe crisis?

It seems, the actual worst of our nightmares is yet to come.

And we are trapped here, in no man’s land.

We are bound through our instincts

Falling Chinese industrial profits, and a beaten-up Glencore.

Some years ago, I was having dinner with Glencore traders within Beijing. Things were bad back then, and now they’re branded the ‘Lehman’ of the mining industry.

It’s funny how the world can turn on you so quickly. However is everything the media says true?

The market is driven by economic indicators for example industrial profits and Purchasing Managers Index (PMI).

Despite the obvious trouble with data accuracy, markets usually take these numbers too much. They overreact to them as if these were prophecies from the Bible.

What’s unfamiliar person is the market reacts in order to past information as if it was new. The collective storage is exceptionally poor.

But because fear takes a firm hold of people’s sanity, the market can create a story of its own, like a madman.

The market believes it, and thus makes it a self-fulfilling prophesy.

And here we are, in the trenches of a headache that we’ve created for ourselves.

In many ways, stock investing is extremely simple. After all, you only have three dimensions to think about – up, lower and time. Is that so difficult? You buy low, hold onto this, and you sell high. Issue solved.

But it is not that simple, could it be? If it was, everybody would be a genius investor. The problem is determining if something is low in the present relative to its future price.

For example, if I said China is very cheap right now, would you believe me? I wager your innate fear would keep you away from what seems to be a trouble spot around the globe.

That’s the problem. We can never be sure of the future. Our primal instinct performs tricks on us and retains us away from reason.

This is the basic dilemma between feeling and reason. It is not financial theories and mathematical models that drive decisions, it’s emotion.

How long will we end up being stuck here?

For those who incorrectly believe a falling emerging market is somehow good for developed markets, here is a reminder.

Markets fall together, especially during a turmoil. So this is not a zero-sum game between world markets.

But how long will we be stuck here in no man’s land before markets bottom and rebound?

I have done some calculations on the timing of a bottom. But as with anything to do with the future, there is no definitive answer. Rather, a range of possibilities.

I have compared the Hang Seng’s current downturn to past crises.

In recent years, the two worst downturns were the 1997 Asian Financial Crisis and the 2008 Global financial trouble. The two were similar in destructive power. In fact, the actual Asian Financial Crisis saw a more severe downturn on the Suspend Seng than the GFC.

We have also seen numerous less severe downturns through the years. The downturns associated with 1989 and 2012 were similar in scope as to the has happened now. The 1994-1995 crash and 2001 crash were more severe.

Source: Port Philip Posting Research

So what we have to decide now is the scope for the current downturn.

In recent weeks, we’ve gone through what seems to be a bottom in the Chinese as well as Asian markets. But is this the bottom? If it truly is, then we’ll see a come back as early as two months from right now.

However, if we’re in the early phases of a mid-level crisis, then we are headed for another six months associated with weakness.

And a full-blown crisis on the magnitude of the Asian Financial Crisis or the GFC will see us go through a year of weakness.

So which will it be?

My bet is that the marketplace will bottom now, however it will flirt with the bottom for a few months. Then we will have a rebound.

Why am I so optimistic? Because I don’t see an excessive amount of systemic risk right now. The actual falls have mostly already been based on past information; The far east, commodities, currencies and so on.

How certain am I? Well, the fact that I can not see systemic risks now doesn’t mean there are absolutely not one. They can develop in time. And when they do, they’ll be revealed over time.

For you, the question is whether to buy now, or a little bit later on.

If you still doubt that rising markets and commodities are cheap, then you are really lacking the point. There’s no doubt that these markets are cheap. The question is when to buy.

My advice is to get ready to get out of the trench. The time is coming soon!

Regards,

Ken Wangdong,

Emerging Markets Analyst, New Frontier Investor

From the Port Phillip Publishing Library

Special Report: The End of Australia Vern Gowdie’s new guide is called The End of Australia: The Real Story Behind Australia’s Financial Collapse and What You Can do to outlive It. We are mailing free copies of this book to anyone who requests one online. It does not alllow for cheerful reading. But the concept is that you’ll be safer (and much wealthier) in 10 years’ time from receiving a more alcohol free and realistic analysis of what’s going on…what happens next…and just what you should be doing about it right now… (more)