Land of Confusion

Ooh superman where are you now
When everything's gone wrong somehow
The men of steel, the men of power
Are losing control by the hour
--Genesis

We're clearly in the midst of a multi-day market crash, with major indices off 20% or more since the beginning of the month. A number of questions have clearly been answered as credit contracts, leverage is unwound, and asset prices melt around the globe.

Q1: In our road to perdition, will deflation or hyperinflation be our initial hurdle?
A: Decidedly the former. Prices are declining as leveraged risk is unwound on a massive scale.

Q2: Is the rest of the world be relatively immune from US credit market problems (the so-called 'decoupling theory')?
A: Nope. Correlation in world asset markets has dramatically increased during the period.

Q3: Will assets of 'fair value', such as stock sporting attractive valuations, escape the selling relatively unscathed?
A: No. In many situations, they go down more. When folks are selling anything that isn't nailed down, they look to items that have yet to get pounded, such as the long held 'consumer safety' stocks like Procter & Gamble (PG), Johnson & Johnson (JNJ), and Exxon Mobil (XOM).

My biggest mistake during this downturn relates to getting Q3 wrong ex ante. I've been accumulating some pounded down names in the pharma sector over the past six months or so. The thesis was that they represented attractive value and had already endured significant price declines. Thus, they'd be more prone to swim against the tide of major selling.

Boy was I wrong. The relative strength of these holdings was good until this last leg down, where forced selling now finds them experiencing daily moves (-5, -8, -10%) greater than names.

So I find myself kicking myself and muttering, "Dang, son, you knew that, during a major deflationary event, the chances of any stock holding up would be low."

Our friend, Clarity, always seems to emerge in hindsight.

no positions