Thursday, August 11, 2011

Bipolar, Manic Depressive Stock Markets.

Last night before heading off to sleep, I checked the futures and it was up 2%. In morning before trading started futures were down 1%. At the end, the stock markets closed the day about 5% high. What changed from yesterday or day before? What is this manic depressive stock market doing? How the retail investors are supposed to trade in this market. And the headlines that follow each rally or sell-off are adding to confusion. Just read note that said "risk appetite gained because... US Jobless Claims came in 5k below forecasts." Anyone really believe that?   And only people who are in control are HFTs and Algos.

Yesterday I wrote about an interesting statistics. “In the 3rd year of presidential cycle, when the 1st week of January and the whole month of January is positive, history shows that probabilities are 90% that the year will end in positive territory. “ So there is a chance (9 out of 10 times) that the year will end in a new high. But that can happen only when there is more liquidity pumping from the Fed. Even after this 15% sell-off, the Fed, in its last meeting did not come out with any new QE3. May be it was too early after the just concluded QE2. So what is next? I think the Banksters may rally the market for a while, and then we see another round of massive sell-off which will force the Fed with another round of free money. Makes kinda sense.

The market cannot survive on its own. The structural problems which led to the financial crisis in 2008 are all there, only they are worse. The assets values in the books of the banks are less than they were in 2008.There is no job growth, no income growth, consumers are stretched thin. Only thing that has grown is debt. It has grown not only in USA but all over the western world and the law of diminishing return has set in. It cannot sustain any further.  If you notice, each round of monetary injection is giving less and less result. We have already gone back to the level of pre QE2. The interest rate cannot go down any further. And Bond market is saying that depression is here. There are no “Growth” folks. At one end of the spectrum we have power hungry greedy manipulative Banksters and uber rich who want more and more. On the other side we have welfare addicted free loaders who could not care less about job and prosperity so long their daily quota gets filled by government dole. The subprime mortgage problem started with Bankers knowingly giving loan to people who could never pay back and people taking the loan knowing well that they would never pay back.  Who is to be blamed for the mess we find ourselves in? The society as a whole is sick with speculation and getting rich quickly. And what we see today in the stock market is just a manifestation of this sick society. Stock market do not reflect economy nor it is an instrument of growth of capital.

Where does all these ranting and raving lead us anyway? It all boils down to the matter of debt. The world governments have over $ 40 trillion in recorded debt and 10 times that much in unrecorded debt. Just ask Goldman how governments of the world hide their debt. Do the governments of the world have enough money to save all the broken banks and keep them on life support for ever? At least Japan has done it for over 3 decades. But at what price? Today the Japan’s debt is 200% of its GDP and the Nikkei 225 now stands at less than 9000, far from its lofty high of 38000. And Japan is in depression for last 3 decades. Magnify this to USA and Europe and only thing that you can expect is deep decade long depression and DOW somewhere between 2000-4000.

Short term, I expect to see some tradable bottom and Indexes may well attempt 50DMA or above by end of the month. May be the stock markets will end the year at a higher high but it does not matter unless you are a day trader or speculator. For average retail investors, it is time to be careful.