A “Scarily Accurate” Prediction

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–The 633 point decline on the Dow Jones was the sixth-largest one-day point decline in that indexes history. The S&P 500 fell a diabolical 6.66%. It’s lost 10% in just three days and 16% since July 22nd. The insider pump-and-dump action on Wall Street is working to perfection. More on how that works in just a moment.

–“The Fed needs a proper stock market crash to justify another round of asset purchases,” we wrote in mid-June. “That could mean even steeper stock falls. What will follow is an even more aggressive monetisation of government debt-or outright default.”

–Since we wrote that, the ASX/200 has fallen by 12.6%. Since its intra-day high at 4,976 in mid-June, it’s fallen nearly 20%. It is nearly certain to fall more today. Thus, you’d have a technical correction and bear market in a matter of months. And what then?

–We’d encourage you to spend half an hour today and watch some of the free updates on the Slipstream Trader YouTube channel.  Back on April 15th, he called the market top. And since then, he’s been knocking it out of the park with his free weekly analysis. A new update will be out tomorrow. In the meantime, you can watch last week’s update, which one commenter calls “scarily accurate.”

–We’re not big-noting Murray to brag. In fact, he’s been reluctant to post his index analysis for free. The trades he’s generating from his “big picture” are accessible only to his subscribers. But he agreed with us that a basic understanding of price action and technical analysis makes anyone a better investor. And in markets driven by volatility and liquidity, the technical picture gives you some useful context for your buying and selling decisions on blue chip stocks. It’s a pretty handy perspective to have in a market like this. Do yourself a favour and have a look.

–Speaking of context, have a look at the chart below, courtesy of Zerohedge. The blue lines track the point moves in the Dow Jones Industrial Index. The pink box highlights last night’s big decline. But we think the picture is also telling us something important about financial markets and credit expansion. What is it telling us, then? Read on…

Dow Jones Industrial IndexSource: Zerohedge.com

–The number of large one-day moves in either direction increased dramatically around 1998. This is when we started our financial career. And we remember the Asian Crisis. We also remember that in every financial crisis since then, the policy response of the Federal Reserve (and all central banks) has been the same: lower interest rates and more credit.

–The effects of this credit are seen in the chart. The more money there is in the financial system, the greater the volatility. Credit destabilises a system, even as it expands. If we’re truly in a credit depression, where we face many years of deleveraging and credit contraction, the withdrawal of credit from the financial system could lead to more large down days like yesterday (and probably today).

–Of course that will only happen if the credit is drained out of the system. The Fed and others will fight to prevent this from happening. But if investors have lost confidence in the Fed and the European Central Bank—the gold price and European bond yields suggest that confidence is lost—the deleveraging may happen anyway.

–Don’t underestimate the nefariousness of Big Money, though. If the insiders have been pumping up the market for months in order to sell into it, they would love the chance to buy after the public dumps tens of billions in stocks. Today’s Aussie trading session could surprise. There will be a point where the Big Money is unable to resist stocks at these prices. Watch for it.

–Also be wary that Goldman Sachs and JP Morgan have both raised their six-month forecasts for gold to $1730 and $2500, respectively. It always worries us when the big investment banks say one thing. We wonder if they’re doing the opposite. Gold hasn’t sold off in this correction the way it did in 2008. That’s an encouraging sign. But we sure would love the chance to buy it cheaper.

–Outside the markets, this week shows that the Nation State is now at war with globalisation. That’s been one of the on-going and probably overly-complicated themes of the Australian version of the Daily Reckoning. But in the last few days, you’ve seen how other national governments are rallying to the side of the US government and attacking the credibility of Standard and Poor’s. In Italy, prosecutors have raided the offices of Moody’s and S&P and seized documents.

–Is it possible ratings agencies are going after governments in order to manipulate markets and generate trading profits? Sure. Anything is possible. It’s also possible governments—and the bullying, coercive, abusive politicians that run them—don’t like being held accountable for their fiscal crimes against the economy.

–This is going to be an interesting fight. And it’s hard to like either party. But it’s also dangerous. If governments begin attacking market critics, it won’t be long before they pursue other methods to influence prices. How so?

–An attack on the ratings agencies is an attempt to keep the price of money low. The bond market has pushed yields up and prices down in response to the S&P’s US downgrade. Silencing the ratings agencies is one way to drive bond yields back down and allow the government to keep borrowing cheaply.

–There is still the small matter of precious metals prices. These prices tell investors that what the central banks and governments are doing to money is insane. You can expect increased margin requirements on the futures exchanges, we reckon. The public goal will be to regulate “speculators.” But the real goal is to prevent gold and silver prices from telling you that the government is ruining money and unleashing inflation.

