Isn’t all this volatility what happens before a crash?

Posted on 13 August 2011 with 2 comments from readers

Unprecedented swings in global stock markets ended the week with a 31-year low for US consumer confidence and a short selling ban in Europe where the authorities look increasingly desperate.

There was actually a bigger flight to the safety of money market funds than after the Lehman collapse three years ago with a record $50 billion exiting bonds and equities for the money markets.

Consumer confidence slumps

The Thomson Reuters/University of Michigan index of consumer sentiment slumped to 54.9 in August from 63.7 the previous month, much lower than expected. This surely portends a slump in consumer spending that accounts for 70 per cent of US GDP. Most commentators seemed too shattered by the week’s ups and downs to notice.

On Black Monday the S&P fell by 6.66 per cent, the devil’s fall; the S&P bottomed out at 666 in March 2009. These levels could be tested again.

If you look at the 1930s then the initial 1929 crash came on Wall Street and then a recovery from that crash was dished by the collapse of European banks led by the Credit Anstaldt in 1931. A double bottom to the bear market therefore has a historic precedent in economic circumstances many compare to that era.

Will there be a QE3 and does it matter? The answer is probably yes and no. The Fed will throw everything into its rescue attempt, causing more inflation. But QE2 did not revive the economy so why should QE3?

Of course last year the economic headwinds, nay hurricane coming from Europe were not nearly as strong. Spraying water into the wind will not work.

The market volatility is indeed a precursor to to move sharply to the downside. You need some considerable imagination to think what could move it to the upside with interest rates already set at record lows for the next two years.

The past few weeks have all been about fear governing the market. We have not seen a final capitulation, although some of the 400-point gyrations on the Dow seemed to come close and then peter out.

Next leg down?

What will it take to drive markets to that place? Not very much if the past week was any guide.

We live in extraordinary times with the crash of an aircraft test flight doing 13,000mph, a cure for lukemia and 1,900 rioters arrested in the UK and the threat of bans on social media and tanks on the street like parts of the Middle East.

Volatility usually does portent a crash in financial markets and presumably the greater the volatility the greater the crash. As usual the mainstream media dare not say what is blindingly obvious for fear of being blamed as the cause.

Still ArabianMoney did get the Black Monday right (click here) and we have been correct in saying financial and emerging market shares would get hit hardest (click here). Let us hope we are wrong this time and it is different.