Since March experts have been saying there will be a market correction. Citi advised 10-20% from the highs. Jim Rogers 15-20%.
In case you don’t know, Mr Rogers is co-founder of Quantum find with George Soros. And together they were the ones who broke the pound on Black Wednesday. Quantum is base off-shore in Curacao and the Cayman Islands. Rogers currently resides in Singapore and is bullish on China. The Rothschild family invested in Quantum back in 1969. So he is as well connected as you can get. I tell you this so you can give weight to their opinions.
These insiders, in public at least, are saying that what we are experiencing is a market ‘correction’. A perfectly normal part of market dynamics. After a long rally, traders cash in profits which causes the market to pull back from its highs.
If this is just a correction and not a double-dip, then when will we see the bottom and get the recovery back in gear? Because if the market blows past the 10-20% ‘correction’ and keeps going down – well, at what point do we and the market, conclude the experts were wrong (again) and that this is not a ‘correction’ but the recession – part two.
Now the Dow was at 11200 and has dropped to 10400. A drop of 800 points in 5 days. That’s a hell of a correction!
When all this started the Dow was at 14000. It plunged all the way down to 9908 which was the bottom on 6th March ’09. A 5000 point plunge. The rally has been 1300 points back up from 9908 to 11200.
A correction of 10-20%, not of that rally which would only be 130-260 points ( We are way beyond that already), but 10-20% of the whole value of the market, would be 1100 to 2200 . Which would bring us back down to about 9000.
IF this is what happens then this rally has been what a lot of us cautioned it was – a bear or sucker rally. And one I feel there is good evidence has been created by government stimulus and big banks ramping prices between them. The question is, whether the banks sold into the drop and left the little investors holding the bag. If so they will be quiet about the need for immediate action to stimulate again. IF however, the big banks beat the drum loudly and soon about the need for more action then I think that is a sign they got caught holding the bag and are seriously hurting.
That, I think, is something to be listening out for next week.
Looking further ahead, I think if we do continue down as far as 9000, I don’t think there will be any coming back. I think too many people will look at the last two years and conclude that 2-3 Trillion dollars worth (globally) in stimulus, bail-out and new sovereign debt – FAILED. And worse, left us with that much new sovereign debt piled on top of the bank debt which began this adventure.
Just a few musing on a Sunday.
Hi Golem. Just wanted to register my thanks. Your commentary and analysis throughout the last year or so has been absolutely invaluable in helping me understand the extent to which we are being conned and betrayed, and as such, deeply appreciated. I read your stuff every day. And sincerely hope that you continue shining the light.
Thank you for you kind words, Dexter.
I appreciate them greatly. And I thank you for reading and thinking.
I guess we will see more of the warped world journalism, so prevalent in financial medias, in which the investors, bankers, funds get to define the problem (our assets have become unsafe and liquidity strained), which then the journalist lays at the door of politics (what have you done to make the assets secure and ease liquidity flow?).
In a way the journalists presuppose that which should be called into question; if it is really "our" problem. Well, it is a problem for all if the banks fail, but is it really in the common interest to use public funds – and in quite astronomical amounts – to solve this particular "social problem" to the detriment of others.
Is it too much to hope for that at least one politician on the European scene can speak out and put the banks in their place? Maybe the European Parlament can play a role, it is elected and it should take action when its constituents' welfare for many years to come is sacrifised to the benefit of the financial classes.
Well said Lars!
Perfectly put.
I'm sure you already read this analysis from the Guardian, but here it comes anyway:
7.50am: Gary Jenkins of Evolution Securities also makes an interesting point. He argues that the European Central Bank helped to create this crisis by pumping so much cheap money into the system last year.
The banks used a lot of this money to buy one-year government bonds, scenting an easy profit, but the Greek uncertainty has left them facing heavy losses – and forcing banks to ditch their government bonds at unattractive prices.
Here's the meat from Gary's research note:
It is interesting to try and analyse how we got into this situation in the first place. There are many reasons but let's just examine one particular part of the puzzle. In the past couple of months we have seen incredible volatility in government bonds. The key reason is of course the realization that the credit quality of many governments is not as good as was thought and is in many cases deteriorating. In addition there are we think the classic case of unintended consequences. Last year, in order to ensure that the European banking sector had access to sufficient liquidity, the ECB held three one year 1% Longer Term Refinancing Operations, lending a total of €614bn, of which €442bn was lent in the June operation and is due to mature on the 1st July. At the time this was regarded as "free money", but with the benefit of hindsight it might be that the manner of this liquidity, primarily the term of one year, was a major contributing factor to the recent problems evidenced in the government bond market.
After all, what can a bank do with a deposit which is a fixed one year term with (at the outset at least) no chance of being extended? They cannot really use much of it to provide finance to companies, but they would want to try and make a profit on it. The obvious asset to buy then would have been a risk free, liquid bond that gave a greater return than the 1% fee. With Spanish and Portuguese 1 year notes at the time both offering a sub 1% yield, there was an incentive to take advantage of the steep yield curve environment and invest in longer dated government bonds. Interestingly from the date of that €442bn injection (24th June) to the end of August Spanish 10 year yields declined from 4.164% to 3.769% and its spread to Bunds declined from 74bps to 51bps. This trend is also evident for Greek and Portuguese bonds.
Let us collate all the banks into one and then say that of the total amount of liquidity injected €400bn found its way into government bonds. Let us then say that this hypothetical portfolio consisted of three equal amounts of Greek, Spanish and Portuguese 10 year bonds. And why not? This would have been seen as a risk free way of making money at that time. However, whilst this strategy worked well at first, it has now been a disaster, with a total loss of 13.5%. Thus our pretend bank is sitting on a loss of €54bn based upon Friday's closing prices. Plus the money is due to be returned within 7 weeks and the liquidity in such assets is more limited than it has been for years. Thus the bank is in trouble, but so is the government bond market because forced selling pressure will lead to higher and higher yields.
That is one of the reasons why the EU has had to provide such a massive support package now. It is not just trying to save the banking sector, but it is saving the government bond sector, and therefore itself.
Worth noting that the ECB has also just announced it will hold a six-month Longer Term Refinancing Operation on 12 May 2010, at "the average minimum bid rate of the main refinancing operations over the life of this operation". More cheap money for the banks at this difficult time?
WHAT HAPPENS NOW?