–And speaking of inflation, if the Fed and the ECB both engage in more debt monetisation—creating new money to buy bonds—you can expect more inflation in commodities. This happened in the last year with rising food and fuel prices. This information—that debt monetisation is inflationary—is communicated by commodity prices. The best way to prevent this communication is to impose price controls on commodities.

–In any event, we are now where we’ve been headed all along…the point at which the stability of a debt-laden global financial system begins to break down. Since March of 2009, more credit and lower interest rates have kept the system expanding, at least artificially. The contractions have begun again. More on what they’ll give birth to tomorrow.

Regards,

Dan Denning
Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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Comments

  1. Aaaah, that chart is surely a precursor to a destructive event.

    Some key words from Dan’s post – confidence, manipulate markets, Goldman Sachs, government, Big Money, bullying, coercive, abusive politicians, fiscal crimes.

    A few small holes here and there and a tiny amount of freezing water will smash concrete.

    Prepare the gallows and sharpen the axe….the day of reckoning is nearly here.

    Reply
  2. Another great commentary from DD. Let’s not forget, however, the importance of politics in all this. The political class has lost all semblance of credibility (check the Bourbons and Romanovs)and their decadence is part-and-parcel of the crash in markets. It’s all incredibly bullish for the metals, of course.

    bob wetemor
    August 9, 2011
    Reply
  3. Note the “miraculous rise” in the Aussie Markets once the dollar went below parity today. If this is not blatant intervention by the RBA or Treasury, I’ll eat my stetson.
    Bob – you are 100% on the ball – the political/wealth classes everywhere have lost all credibility and will literally pull any trick to prevent the markets bringing about the correction that is desperately needed.
    I read today of more businesses in the rural areas – canneries, tomato sauce factory, pineapple cannery closing because of the artificially high Aus dollar. Soon a swag of wineries across the country will follow suit – bringing on widespread bankrupties among farmers and rural businesses.
    The “management” of the Australian, US and European economies now borders on the criminally insane. Yes – it’s time – to build the gallows and tighten the nooses. There will not be any shortage of candidates.

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  4. The U.S has to accept the fact it will ‘NEVER’ repay the 14.4 trillion dollars it has borrowed (actually over-spent).

    It should decide that it will run a balanced budget next year. Cuts and tax rises would do.

    It should then decide to print another 14.4 trillion dollars and buy its own debt at the given price.

    OK so the dollar will become rapidly less valuable than it currently is. Inflation will hit the World, but, it will force the World to share its pain.

    Immediately the U.S can then start to recover and with it the rest of the World which is driven by U.S consumption.

    With a much devalued U.S dollar, the rest of the World becomes a much more attractive place to compete in on price of its exported goods.

    This is ‘the day of reckoning’ the U.S needs. QE1/2 and now 3 (touted today as reason for the ASX rally) are just what the EU are doing. Too little, too late, leaving doubt, fear, and profiteering to take hold.

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  5. David B…to include the management of the Australian economy as “criminally insane” and mention it in a sentence with and before the US and Europe quite simply opens the door to a major credibility concern with any other comments you may make on this forum, however well based they may be going forward. Measured arguments are far better, (even though the lunatics are running the asylum in the US!!).

    Reply
  6. Gerry – I don’t know what your definition of lunacy is but to go from zero govt debt in 2007 to 25% now in a mere 4 years with more coming is not a bad start. On top of this the Govt has presided over a housing bubble that literally dwarfs other countries where housing crashes have literally busted their banking sectors. The very same that happened in Ireland could very well happen here.
    Try the loading of an imbecilic tax on carbon onto an economy where the non-mining sector is showing all the signs that it may be in a recession before long – most people I know regard this as criminally insane.
    I have no doubt Gerry that you are city based and therefore well insulated from the damage being inflicted on rural communities by the policies I refer to.
    Measured Arguments? try closing businesses in country towns, farms that can’t even pay the interest on debt because the dollar has killed exports, suicide rates among farmers that city dwellers care little for, government policies that care more for a frog’s environment than rural communities.
    Try visiting the country sometime Gerry and you’ll get plenty of measured arguments.

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  7. I have to say a big thank you to Dan. I have been reading his columns for over a decade and until recently have not had any real assets to speak of outside of superannuation. Two months ago I converted all my superannuation into cash because of Dan’s commentary. He saved me enough money on that call alone for me to buy him dinner any time he wants. I suppose I will wait for the bulls to run sometime in the future before I step into the market – but I won’t hold my breath on that one!

    Reply

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