First with Financial Comment from Arabia

Markets at a major turning point?

with one comment

It is not just the Bradley date in the financial astrology calender tomorrow, nor the warnings from the chart experts like Bob Prechter and Harry Dent that the end is nigh, there is also the simple flow of mood from optimism to realism to pessimism that drives markets to consider.

Global financial markets have rallied for the best part of 11 months from their lows following the 2008 crash. But the combination of excess liquidity and carefully contrived market spin that has taken the US stock market 70 per cent off its low point is almost done.

Interest rates

The Fed is now debating how to withdraw from near zero interest rates, always a policy that cannot last for long because of the inflation risk. President Obama leads the spin doctors but reality is closing in like a snowstorm in the North East or an earthquake in Chile.

And that reality is nothing like as rosy as advertised. It was always a bit of a long-shot. How can an economy built on debt expand when banks are being more prudent in their lending? How can a consumer driven economy thrive when saving is popular again?

We still have a moribund housing market in the USA with millions of of loan foreclosures to come over the next two years, further depressing house prices and construction activity.

Then again what of China? Again there is a reality check. The growth produced last year as a result of the biggest government intervention in the history of markets is very low quality, causing an inventory build and asset price inflation.

Chinese bubble

Liquidity powers up markets into a bubble. Then they crash when it runs out. This much we know from our history books. China’s 2009 performance is a classic liquidity bubble.

US financial markets’ optimism has been self-reinforcing with recession measures like job cuts boosting profits in the short-term. The problem is that raising unemployment levels does lasting damage to the real economy and domestic demand.

It could be that financial markets stagger sideways for another few weeks until the weight of negative news becomes too much and they take a real tumble. But bad news is greatly outweighing good news right now, so the turning point has to be very near.

Bob Prechter and Harry Dent both expect a big crash after the long rally from the lows of last March. The downside looks considerable and any upside very limited from this point. Sell!


Written by Peter Cooper

February 28, 2010 at 9:30 am

One Response

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  1. I don’t dispute the notion that stock markets will crash in the near term.

    However, since these all markets (stocks, bonds, currencies, commodities, etc.) are being rigged at this point in the movie, I suspect that in the short term, central governments and their agents (e.g. GS, JPM, to name a few!) will make another desperate effort to revive their economies.

    For the timid, the End Game is certainly nigh, and getting out of the market is an excellent strategy. But with the LEI and other indicators pointing up (they’re rigged, too!!!), there may still be room for a 5%-10% on the upside in the short term.


    March 1, 2010 at 9:01 pm

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