The View from Here: Beware the 'suckers rally'
They call it a "suckers rally". In the markets, this is the part where the crisis appears over and you think it's safe to go back into the water. Moments later, a large fish with big, sharp teeth comes along and ruins your swimsuit.
One of the biggest sucker rallies occurred in the months following the crash of 1929. The markets lost almost half their value in the autumn of that year, but, six months later, had regained most of their losses.
But in April 1930, it crashed again, losing almost 90 per cent of its value. It did not regain these losses for another 25 years.
During the interlude, investors who had escaped the 1929 crash returned and piled in. They made out like bandits. They had capital and shares were cheap.
It was the second, fatal crash that heralded the beginning of the darkest financial winter of the past century. It destroyed the capital so carefully preserved by those wise enough to escape the first market collapse.
Of course, like the walking fish food in movies, the main characters of the 1930s sucker rally were unaware of the scene about to play out. Nobody called it the Great Depression because it had yet to happen.
It would, like so many of history's defining events, be coined by later generations, ruminated over by scholars and, of course, old men with stories to bore their grandchildren.
In the decades following that anguished time, smart men and women have spent entire careers studying why it happened and how to prevent it from taking place again.
Ben Bernanke is, for instance, a world-recognised authority on the Depression. He earned his nickname, "Helicopter Ben", because of his allusion that deflation - a contracting economy - could be cured by dropping money onto it from a helicopter.
"The US government has a technology called a printing press [or, today, its electronic equivalent]," he said, "that allows it to produce as many US dollars as it wishes at essentially no cost."
Well, yes. Quantitative easing and stimulus packages, tax breaks and, across the water, euro bailouts of entire countries.
But what's happening today looks an awful lot like the 1930s. Unemployment in the industrial world ranges from really bad to terrible.
We are beguiled by reports that corporations, and banks, are cash flush, if reluctant to spend it. In the week leading up to Uncle Sam's credit max-out, Apple had US$76 billion (Dh279.1bn) in the bank; the US Treasury, by contrast, had $73bn.
That a company peddling what are essentially lifestyle accessories can have a greater cash reserve than the world's most powerful government tells you at what a state of crisis we have arrived.
Economists have their own criteria for when we are officially in a recession, or depression, for that matter. But it does not take a number cruncher to know that things are perhaps the bleakest they have been since the 1930s.
For the personal investor, these are hard times to make decisions. But know this: events are conspiring to make you poorer. From creeping inflation, joblessness, tottering markets and, of course, corrupted institutions, we are being set up for a fall.
It does not help that the very edifices we trust in times of crisis - banks and governments - are tying their shoelaces as events unfold.
Right now, preservation of capital is everything. For the small investor, who is probably paying off credit cards, maybe a mortgage back home and still needs a decent set of wheels to make the daily Airport Road commute, this is easier said than done.
But there is a bright spot - clear waters without fish that bite. Abu Dhabi is a resource-based economy that finds itself in the happy position of having lots of spare cash and oil; something that people still need, regardless of global finances.
Expatriates by their very nature tend to look to the long term. The host country is an opportunity to make money and, some day, fund a comfortable lifestyle back home. Abu Dhabi, too, has a long-term plan, one that will outlast the current malaise. It has become a lifeboat for many who would otherwise be unemployed, or even barely employed.
The strategy of choice would be, therefore, to use this as an opportunity to save as much as possible. Because sooner or later, the water will be clear again. And that will favour those who have built up a store of capital.
Gavin du Venage is a business writer and entrepreneur based in South Africa.
Published: August 5, 2011 04:00 AM