Monday, April 19, 2010

How Do You Measure A Paradigm Shift?

For the record, this is not a recession.  This is not even a very harsh recession.

What we are currently smack, settled, and complacently in the middle of is a Depression.  A rare, multi-generatonal economic "phenomena" that takes the vast majority of the population by surprise.

A depression is not the type of situation where supply has outpaced demand growth (due to minor levels of malinvestment, generally due to the meddling of money supply and interest rates), where the heat needs to settle in and the shelves need to clear some space before growth can resume.

A depression is where capital has gotten so out of whack with natural market forces that much of it needs to be put on fire-sale and fast. This isn't a run-of-the-mill recession where the government puts on the appearance of "fighting" it, and "providing jobs" that seems to work enough for the non-economically educated to give them some credence.  A depression is where generations of "help" from the government and easy money and credit have finally misallocated such a vast amount of resources and capital that the whole thing just sort of gives.

It would stand to reason that since this literal era of misallocation and malinvestment we have concluded took more than a few years (decades, is more like it) to play out, it would take more than one or two years to even partially correct itself.  Especially since it involves something humans seem to fight against tooth and nail.  Change - lots of it.

This massive misallocation of resources happens to include, in part, the attitude and ownership of financial assets in general.  Therefore, the following might be a hint of the future.

One thing I have been forecasting for several years is that the overall allocation of resources into financial assets will decrease sharply in years to come, especially measured against actual capital and tangible production.  There are still swaths of debt instruments that will be declared worthless or "unmarketable" as time progresses, and many other assets worth far more than their real value.  Migrating cash from these sketchier plays (where everyone seems to be going, to get the "yield" compared with high-quality debt) into something safer is certainly one of the smarter things that an investor could do.

Things are lining up for a major market top within the next few months and the coming downturn should put a more realistic perspective on a lot of things that everyone is "hoping" have somehow worked themselves out.

Have a great week!