Stock market: correction or start of something bigger?
Right now the focus is on the turbulent financial markets and for good reason. Volatility has increased drastically and after almost one year of steady gains, such volatility should be a concern. Previously I discussed the movement in the currency market as a potential catalyst for a move in American costs.
Specifically the move in the Euro, or rather it's ultimate demise. Ever since Europeans decided that they would rather keep Greece in the union and willingly print Euros to cover the rapidly deteriorating debt of the Greeks it signaled the beginning of the end. Reason is rather simple actually, when a central bank is willing to print more money just to keep an artificial coalition together outside forces will grow skeptical of the value of this currency. Furthermore it exposes other weak links within that coalition, namely Spain, Portugal and Italy. There was only one correct move in the case of Greece fire and that was to snuff it out, instead the Europeans decided to get together put large cardboard boxes over the raging inferno.
Our first clue something was wrong across the pond happened on Thursday of May 6th, a flash crash on the Dow of -1,000! Quickly our media whores blamed a fat finger trade, sure, as the Euro was melting down a scapegoat seemed appropriate. What happened after was rather predictable, a massive move by the ECB to offer almost 1 trillion dollars to shore up European banks. Why? European banks hold each other's debt and lots of it. In fact just understanding the debt structure can be a herculean effort. Not that it really matters, because all you need to remember is that each individual European nation has it's own debt problem.
This massive circle of debt can unravel very quickly. Debt to GDP levels like Greece and Italy have are not sustainable. Keep in mind America is not any better off, we just happen to be the beneficiaries as investors flock to what they perceive is temporary safety of America's stability.
So After Europe unveiled it's brilliant plan to prop this Ponzi debt structure our stock market rallied like crazy. This is a pattern we are all used to, who ever is doing the buying now in our stocks anticipates that another credit expansion will occur and that everyone can return to their happy spend + borrow days. This will NOT happen, not this time. Days of faking growth and living on the promise of paying back tomorrow are over, it's been a good 30 year run though. Euro promptly began selling off against the Yen, Franc and Dollar. This quickly turned into another sell off in American stocks.
However the drama continued. As if using a script from the 1930s, Germany last week unveiled a naked short ban a move that was hailed by many as the right thing to do. Maybe it was and maybe it was not, but let me tell you, this is nothing more than a desperate attempt at finding more scapegoats in a time of crisis. Instead of questioning why someone would be willing to take a risk and bet against certain countries, leadership prefers to just ban the action all together. There is certainly a distinction between shorting and naked shorting, but this was just a move of desperation. At the same time major interventions by the Swiss Central Bank caused moves in the Euro/Swiss that puzzled even the most seasoned of forex traders. Unprecedented moves happened in 2 consecutive days sparked by a rumor that capital was leaving Germany and UK banks and moving to Switzerland.
This move stopped the bleeding in the stock market and bolstered the Euro. Temporarily.
This morning, futures are down big again and last week's lows are threatening to break again. It looks like the interventions from the central banks no longer last nearly as long as they used to. Confidence is eroding as we speak and virtually none of the core problems have yet to be addressed, other than laughable promises of austerity. Observe the Euro/USD chart as of this writing:
Speaks for itself. The critical level breach last week is what sparked the 1 trillion dollar commitment although the bailout was not designed to save the Euro, it was designed to maintain the banking structure. What is happening now is a continuation of reality.
While this will make European exporters happy and the central banks who are mired in debt it will cause a lot of pain to the Europeans and drastically reduce their buying power thus leading to an inevitable recession as basic goods spike in price.
We live in an age where the institutions that create Euros and Dollars secretly wish for that currency to depreciate to satiate their appetite for debt, but a currency can only depreciate so much before it threatens the collapse of the nation. Whether Rome, Byzantium, Weimar Germany or Zimbabwe it does not matter how one debases the currency, the result is always the same. Faking Byzants with worthless metal is trickier than turning on the electronic printing presses, but the goal is identical. Pay for something one cannot afford with something one does not have.
I do believe that we saw a very important top in American stocks in April and believe that this is the start of another bear market. Historically speaking our situation is loosely similar to 1930 although there are many important differences, namely fiat currencies and our insane debt levels. Just like in 1930 Austria's major banks failed we will see the contagion start in Europe, the very thing they are desperately trying to extend and pretend - typical of politicians not willing to address the truth. As panic sets in American stocks, a bottom should form providing an excellent opportunity for shorting in the coming weeks. A bottom could form quickly if the Euro halts it's decline.
