The Stock Markets Compared to 2008
We are in a sustained downtrend for junior commodity stocks. Some juniors have lost 50% of value and some have lost 80% of value. The Wall of Worry continues and this fear that pervades is driving stock prices lower. Many are comparing the current period to the dramatic falls in October 2008 and March 2009.
Many in the Investment Community are fraught with fear and despondency.
Every day there is disturbing news about the debt crisis in Europe and people worry that the EU will fail, that the Euro will cease to exist, that housing starts in the USA will fall, that the jobless numbers will rise, that inflation will creep back, that carpenter ants will invade their houses, and every else that you can imagine.
How Junior Commodity Stocks Raise Funding
Juniors do not have a continuing stream of revenue to fund their operations. There is no stream of finished goods exiting their doors that brings in revenue.
Instead, juniors rely on going to the market on a regular basis and raising new funds through equity offerings to continue their exploration and development of resources. After a resource is found, it generally takes from 6 to 16 years before that that resource goes through all of the regulatory issues, all the development issues, all the funding of Capex issues and starts producing the resource.
The State of Raising Capital
While there is the exceptional company that is still managing to raise funding, the vast majority are finding it impossible to raise new funding. Brokers raise their hands in frustration when approached to do a new funding.
According to one recent estimate in the Wall Street Journal, there is over $1.5 TRILLION sitting on the sidelines in money market funds. Investors and funds are fearful of losing capital by investing in stocks that are going to diminish in value.
A Dose of Reality
The world moves in economic cycles. It has always had these cycles. It will always have these cycles.
Periods of great optimism are followed by periods of despondency, that are followed by periods of optimism.
The only difference this time is we had foolish financial so-called experts like “Helicopter Ben” who was willing to print so much money that it would be thrown out the open windows of circulating helicopters, and Alan Greenspan who arrived at the stupid conclusion that he could go down in history as the Man That Eliminated Economic Cycles by Printing Money.
Greenspan had one cure for all economic woes. Print more money. It seemed to work each time – at least for a while each time. So what happened is that the period between the last downturn and the current downturn took much longer than previous cycles.
But because of the enormous stupidity of these economic theories, the downturn this time is much more painful than it should have been.
We simply have to live through it.
But there is great hope on the horizon. There are more middle class people in the world today than ever before. There are more people demanding goods and services than every before. There is a new entrant (China) to the group of economically developed societies, which adds greater demand for goods and services to the world economy.
The Searching For the Next Great Fear
It is ridiculous than in this age of instant communication, we search for the latest news and markets, and emotions rise and fall dramatically with current news. The US job numbers were released today, and there were 39,000 new jobs created.
It was not taken positively that new jobs are being created. There is a silly reference point that we need 400,000 new jobs each month in the USA or the economy will tumble. An incredibly naive and unfounded belief.
In every cycle in recorded economic history, job growth trailed the rise in economic activity by months and years. It is doing the same this time as it has done every time in the past. Yet we are in an age of instant communication, so this news becomes dramatic, where it is not of any great significance.
We Are Where We Are
What to remember is that the situation exists. It cannot be cured by dramatic action by governments, or by anything other than time.
The USA housing starts are stagnating again and new mortgage applications are not increasing. The Wall of Fear gets higher.
A strong economy does not rely on housing starts. That is a false barometer of the economy. Housing created the last cycle because of Helicopter Ben and because of Alan Greenspan. It should not have. An economy is created by advancement, by technology advancement, by new inventions, new processes, new ways to create wealth, exports of goods, or of technologies, or of wisdom, or of scientific advancement, or capital formation and application, and so on.
The next cycle will occur because of rising demand of more and more consumers, and because of advancements in the fields of technology, health care, gene therapy, space exploration, and more. We have to stop looking at the falsehoods that created and perpetuated the last boom, and start looking at the reality around us.
Next: How to treat the large deficits and what governments should do. Commodities are needed and demand will grow. What to do with stocks that have lost so much value.
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