Black Monday coming for stock markets, sell, sell, sell!
Posted on 11 June 2011 with 3 comments from readers
Stock markets still look amazingly high for the increasingly gloomy economic outlook. But the long rally in US equities turned down six weeks ago and shows no signs of recovery. The Japanese earthquake disaster is impacting on Asian economic data.
There are big problems with no realistic solutions wherever you look. Even quantitative easing has lost its credibility with markets as it has so obviously failed to deliver the goods aside from delaying disaster.
QE folly
Why anybody thought printing money and going further into debt would make life better was not apparent to ArabianMoney a year ago. However, we underestimated the power of money printing to inflate financial markets, and that of course is the real reason for the total disconnect between stock market prices and economic reality.
If the prospect for the US is at best low growth for the next 10 years as one commentator suggested yesterday then stock prices have to be reset. Indeed, it does not have to be that dramatic, just properly discounting the high unemployment and falling house prices of today would be enough to require stocks to trade at a much lower level.
Presumably treasuries and the US dollar will be the most immediate winners as this happens over the next few months, and while we may see a Black Monday or two for equity markets this sort of process usually takes some time. Markets climb a wall of worry and then tumble down in stages.
Could this be the start of a multi-month sell-off with a cataclysmic bottom in October? After six weeks of modest losses you might expect a more sudden loss of confidence, often after the weekend when doubt has a chance to mature.
What could stop this process? There is not much, except some good news. US exports were up sharply last month on a weaker dollar. But if global economies deteriorate further, and Chinese export data showed a big slowdown in May, then the US will not get much help from abroad.
China crisis next?
China itself could be the next major crisis as Dr Marc Faber said in a recent interview with Bloomberg (click here).
Mr Bernanke could produce a QE3 or better explain how he continues to use QE2 to prop things up. But this is rather a broken record now. Mr Market seems about ready for a serious nervous breakdown as the old medicine is not working anymore.
The next issue of the ArabianMoney newsletter will be examining ways to short this market fall (sign-up here). But in the meantime abandoning all stock positions is advisable to protect capital.
This Monday is also the date cited by Martin Armstrong in his 8.6-year cycle that matches with the crashes of 1987 and 1929 (click here). Is this a date with destiny?
3 Comments posted by readers:
Why anybody thought printing money and going further into debt would make life better was not apparent to ArabianMoney a year ago.
A: Printing more money => lower interest rates => lower cost of debt => more positive NPV projects => recovery in markets.
Also, Quantitative easing is not an instant process / cure.. It’s not as if the moment they announce it, everything should recover, and the moment it ends, everything should fall. In fact, it still has not reached even half of it’s effect.
Both points of your analysis : printing money and “one” commentators suggestion are really a weak basis for telling everyone to “abandon all stock positions to protect capital”. Not saying that your prediction is definitely wrong, but the basis of it is weak.
Ed Note: So are you saying that borrowing more and more money actually makes you richer? Actually it is the reverse. You are poorer because you owe more money. The stock market rally is therefore also not solidly based.
The three pillars of Obamanomics that will lead to prosperity.
1. Print billions of dollars of new money.
2. Borrow billions of dollars from overseas.
3. Spend our way out of debt.
Seriously Obama you gotta be kidding. A five year old could have told you that this isn’t going to work.
In response to Ed Note:
“So are you saying that borrowing more and more money actually makes you richer? Actually it is the reverse. You are poorer because you owe more money. The stock market rally is therefore also not solidly based.”
I can see how that isn’t intuitive, yes you will owe more, but if you could use the borrowed money to buy assets that can generate a positive NPV, then borrowing does increase stock valuation and hence a rally is justified… Now whether the investments of the borrowers are sound, that is another question.
In response to Jim:
Well, this is nothing new, the US National debt didn’t reach 14 trillion in 4 years, (or only during Obama’s term).. it took years of dedication to the US way of life to reach this milestone, Bush’s 8 years in power cannot be undone in 4 years.