Something Out Of Nothing
Now sit yourself down, the whole correction thingee over the last 3 days was brought on by the China markets which fell 9% of rumours of a 20% capital gains tax on stocks, which did not materialise and was denied by the authorities via the front pages of dailies. So, it was nothing! What happened next in other markets was a fear-based reaction, everything was fine and dandy with no big risks in the horizon. I have mentioned the external risks to the bull run but even then the external risks did not actually eventuate. Yes, I said "austerity measures" from China could rock the boat, but this was not even an actual move but just rumours. Yes, I did say the unwinding of yen carry trade, but first yen has to appreciate a lot more to bring about the problems. Does the yen have any reason to gain ground? BOJ raising rates to 0.5%??!! Hmmm, where are the Fed Funds rate, what's the rate in Australia or Malaysia, that's still a pretty good differential.
Now you have the core inflation data in the US at 2.3%, slightly above the comfort zone of the Fed, which mean any imminent reduction of Fed Funds rate would be diminished, thus reinforcing the interest rate differentials. If the yen rise more, I tell you, this would not spell the reversing of yen carry trade, but rather prompt more to do the yen carry trade.
Is this a correction or a major bloodbath. Major long term bear markets are prompted by something significant happening. 1987 (interest rate/yen/dollar); 1990 banking crisis; 1995 banking default by Mexico; 1997 Asian financial implosion; 1998 Long Term Capital Mgmt's hedge bets gone wrong; 2001 internet bubble demise; the September 11 factor; ... and now we have ... rumours of something which did not happen in China... and the fear of yen carry trade reversal which looks to be a scare rather than real. So, what I am trying to get at is a genuine blowout stems from something significant, what happened over the last 3 days is a load of smoke n' mirrors.
p/s of course the beautiful picture is a sequel to an earlier posting entitled "People Say I Am Pretty", but its mainly a silly excuse to load the two wonderful pictures up