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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

What the Autumn May Bring For the Stock Markets

Stock-Markets / Global Stock Markets Aug 22, 2009 - 05:40 PM GMT

By: Phill_Tomlinson


Best Financial Markets Analysis ArticleHistory has a habit of repeating itself. Markets also, follow a similar pattern as history can show. As Summer draws to close, as we enter Autumn, I feel we are in for another action packed time, similar to the close of 2008. Optimism is in the air all around with a complete turnaround of sentiment. When the majority are optimistic, its best to go against the tide and September and October are historically torrid times for the markets.

There is evidence all around the globe that imbalances still exist - many worsening as time passes. China is in a rampant bubble driven by the Communist party. Many Eastern European nations are close to currency crisis, exposing many Western European countries who have lent them money. Sterling continues to worsen, as the UK leads the developed world in printing money and debauching the currency. Liquidation is put on hold, as governments believe they can avoid the inevitable. There have already been ominous signs for this month, with the classic August stock market volatility. Central Banks are planning their next moves, in the US there have been rumors regarding a second stimulus package as the first one runs out.

If we take a look at the VIX (the volatility index) it has been moving downwards since the events last October. Notice how quick it can move upwards as last year shows.

There was always going to be a market rally. Nothing ever moves straight up, or straight down. There are always periods of consolidation. If we look at Sterling, it has rallied quite substantially since its dramatic decline last year. Does this mean it has reached a low? I'm afraid not, all the fundamentals point for it to resume its bear market run, and if I was a trader I'd be looking to put shorts on Sterling as the next few months should see a deterioration once more. Sterling looks once again a basket case currency as it did during the sixties and seventies with a new generation that is fooled with the same rhetoric past politicians used to say to justify the devaluations.

30-40 years ago the politicians always justified the devaluations. We need to buy time, it will make our exports more competitive, we need to 'invest' to keep jobs and so forth. Roll forward 30 years and the same fallacies are being told. The idea that a devalued currency can bring prosperity is sheer madness, if it was that easy then no one would have to innovate or increase productivity. Over the long term this policy never works. You need a strong currency and a strong government to put the breaks on and say 'Ok, we tried to inflate, it didn't work, therefore we will stop the printing'. As painful as this would be it works. People adjust, they become more competitive, make better products, start investing. This is how you become wealthy and give your exports the edge. This is what Japan and West Germany did.

After the Second World War both these nations had worthless currencies. War torn, people had resorted to bartering rather then use government money, they had no currency reserves and their people were living in poverty. Nations usually have to get in this state before politicians get a spine and change their ways and that's what happened. Germany abandoned the flawed Reichmark and introduced the Deutsche Mark with a new emphasis on maintaining a sound currency, and so began Wirtschaftswunder, the great Germany economic miracle. Britain meanwhile became the sick man of Europe and was synonymous with the term 'Brain Drain', despite getting more American Aid than the Germans from the Marshall Plan. Germans on the other hand enjoyed a booming economy, one that had low inflation during the stagflationary seventies.

Japan also took a similar route. Their goal was to get Western Currency, and the only way they knew how to do that was to sell quality products that Westerners wanted to buy, and in return they got their pieces on paper. Did they debase the Yen to achieve this? They did the exact opposite and they created quality products. Westerners used to joke about Japanese products (similar to what they say about Chinese ones now as China tries to emulate Japan) but what do people think of when they see Sony, Toyota or Seiko now? They did this while the Yen appreciated, innovating, increasing productivity and smashing the Americans once dominance of export markets during the 1950's and 1960's. The only reason Nissan or other such companies placed their factories here in the UK is for shipping costs and the 'enlightened' tariffs governments have imposed to 'save' jobs. Even if the Chinese or whoever could do it cheaper.

Of course Japan and Germany are different entities now. Their first and second generations built their wealth and generally as the generations move on it gets wasted. They aren't the countries they used to be. Nations such as China are where Japan were back in the 1960's, a generation who still remember Communist hardship, whose parents still remember the mass poverty and killings. Following a similar model they had no currency reserves and now have amassed $2 Trillion Dollars, and are still amassing them. They have high savings rates like Japan once had and are becoming a huge creditor nation. All of this takes huge personal sacrifice. Sacrifice many current western generations are not willing to make.

So will anyone take similar action as the above for the UK? I don't believe so. Things haven't got that desperate yet. They will keep debasing telling the public the reasons above, a noose will slowly tighten around the government. Spending out of control, exports unable to pay for imports, international investors dumping the currency, tax increases on businesses driving out talent, with the process going full circle. Of course the markets will force their hand eventually. We are a way off yet, but I feel this is what it will take. A real crisis. We should see currency controls at some point in the future as the government attempts to bolster Sterling. They may even start with limiting the amount of foreign money you can take abroad.

