The Shit Gets Closer To The Fan
The first week of August 2011 has been the most tragic week in the market since the drop in 2008. In the crash of 6 to 10 October 2008, the DOW lost 22.14% in that single week.
Not since the January 2009 tanker at the end of that fateful Financial Crisis have we had worse … until the past two weeks – it has been the most drastic two week drop with the DOW losing 10.79% in ten sessions.
Confirmation of more pain to come is evidenced in Friday’s leading sectors; Consumer Staples +1.6%, Utilities +0.9%, Health Care +0.8%, Telecom +0.4% – all defensive plays in proper order of fear … and the lagging sectors were the ones that usually provide good leadership in a bull market, also in proper (inverse) order: Energy -0.1%, Materials -0.2%, Tech -0.6%, Financials -1.7%.
Friday’s session left the U.S. markets in negative territory for the year with the DOW down by -1.1%, NASDAQ at -4.5% and S&P500 at -4.6%. And this was BEFORE the bad news …
Marketwatch on Friday 05 August, 2011 After the Close
U.S.’s AAA stripped: S&P yanks coveted rating for first time
Standard & Poor’s downgrades U.S. debt to AA+ from AAA and, while removing world’s No. 1 economy from “CreditWatch,” says the outlook is negative. It cites unpredictability and insufficient deficit cutting.
I did mention in my Daily Market Analysis on Monday 1 August 2011 after the Debt Talks came to a pass that the real worry would be the threat of a downgrade on U.S. ratings.
Originally Posted by Conrad on Monday 01 August, 2011
Let’s not forget that it won’t be the vote that moves the market in the long term but the rating agencies’ view of the deal that will. If the agencies don’t agree with the deal, the U.S. could lose its AAA rating and that will surely move the market down.
And it has happened. And it will get worse in the next 12 to 18 months as other agency’s lower their expectations on America’s viability.
This has resulted in Asian markets falling today, Monday 8 August, by 2% to 4%. (DOW futures are down -300 points -2.5% at the time of this post) China’s inflationary woes will only heighten as a result of this downgrade. The downgrade will also reduce the value of its reserves. China has lashed out at America’s “disgusting politics that is hurting the rest of the world. American Congress has become so irresponsible with all its bickering. America has essentially abdicated its responsibility as financial leader. The U.S. government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone. America needs to end its addiction to debt by curtailing its military expenditures and social welfare programs.“
Yeah, right … cut back on military spending so that China has the biggest gun … I don’t think so.
As far as all this goes, it falls in line with my 4 Year Recession Cycle … and one more very frightening pattern …
In 1925, Wall Street got greedy and introduced leverage to drive the markets up. This drive was not sustainable and subsequently capitulated in 1929 into what became The Great Depression. The Depression “ended” after a 91% decline in 1932 and the government helped the market up in a steady recovery. FDR then pulled the plug on the recovery by cutting spending and that killed the market again.
In 1942, America got the biggest bail out in history – WWII.
Fast forward to 2005 … Wall Street gets greedy and impatient coming out of the Dot.com crash, the scandals of Enron and World.com and the LTCM farce. It introduces leverage in the form of toxic assets like CDOs, Credit Default Swaps and Sub-Prime Mortgages to drive the market up. The drive up is not sustainable as Wall Street shoots itself in the foot and the market capitulates from October 2007 to March 2009 in a 54% decline. The government then introduces TARP, lowers interest rates to 0% to 0.25% and pumps more than 11 trillion dollar at the problem. The hot money drives the market up in an artificial recovery and in 2010, the government takes back its TARP and almost sends the market into a Double Dip so the Fed throws another 600 billion dollars at the problem to drive up the market in another artificial rally.
On 2 August 2011, the Obama administration cuts spending …
… and China wants America to cut its military spending? HAH! Methinks it more likely that America looks for the next big bail out!
The circumstances today are far worse than any other time in history, including 1929. Today’s problems are global and systemic with each region suffering from their own financial fall-outs;
- Japan in Recession
- Greece Defaulting
- Portugal, Italy, Spain and Northern Europe’s Debt
- ECB’s Insolvency Problem
- U.S. Debt Threat and Ratings Downgrade
- China’s Inflationary Threat
- Australia’s Massive Slowdown
- Global Manufacturing PMI Contractions
I wrote that Singapore’s Ballooning Economy (July 26, 2011) was ready for an implosion … now sit back, kick your shoes off, put your feet up, let your hair down and get ready for the show of your life.
Check out this posting for your remedy.
So, if the market’s recession cycle is four years, and the market’s trend cycle is 20 years, and economic failures happen every 40 years … then is it possible that depressions happen every 80 years? Think about it – 1929 – 1932 Great Depression … 2009 – 2012 GDII?
Have a nice day!
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Great analysis!
So if the Great Depression repeats itself every 80 years, probably a major bailout will follow after?
Can it be WWIII?