fat prophets says hang in there

I received this message from Fat Prophets today. I am not sure how much notice one should take of their view.

May be I should cancel my subscription.

loki


"Today’s market action has been truly extraordinary. What we are witnessing is complete and utter capitulation by investors. Fear and panic are at historical extremes and are unsustainable.

Market’s are pricing in a systemic collapse and looming depression whereby the wheels of commerce grind to a halt because of the drying up of credit. We have stated in the past that we do not think this will be the outcome. It’s a high risk assumption, we know.

The 1920s credit bubble was resolved with a deflationary depression. Interest rates were increased and credit tightened, which exacerbated the downturn. We believe this decade’s credit bubble will be resolved via inflation. Efforts to reflate will take some time however and official intervention will continue to escalate.

In the 1930s, there was no electronic banking system and culturally, the financial world was wedded to the concept of sound money. Now, money is created out of thin air but as much as money is now being freely created, the fear of bank insolvency is not allowing the banks to lend and function properly.

We believe the next step will be for the US government to recapitalise the banking system. Once the fear of banking insolvency is removed, the flow of credit will begin and investor fear and panic will subside. This will most likely be the outcome of the weekend’s deliberations amongst global policymakers.

We’re not suggesting this will be a panacea for the global economy, which is clearly slowing. But such moves will at least allow credit to be advanced to worthy recipients (not western consumers who already have too much debt).

The New York Stock Exchange has experienced three ‘90% down days’ this week, which represents evidence of capitulation selling. This is almost unprecedented. (A 90% down day means 90% of stocks falling on a price and volume basis).

In what we believe to be a telling move, US Govt bonds have been selling off in recent days. The 10 year govt bond yield reached a low of 3.24% on 16 September (meaning bond prices peaked). On 8 October, yields had risen to 3.4% and after trading last night were 3.37%.

Falling bond prices do not point to a deflationary scenario. We believe the bond market may be beginning to price in the torrent of government paper they see coming on to the market to bail out the system.

As hard as it sounds, Members should hold their nerve at this point. History suggests selling pressure that is driven by extreme fear is not sustainable. The past two weeks selling has been unprecedented and shown no concern for value.

We understand many Members are angry and disappointed that we have not sold many stocks that are now in freefall. Our inflationary reasoning is obviously wrong in the short term and right now, there’s no such thing as long term investors. But this is not the end game.

The stock market does not cease operating after today and those brave enough to endure the storm will live to fight again. The real battle now is to control emotions.

We will be posting a new audio on the website this afternoon and encourage all our Members to listen in. In addition, we are providing daily Fat Chat (blog) updates on the site.


Best Regards,

Fat Prophets