Should You Believe an Imminent Crash is Coming?
Once again we hear the market cheerleaders beginning their chant about an imminent crash coming. The crescendo usually gets louder and louder until they realize that their timing was off once again and they go back to targeting another area. It is like Robert Prechter, Harry Dent, and a few other cyclical analysts. If you throw enough shit at the wall some of it will likely stick.
Yes there are a number of cycles all converging at once. Yes there is a lot of negativity in the air and fear. Yes there has been no significant correction in the markets in a long time.
Does that mean that an imminent crash is approaching. One that will wipe you out once again. Should you batten down the hatches to prepare for the coming hurricane?
In a simple answer, "No"!
Let me tell you why.
First of all the central banks all trade on the open markets and exchanges now. This has never been the case before and of course they control the direction and price action of most of the markets. It comes down to ones ability to print money. How do you combat that if you are a trader?
Well simply put you don't (and no one does) have enough fire power to take the opposite side of the trade.
Like LP's (liquidity providers) central banks can be on both sides of the market. So pulling orders or placing more orders is quite easy for them to do. When they are not fully engaged in this they have the big banks do their work for them. It is the reason why most hedge funds under perform the markets these days. It is the same reason why volatility is at all time lows.
We base our market analysis on the past in order to predict the future. Most times we only go back 40-50 years or so. At one point the markets were allowed to function as free price discovery vehicles but those days are long gone. You have to know what central banks are likely to do in order to be somewhat profitable. Not an easy task.
If central banks were not so heavily invested in the markets and their directions I could easily buy into the theories behind inflationary and deflationary pressures. That would be for the simple reason that the markets would function as they always have in punishing the debtors and rewarding the savers. This is no long applicable. If it were the Dow would likely be at 3000 by now and bonds would be giving great interest rates at likely 10% or higher. Deflation would have long since won the battle and we would be waiting for the next cycle of spenders to come along and push the markets higher once the structural debt had been cleared.
Don't get me wrong there is a lot of structural debt and this is still a major issue for central banks. In fact debt has never been higher. The last time it even remotely resembled this level was shortly before the financial crisis of 2008. They thought they had controlled it back then too.
The difference in the two time periods is the ability to sustain the bubbles that are blown by covering the potential losses of over leverage. For example here in Canada the housing bubble seemed poised to fully collapse about two months ago (and it should have). However when problems hit some of the bigger sub prime lenders miraculously some large companies stepped in and swallowed the bad debt and refinanced the sub prime market before contagion set in.
It is this ability to sustain the bubbles that will keep the markets from collapsing and to prevent debt spirals. So what I am saying is it would appear that deflationary pressures are contained. Whether this will be the case forever as Janet Yellen mentioned earlier remains to be seen but as long as funny money can be printed then there really is no way to tell how far or how long the debt binge can go on. Please remember that next time you hear that all hell is about to break loose. Cheers!
Yes there are a number of cycles all converging at once. Yes there is a lot of negativity in the air and fear. Yes there has been no significant correction in the markets in a long time.
Does that mean that an imminent crash is approaching. One that will wipe you out once again. Should you batten down the hatches to prepare for the coming hurricane?
In a simple answer, "No"!
Let me tell you why.
First of all the central banks all trade on the open markets and exchanges now. This has never been the case before and of course they control the direction and price action of most of the markets. It comes down to ones ability to print money. How do you combat that if you are a trader?
Well simply put you don't (and no one does) have enough fire power to take the opposite side of the trade.
Like LP's (liquidity providers) central banks can be on both sides of the market. So pulling orders or placing more orders is quite easy for them to do. When they are not fully engaged in this they have the big banks do their work for them. It is the reason why most hedge funds under perform the markets these days. It is the same reason why volatility is at all time lows.
We base our market analysis on the past in order to predict the future. Most times we only go back 40-50 years or so. At one point the markets were allowed to function as free price discovery vehicles but those days are long gone. You have to know what central banks are likely to do in order to be somewhat profitable. Not an easy task.
If central banks were not so heavily invested in the markets and their directions I could easily buy into the theories behind inflationary and deflationary pressures. That would be for the simple reason that the markets would function as they always have in punishing the debtors and rewarding the savers. This is no long applicable. If it were the Dow would likely be at 3000 by now and bonds would be giving great interest rates at likely 10% or higher. Deflation would have long since won the battle and we would be waiting for the next cycle of spenders to come along and push the markets higher once the structural debt had been cleared.
Don't get me wrong there is a lot of structural debt and this is still a major issue for central banks. In fact debt has never been higher. The last time it even remotely resembled this level was shortly before the financial crisis of 2008. They thought they had controlled it back then too.
The difference in the two time periods is the ability to sustain the bubbles that are blown by covering the potential losses of over leverage. For example here in Canada the housing bubble seemed poised to fully collapse about two months ago (and it should have). However when problems hit some of the bigger sub prime lenders miraculously some large companies stepped in and swallowed the bad debt and refinanced the sub prime market before contagion set in.
It is this ability to sustain the bubbles that will keep the markets from collapsing and to prevent debt spirals. So what I am saying is it would appear that deflationary pressures are contained. Whether this will be the case forever as Janet Yellen mentioned earlier remains to be seen but as long as funny money can be printed then there really is no way to tell how far or how long the debt binge can go on. Please remember that next time you hear that all hell is about to break loose. Cheers!
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