Bear trap
Illustration: Adam Fitzcharles

Financial Gitmo

By Cassandra*

I am a survivor of the Japanese bear market. Twelve (or twenty - depending on your school of thought) long years of it. Call it "Financial Gitmo". The lessons of this incarceration were varied, and the experience invaluable - indelibly etched upon my brain for ease of retrieval when required in the future. Like now. One such lesson was that once the initial violent trauma of the market waterboarding dissipated, the mind-fucking treachery and psychologically-painful water-torture begins. Not unliike being forced to watch the same lame episode of "Kudlow & Cramer" or being subjected to a Mossad interrogation (at least according to recountings of the tens of thousands of Palestinians so graphically subjected).

Deeply oversold markets can rally for all manner of reasons: simple sellers' fatigue; government intervention, whether directly in markets (PKO anyone?) or indirectly through moral suasion, jawboning, or policy response, inciting the feedback loop to short-covering, which, causing higher prices fuels positive momentum and the optimism that the worst is maybe, possibly, hopefully over. The Strategist weatherwanes (like Abbey Cohen or Alex Kimmont) chortle which way the wind is blowing rather than where it will blow tomorrow. Professionals get squeezed-in to further penalize their (and their customer's) less than prescient capitulation at or near the prior lows. These episodes typically last longer than most bears can tolerate, both in time, though more acutely in P&L. They decry the move and point to fundamentals (and they are of course right, though it matters not). They conjure conspiracy and highlight manipulation (and may be right) but it gets no traction for the bullish side has more constituents than the bears. Their confidence wanes with their P&L, each higher intermediate-term low pushing them one step to closer to covering. The trend-followers have long-since bailed - even the longer-term programmes are turning bullish. Markets do, after-all, lead, don't they? Finally, like the interrogated, the short is broken and confession to anything and everything is achieved. And like a false confession, this capitulation is a hollow victory for the bulls and the market, since it is likely to be an intermediate-term top - NOT an early whistle-stop along the New Prosperity Line, particularly where The De-leveraging is The Big One.

So hearing Mobius, Cohen, and other pundits speak of bull-markets and greenshoots is predictable. But I reckon that Mssrs Schilling,and Roubini, will in time - once again - more likely be correct insofar as I believe continued recession and mild deflation will predominate longer than optimists (and inflationists)- and in particularly longs, can bear once the shorts have sufficiently covered and the intermediate term optimism rolls over with the continued bleak news flow. Then, the trend-followers will mechanically bail, and reverse positions, prescient programmes and specs, too, will re-establish their shorts, until finally the squeezed-in will, once again get squeezed-out, and those amongst us with weak constitutions will be forced to hide the pills and sharp objects to avoid .... tragedy.

*not her real name. Cassandra is an investment banker who authors the blog Cassandra does Tokyo.

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