I think we are in a watershed event that is going to lead to depression around the world, but even that situation will have an end. The Great Depression lasted 20 years, even though historians seem to gloss this fact over with nonsense about the New Deal and other socialist programs that basically were make work, survival programs and little else. But, even in that vein, one of the great bull markets in history occurred between 1932 and 1937, where gains were in the area of 400% on the Dow. What followed was a bear market that was also one of the worst. There was a difference then in the sense that they at least could debase the local currencies and leave gold for international settlement. That end of the game is over and the only thing left to do is move the currencies to zero as a solution. I doubt TPTB will allow that to occur, as it would mean everyone was bankrupt. Also, the impact of intentional deficit spending isn't new any more and won't have the impact it might have had then. the only solutions so far are to sustain prices and demand at unsustainable levels and massive resistance to let the situation finish adjusting and put the problems behind us, thus the heartburn might just turn into a heart attack.
The US is the demand for the world. Robert Rubin undertook this path in the late 90's in order to attempt to finish the Asian crisis and we forgot to stop it. Trade deficits exploded with the stock bubble, then florished with the housing bubble. It hasn't seemed to sink into the average Joe's head or the average analyst what impact this trade deficit going away is going to have on the rest of the world. This is demand fueled by credit from the US. It might be money loaned back by other countries, but the credit is made in the US and that system is reversing itself fast. I believe this mess has the capacity to balance the US trade deficit and there isn't 5 countries combined in the world that could replace the $600 billion or so in excessive demand that the US brought to the table and if there are, it is only due to the fact that the US is running deficits with them right now. This amount of credit would suck China dry in about 2 years. They won't be able to expand or maintain trade by shrinking the value of the medium of trade.
The idea of Peak Oil might turn out correct not because potential production has peaked, but because consumption has peaked. I think people now will be shocked to see how much less gasoline is used, how much less paper towel is used and so on and so on. Take away pricing pressure and you will soon see the shitcan the Arabs have put themselves into with all their financial commitments. India implodes and the financial backing in China disintegrates. Commodities collapse and the commodity exporting contries go with it.
It will be worldwide and the signs are already showing worldwide. One of signs of this will be oil and what is right now being viewed as a bullish development, the price coming down, is either a temporary respite or a sign that what I am illustrating is starting to occur. The price of oil in this area has been there too short a time to have caused much of the economic grief that has shown up on the scene and much lower prices would have to appear before there was any impact on the current conditions. Bullish or not, oil is a limiting factor on economic expansion due not to price but to supply.
If demand for oil is indeed falling and price follows, then at some price there will be a need to sell more oil, not less oil due to financial necessity. At what price does this occur? I am guessing under $70 and maybe under $55. Remember if you were there, that in 1980, we were never going to see oil at $13 again and yet we did on and off for the next 19 years. I think $55 is a much more substantial price than $13 was 25 years ago, due to the direction other assets are headed and the relative financial position of the exporters. It is also substantial in that instead of allowing consumers to keep there cash and pay down debt, it keeps the money in circulation and in bank accounts. The main reason oil prices are inflationary at this time is they keep the money coming, but the consumer can only send out so much before they are tapped.
I would guess the best way to tell that my prognosis is wrong is if the bull win enough rounds to keep this from occuring is that home prices quit falling and home starts tick up(this is probably a nonsense sentence, but I didn't know how else to write it and I hope you know what I mean in the form of demand). As long as these are inclusive of each other, this game is going to go on and it isn't a housing crisis to start, but a housing bubble. Without price increases, construction increases only prolong and make the problem worse. I think the other thing is that oil demand remains high. As long as the demand and price for oil are high, the bulls are still in the game, contrary to the news. The most bearish news right now is if oil keeps coming down. The bulls didn't need lower prices, they just needed a price where it would stop going up. I believe that if China isn't in full financial crisis by this time next year or apparently headed for it, depression will probably be avoided. I would watch to see how much it slips. A legitimate boom continuing in China probably precludes a depression, but I have to believe for the time being that China is booming toward over expansion that won't be profitable. There is a lot of money from around the world chasing Chinese assets that outsiders really cannot own. The return will be zero.
Now if you followed me closely, I might have made sense. But, if you got lost by your follow the press logic, you might be more confused than before I wrote this. I think most of us bears believe the US credit system has run its course and this will take down the world economy, but at the same time, we have our eyes on 2002. This time is different, as all the financial companies have impaired financial positions and there isn't any home equity left to leverage. The hedges are fully leveraged and before long there won't be a counter party to buy what they have to liquidate.