Disclosure: All 401k accounts moved to cash.
Specifically the move in the Euro, or rather it's ultimate demise. Ever since Europeans decided that they would rather keep Greece in the union and willingly print Euros to cover the rapidly deteriorating debt of the Greeks it signaled the beginning of the end. Reason is rather simple actually, when a central bank is willing to print more money just to keep an artificial coalition together outside forces will grow skeptical of the value of this currency. Furthermore it exposes other weak links within that coalition, namely Spain, Portugal and Italy. There was only one correct move in the case of Greece fire and that was to snuff it out, instead the Europeans decided to get together put large cardboard boxes over the raging inferno.
Our first clue something was wrong across the pond happened on Thursday of May 6th, a flash crash on the Dow of -1,000! Quickly our media whores blamed a fat finger trade, sure, as the Euro was melting down a scapegoat seemed appropriate. What happened after was rather predictable, a massive move by the ECB to offer almost 1 trillion dollars to shore up European banks. Why? European banks hold each other's debt and lots of it. In fact just understanding the debt structure can be a herculean effort. Not that it really matters, because all you need to remember is that each individual European nation has it's own debt problem.
This massive circle of debt can unravel very quickly. Debt to GDP levels like Greece and Italy have are not sustainable. Keep in mind America is not any better off, we just happen to be the beneficiaries as investors flock to what they perceive is temporary safety of America's stability.
So After Europe unveiled it's brilliant plan to prop this Ponzi debt structure our stock market rallied like crazy. This is a pattern we are all used to, who ever is doing the buying now in our stocks anticipates that another credit expansion will occur and that everyone can return to their happy spend + borrow days. This will NOT happen, not this time. Days of faking growth and living on the promise of paying back tomorrow are over, it's been a good 30 year run though. Euro promptly began selling off against the Yen, Franc and Dollar. This quickly turned into another sell off in American stocks.
However the drama continued. As if using a script from the 1930s, Germany last week unveiled a naked short ban a move that was hailed by many as the right thing to do. Maybe it was and maybe it was not, but let me tell you, this is nothing more than a desperate attempt at finding more scapegoats in a time of crisis. Instead of questioning why someone would be willing to take a risk and bet against certain countries, leadership prefers to just ban the action all together. There is certainly a distinction between shorting and naked shorting, but this was just a move of desperation. At the same time major interventions by the Swiss Central Bank caused moves in the Euro/Swiss that puzzled even the most seasoned of forex traders. Unprecedented moves happened in 2 consecutive days sparked by a rumor that capital was leaving Germany and UK banks and moving to Switzerland.
This move stopped the bleeding in the stock market and bolstered the Euro. Temporarily.
This morning, futures are down big again and last week's lows are threatening to break again. It looks like the interventions from the central banks no longer last nearly as long as they used to. Confidence is eroding as we speak and virtually none of the core problems have yet to be addressed, other than laughable promises of austerity. Observe the Euro/USD chart as of this writing:
Speaks for itself. The critical level breach last week is what sparked the 1 trillion dollar commitment although the bailout was not designed to save the Euro, it was designed to maintain the banking structure. What is happening now is a continuation of reality.
While this will make European exporters happy and the central banks who are mired in debt it will cause a lot of pain to the Europeans and drastically reduce their buying power thus leading to an inevitable recession as basic goods spike in price.
We live in an age where the institutions that create Euros and Dollars secretly wish for that currency to depreciate to satiate their appetite for debt, but a currency can only depreciate so much before it threatens the collapse of the nation. Whether Rome, Byzantium, Weimar Germany or Zimbabwe it does not matter how one debases the currency, the result is always the same. Faking Byzants with worthless metal is trickier than turning on the electronic printing presses, but the goal is identical. Pay for something one cannot afford with something one does not have.
I do believe that we saw a very important top in American stocks in April and believe that this is the start of another bear market. Historically speaking our situation is loosely similar to 1930 although there are many important differences, namely fiat currencies and our insane debt levels. Just like in 1930 Austria's major banks failed we will see the contagion start in Europe, the very thing they are desperately trying to extend and pretend - typical of politicians not willing to address the truth. As panic sets in American stocks, a bottom should form providing an excellent opportunity for shorting in the coming weeks. A bottom could form quickly if the Euro halts it's decline.
Disclosure: All 401k accounts moved to cash.
Comments
Post a Comment