Nov 21, 2011

All equity market indicators went negative in a big way last Thursday. So far, markets are not trading on any specific bad news but, like late Jul/Aug, on fears on something big. Those fears are entirely rational and the equity markets are merely catching up with the fears in the credit markets which didn’t have a bounce over the last six weeks.

Europe is clearly experiencing large-scale capital flight. Her sovereign bonds are falling like rocks. Her leaders make the Keystone Kops look like Sherlock Holmes. The technocrats have, basically, overthrown Greek sovereignty and installed an IMF/ECB technocracy. In Italy, Mr sex crazed bunga-bunga has been replaced by yet another technocrat. China is looking increasingly like it will experience a hard-landing — and perhaps far worse — as its housing bubble pops. Australia’s housing bubble is popping too. Canada’s won’t be far behind. And in the US, the “deficit” committee has, unsurprisingly, failed to agree on anything so attention will likely be paid to the unsustainable fiscal situation and the venal corrupt poisonous political environment here. Gold is sinking fast and it does not seem, for now, like anyone is viewing that as “cash” or a safe haven. Other commodities are complete garbage – as they have been for awhile now. And the dollar – and Treasuries – are catching a bid.

IOW — fear is now firmly in place. If some actual news event – a default, a bankruptcy, ECB monetization, etc – doesn’t occur in the next week or two – then the markets will likely tradeably bounce once they drag into oversold territory. Who knows what level that will be at – but it will occur within two weeks IF a news event does not occur. If there is some news event that manifests, then the downtrend could last longer depending on what that news is.

The best to-do for now is to pull together a core watch list of things to buy and watch them — from the sidelines. Because if/when a rally happens, it will be a rip-your-face-off rally. Europe itself may be getting to the point where it is pricing in some serious Armageddon. The biggest risk of sitting on the sidelines now is that “cash” itself may not be as safe as people assume it is. If the news event is something like a global money market freeze-up, then cash could easily turn into a unrecoverable illiquid asset with no upside and tons of downside. The masters of the universe have really screwed everyone — quite successfully.

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