If you thought the first Round of the Financial Crisis was bad, wait until you see the next one. Indeed, I fully expect that what’s coming is going to be 2008 on STEROIDS. I’m talking about market crashes, civil unrest, riots, bank holidays and more.
The political and social environments in the US are growing increasingly anti-loose money from the Fed. The Fed knows this which is why we’re seeing dissent internally (see Dallas Fed President Dick Fisher’s comments from earlier today).So absent some kind of catastrophic event, QE 3 isn’t coming any time soon. Which means the floor has come out from under stocks (it just did). Which means…
The next round of German elections comes in September (the 4th, 11th, and 18th). Is Merkel (and her party) really going to commit political suicide to support the Euro? After all, she would literally have to change the German constitution to participate in the creation of Eurobonds (the latest deranged ECB idea). You think the German people will go for that?
When you combine these patterns with the light volume that has occurred throughout this latest move upwards as well as the fact it’s moving on rumors (seriously, Eurobonds? You think Germans are going to support this?), we’re very likely going to see a reversal in the near future culminating in new lows for the year.
Big picture: I warned to get defensive several weeks ago. Stay defensive now. This snapback rally is not the start of a new bull market rally. If anything, the volatility of the last week has made it evident that we’re back in a 2008 environment: you simply don’t see 3-4% price swings on a daily basis in a healthy market.
Nothing goes straight up or straight down. So there are going to be sharp bounces during this collapse. This was certainly the case in 2008. In fact, during the two months of October-December we had three sharp rallies of 11%, 17%, and 20% respectively. Every time the market rolled over hard soon afterwards.
Stocks are now back to November 2009 levels. In plain terms, the last year and a half may as well have not happened. The second half of QE 1, QE lite, and QE 2… literally everything the Fed has done since the end of 2009 has been wasted money.
However, the fact remains that the market is on Red Alert mode. The financial system is more leveraged than it was during the Tech Bubble. Mutual funds are more heavily invested in stocks than at any other time in the last 50 years. And the cause of the 2008 Crisis (derivatives) still hasn’t been reined in.
Just like in 2008 we’re going to see a full-scale market Crash. Only this time it will also involve countries defaulting on their debt, bank holidays, civil unrest, and more. In simple terms, it’s going to be 2008 on steroids.
Indeed, the only thing that could really kick off a rally for stocks would be the announcement of QE 3 (or hint of it) from the US Federal Reserve. However, even this would be short-lived. The market has finally begun to realize that the Fed can’t solve the issues that created the 2008 Crisis.Which is why we’ve been in a free-fall for over a week now.
Nothing from 2008 has actually been fixed. Faith and trust do not exist in the financial system anymore. Everyone knows the deal… they just don’t want to admit it as it means GAME OVER for the system as we know it.
My primary point over the last year: that at some point the markets will no longer respond to any Fed intervention, because it will be clear that the Fed can’tsolve the problems facing the financial system. When this happens, the result will make the 2008 Crisis look like a joke
For 80+ years, the US financial system has operated under the belief that the Federal Reserve could handle any problem. This belief was put to the ultimate test in 2008 when the Fed faced off against the biggest Financial Crisis of the last 80 years. And the ONLY thing that kept us from the brink was the belief the Fed could fix things.
We are currently witnessing a pattern in the stock markets that has occurred multiple times in the last century. This pattern has occurred in 1907, 1929, 1931, 1987, 2000 and 2008. And every time it ended in misery.
Make no mistake, something big is afoot behind the rhetoric and political talking points being thrown around by the White House and the GOP. That something will be some means of letting the banks get through this period without getting crushed.
