Slow Capitulation

When most people think about capitulation they envision some sort of climactic crash that washes away whatever it is supposed to wash away and then the market can go higher. How many times have we read something along these lines? How many times in the past has that sort of scenario been correct? The answer to both questions is a lot.

This go around the bottoming process seems to be going differently. The capitulation seems to be playing out on a much slower time table than most people expect. Last week there was a very long post in the FT laying out the plausibility of the UK going into default. It is a small country, massively over leveraged, not a reserve currency (not 100% sure about that one) and a debt country.

I would expect there to be fewer sovereign defaults than the expectation being built but the UK? Defaulting? Really? The selling of all asset classes has been unrelenting for several months now, the case for closer to depression size contractions is more plausible, the faith that government has even found the right path is non-existent (regardless of your thoughts about whether government should be involved, they are) which all adds up, IMO, to a wearying of market participants.

The word wearying implies a much slower capitulation than people hope for. I have been consistent in thinking the lows are about in (give take 25-30 SPX points) in terms of  price but it might be months until it sorts itself out in terms of time, I think next spring.

If this is remotely possible then it sets the stage for many more people to give up on investing in the capital markets then at some point after enough people give up the market will start to heal. As it heals it will move up in price but people will not believe that the market is back. At some point there will be "easy" money to be made like in 2003 but many people will miss that opportunity.

Knowing what to do, keeping emotions out of the equation and figuring what to do next are all difficult but betting on the end of the world is more of a long short than some sort of recovery in the next couple of years.

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