Depression, Climate Change, Swine Flu and Markets

Dear Readers,
These are interesting times and people have the tendency to develop new theories in such times some of them derived from history and some from recent past. One thing that remains most influencing on the majority of population is short term memory, people are most affected by the events and patterns that happened in recent past. Today I am posting here my views on the bad situation of economy (which I say is Global Depression ) and a potential pandemic - Swine Flu.

Global Depression
When I use the word "depression" I get immediate negative reaction and disapproval from most of the people. They say this is not a depression as there are no food lines, no social unrest, no major shift in people's habits etc. like that was during The Great Depression of 1930s. They say its only a "deep recession" and only a matter of time before we "get out" of this downtrend and see those good old days again.

But, I insist. This is a Depression. There are no food lines, no social unrest...... of the kind of 1930s but still this is Depression and that too a Global Depression. Why? Well, you need to know few things before comparing today with 1930s time.

The situation today is quite different and the base (from where it started) is very different in both situations. Today there are more people with more wealth to withstand the early part of this Depression. Comparing to 1930s, there are many more households that fall in upper middle class category and they have enough money to stand in food lines easily (I wish no one has to do that). In fact, there may be no food lines at all even when this Depression is in full force and deepest point! However, what do you say about the unemployed having "Unemployment Benefits" by govt? Isn't that similar to food lines?
The dynamics are different today and so comparing the two times exactly is not fair. Instead, we should think on the line that people are changing habits very quickly. Their perception of life is no more the same it used to be before 2008. They are suspicious of "investments" in assets ranging from stocks to houses to even art! They are not spending like there is no tomorrow, even if they have money.
And, this is only first year of this Depression. In 1930s, there were several occasions when there were strong and powerful rallies in markets that made people believe "worst is over" and they were disappointed every time for at least three years!
Why do I think this is going to be worse? Let me put the actual situation in simple words - people in US and other developed world spent too much on things they did not need with the money the did not have resulting in excess inflation in asset prices of stocks, houses etc. Credit was available to anyone who was willing to take risk and spend no matter what his / her capacity to pay back was. Too much of credit and too much of spending could not sustain and finally when it hit the wall, the leverage factor which was multiplying profits changed direction. Now, we are still at the beginning of this massive unwinding of the excesses that were created in the boom time and all the govt can do is merely postpone the recovery that would happen if it were left to the market itself to correct. That's why I call those bailout plans "Crisis Postponement Plan". Please read these posts here and here for my detailed views on this.

In the first paragraph I told about people's short term memory and its effect on their thinking. Today so many people are optimistic because they still remember the recent past (recent recessions and how things improved) and don't want to believe that things are very different this time. They still think that govt can "correct things". By this I don't mean there will never be a recovery, what I mean is this time there is a lot to happen before we start rising again. We are just in the first phase of a big Depression and there are a lot of things waiting down the road.

Climate Change
Global Warming is definitely making its presence felt as there are evidences of big changes in Arctic ice sheet, rainfall patterns, mountain glaciers and temperature patterns across the globe. Freshwater sources are depleting fast, revers are drying up or flooding - going to extremes faster than usual. However, still majority of people are in no mood to accept these facts. They deny it. The deniers are also affected by short term memory which makes them think that these "small" changes are not going to do big damage and so they don't need to care at all.

We as a species have been growing too fast for some time in terms of our number of heads. The total population of world was 1.65 Billion in 1900 and today there are 6.77 Billion of us!!! We added SIX BILLION MORE of us in a century! or to say in other words, we MULTIPLIED FIVE TIMES in 108 years!!! More people means requirement of more resources. Mother earth has plenty of resources - almost everything from fresh water to natural resources of all kind to sustain even this growth BUT then we have the DEVELOPED WORLD. Thanks to their outrageous lifestyle of over consuming and wasting which has put huge pressure on resources. The culture of "long drive for pleasure", wasting food, wasting water (private swimming pools, lawn sprinklers and what you have) was the main driving force behind the prosperity of past 50 years but this over consumption was unsustainable both economically as well as environmentally and SO WE ARRIVED AT PEAK OF BOTH.

Mother nature has big heart but she is equally brutal when we take everything for granted. The bad thing is she does not care who suffers. So is this Depression a manifestation of nature's balancing act? May be. The only way people could cut back on excess consumption could be this economic collapse otherwise nobody would want to stop throttling his SUV and burn fossil fuels for no requirement. Showing off is human nature and people just don't behave themselves. They have to receive a message and they take it the harder way. The rule of pain or gain could have worked as well but that would have taken longer time and the damages by then would be irreversible. So, there is good reason to believe that this Depression is at least coincidentally a balancing act by mother nature in response to human activity.

Swine Flu
Mainstream media has started reporting the outbreak of swine flu as "next big worry after recession". Some say its going to wipe out "the recovery in economy". First, there is no recovery at all. If you say -6.1 than -6.3 is real recovery then you are daydreaming. Second, this flu is not that big a trouble as the worst case scenario, as reported by computer simulation by scientists, is a mere 1700 deaths worldwide and that is when it is handled the worst way. So if you are fearing that this flu may be a real pandemic, you are worrying too much.

History shows that big economic downturns and big epidemics go hand in hand but this flu doesn't look like a big one, at least so far. There may be epidemics but swine flu is more a danger to poor pigs who will get culled, than humans. However, we never know what methods mother nature may have in store to contain growing menace by the so called intelligent species.

Markets
Stock markets the world over are perhaps underway a big bear market rally. Most indices are up 25% or more for last six weeks or so. Opinions are divided. Some say its a new bull markets while others like me say its more a bear market rally. Markets have the tendency to retrace to 50% on an average and as high as even 62% some times and still remain in the primary trend which means we may see this rally to continue further and still we be in secular bear market. Fundamentally also there are no signs of a meaningful recovery (a pause is not recovery and so don't believe the "-6.1 than -6.3 means recovery" guys). There is a long way to go before we hit bottom in the downturn and this Depression will give many more such big bear market rallies before we hit ultimate bottom.

For traders I don't recommend following fundamentals and instead chart patterns represent better outlook and should be looked at for clues. The chart patterns for US markets are not suggesting any change in primary bear market. However, I am not so sure about Indian markets as the chart patterns on Nifty and Sensex suggest a disturbance in primary bear market. But, this does not mean there has started a new bull market. Even if the primary bear market is over, there may be a sideways trend for some good time which will eventually equal a timewise bear market. Its too early to say anything for sure and we need few confirmations before we seriously consider that Indian Markets have bottomed out.