So hopefully you are all cashed up. I was a little late getting out of the market, though when I did, I almost liquidated everything, so I could re-enter the market. I was caught by surprise, when the DJIA broke 13,500pts I thought it was going higher, and though it weakened I thought it was looking at a 13,500pt support. But when it broke 13,300pts I knew we were looking at a further falls. I am very sensitive to falls because of the nature of the stocks I buy. So the bad news is - I lost 15%. The good news though is that I should pick up 30% on the recovery in just the first week.
I think its important to note the strategy of the Fed at this point. Its leaving interest rates steady (that is retaining an easy monetary policy) whilst responding to a falling asset market by pumping up bank liquidity. There are 2 aspects this nonsensical policy:
1. Neutral monetary result: The Fed is taking with one hand and giving with the other. Although the Fed is currently keeping the Fed rate on hold, there is no question that it will raise interest rates in future. But the reality is that the increases will lag inflation. Why? Thats the taking. Next its giving the banking system the capacity to borrow money so they dont need to raise interest rates, well at least by not as much. Who benefits from that? Well since its households are highly indebted, its the cashed-up companies that will benefit.
2. Desicrating Robin Hood's grave: Well I never believed in the notion that Robin Hood was taking from the rich and giving to the poor, as landowners were paying taxes as well. A more realistic scenario today and during Robin Hood's time is that governments allign themselves with certain interest groups. So basically governments screw everyone, just they need tax from 'discretionary' business so they screw them less. Afterall they have more choice than salarymen to move offshore. But recognise that the essence of their policy is to 'take from the poor and giving to the rich'. Errol Flynn (aka Robin Hood) will be turning in his grave. The interesting thing is that governments that profess to be big on welfare are not opposed to a policy which actually supports the mass transfer of wealth from the poor to the rich. Think about it! Sure everyone lost money in the fallout of this correction, but the poor lost all savings, so they have no capacity to buy back. Those assets will be bought back by the wealthy. The wealthy might have even hedged with derivatives. The poor will be scared off even if they could afford to raise a few thousand to benefit.
I have shown two scenarios on the chart - a more favourable 'green outlook' and a more pessemistic 'purple outlook'. The rationale is that I think the market will rally from 13,800pts, however 12,000pts is a stronger support. But I think it can only get to 12,000pts if there is a plethora of bad news. In any respect I think the spec end of the market that carried the greater burden will recover quickly, then profit-taking will set in. So I dont see the market going to 12,000pts in a hurry. But if a few financial institutions fail it could be a very different story. But even if that were the case, expect the Fed and other central banks to step in to save the market.
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