Thursday, January 24, 2008

Getting The Right WHY

Been watching the CNBClast two nights and I was amazed at how many are still looking at the wrong reasons why the markets are correcting. Some are still explaining that the US jobs data are still good and that a US recession is not likely.
The markets were already factoring in a 50 basis points cut end of January. Doing an additional 25 points a week earlier: is that sufficient? The markets recovered, and Asian markets went ballistic. Thank goodness Malaysia was closed, if not, many would have been sucked in buying, and would be staring and shaking their head later today.

Downward property prices and impending foreclosure won't be helped by a 75 basis point cut. Like I said before, this is a correction which aggressive rate cuts won't help, it has to play itself out.
Its not US recession, neither is it US jobs situation which is killing the markets. If you cannot get to the right reasons, you will mis-read the markets. If you have to put it down to one reason, its the implosion of credit bubble. If you want a secondary reason, it will be inflationary pressures due to the excessive money supply growth worldwide for the past 5 years - which are directly linked to the primary reason.

We have seen through a long period of inflationary credit expansion but credit expansion is a self-limiting condition. Credit bubbles are merely the rediscovery by a new generation of the powers of leverage. Every credit bubble that ever existed has eventually deflated. Is this a credit bubble being pricked? Sure looks like one. We have essentially already reached the limit of debt serviceability that brings the merry go round to an abrupt end. We are already seeing the tightening of credit standards, the refusal of banks to lend to one another, the frozen commercial paper, the bank runs, the redefinition of what constitutes a store of value, the rejection of financial alchemy, the debt defaults, the falling prices in the housing market, the lack of confidence. These are all hallmarks of a credit bubble bursting.


4 comments:

ONG said...

Bro, it can't rain all the time, your concern about the market is undeniably sound but what the heck, I'm still bullish on DJ & HK.. by the way, I like the BULL you better than ur current state heheh..

Salvatore_Dali said...

ong,

there is a time and place for everything... i had been a strong bull for the first 2.5 years of my blogging, now I'm only bearish and it should be just a few weeks as I see the downward spiral happening very fast indeed, will be a bull soon.

The Rock said...

I agree. The market panic will cause massive sell down and adjustments to portfolio allocations. Thereafter the markets will likely to recover. Then it will get hit again by the next selldown a few months down the road. The cycle will repeat itself very few months until the credit bubble come down to earth. So good trading oppurtunities.

xatomic said...

i like that comic..hilarious :)