–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…
–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.
Daily Reckoning Australia