Tread carefully. My thoughts are that we have hit a short term bottom - a few Bearish punters think that as well. This market might rally for a few days, a week, a few months, but I don't think it will last.
Why not? Firstly, job losses are just on the way up and demand is falling and this won't come fully through in earnings reports until later. Also, credit is being restricted and people are less inclined to take on new debt in uncertain times which means less aggregate demand once again reducing earnings across the board, forcing weaker companies into insolvency and reducing employment.
I was considering buying a house (not that I thought it was a good time to do so, but due to family circumstances). Now there is not a snowballs chance in hell that I will be making that move for at least a year before I see where prices end up. Many will be thinking like me. The psychology of deflation is only just starting to take hold and this will be almost impossible to turn around over the coming months and years. People are going to be waiting before jumping in because their is so much uncertainty and no one knows who to trust with their money. Thus, because people will only purchase when prices come down, prices will come down. But as they come down, people expect them to come down more and hence hold of spending so the cycle feeds on itself. Stimulating the economy via monetary policy becomes hard, and this will lead to a lack of confidence and unemployment in general thereby exacerbating the cycle.
Personally, I believe that we are in a 1990's Japan style deflationary period. There are things that the central banks are going to try to do to inflate their way out of this, but I am not sure that they will be successful in their endeavors because of my reasoning above.
So what to do? Cash is king in a deflationary environment. If the central banks do manage to inflate, I would shift out of cash and into commodities (oil and energy in particular). I still think energy is a great long term play. I think there is a 85% chance of deflation and a 15% chance of a central bank induced inflation.
Personally, I feel housing is highly overvalued in Australia. Values of houses are far too high at 7.5x median wage when the historical average is around 3x median wage. In my opinion, buying a house right now would be like buying stocks in pets.com at the height of the internet bubble.
It cannot hurt to wait and see. One of the biggest mistakes I made after the internet bubble burst was jumping in and purchasing a couple of solid stocks on the cheap afterwards - I should have waited a lot longer and I intend to wait when purchasing now. This won't be like the 87 crash. That was a price correction in an overall bull market. What we are seeing now is a panic, where people don't know how to value anything properly and no one trusts anyone. The dynamics will be vastly different unless the central banks are able to kick start things again which while possible, is uncertain at best.
