The Fed did not come up with more free money, yet. So where do we go from here?
I strongly believe that what we are seeing is the beginning of the end of debt super- cycle. All the prosperity and growth of the last 40 years are largely based on massive debt which resulted in speculation and hubris.
The question going forward is whether we will have inflation or deflation. My thinking is more towards deflation. But Governments of the world are trying their best to pump in more money. And it is a losing battle all the way. Oil has already in 80s and other commodities are on the way down. All the money printing has only resulted in increase in the price of foods all over the world. People in developing world are finding it more difficult to put food on the table and that is causing a great social unrest.
Closer to home, London is burning. One of the reasons of the riot is social disconnect by a large part of the unemployed youth. The unemployment rate among the youth of colour is over 25%. How long before that social unrest reaches our shore?
Will the emerging markets save the world? I doubt it. China and its economy is a mirage and I will be writing a detailed report on the coming hard landing of China. India and Brazil would be happy to survive and keep its own population fed. India, at least is not an export dependent country and so the effect of the coming world crisis will be less on India, as we saw in 2008. The emerging markets will soon become emergency market.
The gyration of the stock market from May onward is a process of forming a top. I was hoping that we will see a new high before we plunge, but I was wrong. Now I think we should be lucky even if we get back to 1300-1350 level in SPX. Unless we have a definitive QE3, there is no way the share markets are going to hold up.
One piece of interesting statistics. In the 3rd year of presidential cycle, when the 1st week of January and the whole month of January is positive, history shows that probabilities are 90% that the year will end in positive territory. The only way I see that happening is if we sell of hard between September and October and Fed ultimately comes out with QE3 to inflate the asset prices.
Price actions of the last 3 days show that the market is taking a breather. The force of selling has reduced somewhat. It can either break down from here and go to 1000 or shoot up. Rest of August is going to be interesting. But 2012 will definitely be the worst to come. Stock market historian and CLSA consultant Russell Napier says that S&P will go to 400. Watch the video. Sobering thoughts indeed.