People in the UK, I feel, are putting too much trust in David Cameron and the Conservatives, that they will win the election next year and all will be fine, however I personally think the trust is misplaced. Tory Party members have recently attacked the NHS and David Cameron has shown what he feels. He wants the NHS and is willing to spend more money on it. I don't think he has the conviction to scale back government significantly and even if he did the damage is already too bad. Mr Cameron seems to want to mimic Labour as close as he can and won't want to upset the public too much. Even if he was like Thatcher, back then the deficit wasn't as bad, we had oil and gas, and we weren't monetising our debt on the scale we are now. Thatcher would recoil in what needs to be done under our current circumstances.

In a nutshell the world still has plenty more deleveraging, which means Governments will be looking to carry on with printing more money. The UK has continued with QE and for some reason this shocked the markets recently, but it shouldn't have shocked any regular readers to this blog. It will keep on going, £200B, £300B and so on. I don't know how much but I do know there is no way they will sell it all back to the market like many believe. Not when the nation is running deficits for the next decade at least. Now the path has been embarked upon it becomes very hard to stop, and as our politicians were all too weak to take the pain from the credit crunch there is no way they will stop the monetising of government debt. You see people still don't understand and tell themselves "Well we will just wait a bit until the credit crunch passes then we will sort out this or that". It doesn't work like that. The easiest path would have been to take the pain fully as soon as the credit crunch hit. Once you postpone it, you make it worse and then politicians keep saying we will wait until this next crisis passes etc. Then the markets force their hand, and then a nation faces real hardship with no alternatives left.

In times like this there is only one asset for amateur investors - Gold. It reveals all the lies the government and media tell us. Its price tells you what is really happening. Recently the asset has been mentioned in the press, with commentators talking about it, however they still don't understand its value. They ask the wrong questions such as "Why would you place value in Gold?", rather than "Why do you place value in Sterling?". Ignorance and historic naivety, its amazing how well we have been conditioned away from Gold and Silver, free market money. Over a hundred years ago our ancestors would have gasped in horror at the financial system we live in. Four Pounds used to buy an ounce of Gold back then, now its more like 570. Gold may have made the news but what do commentators say when they mention it? Should people sell at these high prices. People are interviewed selling the stuff. When did you ever hear these people call a bubble, and now they seem to think Gold is in one. It will be in a bubble when they are all telling people to buy the stuff, its a safe investment, supply and demand and all that jazz. There's a long way to go until that moment happens.

Gold also tells you the truth of real prices. While people were hysterical regarding house prices, did they realise what was actually happening to the true price? Of course in Sterling prices shot up 200-300% but what about another currency, for example Gold, true historic value. In Gold house prices were stagnant as Gold climbed a similar amount during the same period against Sterling. You could have saved yourself all the hassle of estate agents, mortgage brokers, Tenants, property maintenance and so on, and bought gold in a few minutes online and sat back. Sterling lost its value which gave the illusion that houses were worth more. In other words we never had a housing boom. We had good old currency debasement, mass inflation. Its the same with Oil and so forth. Oil jumped ahead last summer due to demand being larger than supply, but its now still up around 300% since its low 10 years ago in say dollars, but in Gold it hasn't moved.

The governments in recent months have allowed the banks to use false accounting laws. If the market did this the company executives would be sent to jail, but when the Government changes the rules its fine, just like before the S&L crisis blew up. Central Banks have all sorts of worthless paper on their balance sheets. They are monetising the deficits. The banks they have nationalised are trying to lend further money to the economy. Easy money, ruins society. It always has throughout time. The decline of the Roman Empire as they debased their Gold Coins. The Spanish Empire as the Conquistadors drove out the Islamic Moors from what is now Andalucia and continued their conquests by discovering the Gold laden lands of South America, again easy money same effects. Latin American nations throughout the 20th Century had government after government who pursued similar mistakes, despite places like Argentina being richer than the US 100 years ago. Italy and Britain during the sixties and seventies played with easy money and look where it got them during the seventies devaluation sagas. What remained of British Industry collapsed, as companies thought they could keep selling on price, rather than quality and innovation, but eventually costs go up also as companies become sloppy relying on further devaluations to bail them out.

Politicians are too tempted to play the easy money card as the great deflationary juggernaut, China, exports low cost products, recycling their money back to the West to encourage further easy money policies here. China have studied their history well and know full well how destructive easy money is to society, and realise what they are doing to the West.

Unfortunately when Fiat currency exists it is a lot harder for the Government to face the pain and do what is right for the long term. Easy money means easy living for the short term, but it just impoverishes society in the long run and puts a greater burden on future generations. We should have another scramble for cash over the coming months, but I suspect this will be the last scramble for the fiat currencies. After that only true money that has a historic track record such as Gold will be desired. What will the Autumn bring ... we will all have to wait and see

By Phill Tomlinson

The Age of Stupidity "There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.", Ludwig Von Mises

© 2009 Copyright Phill Tomlinson - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.  

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