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| Joined: | Mon Nov 21st, 2005 |
| Location: | California USA |
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EXHAUSTION
The experts say that the traditional sign of a bear market climax is a panic sell-off of shares. This is called exhaustion. Exhaustion can produce a bottom. It also creates a sucker's rally.
In October 2002 the S&P 500 bottomed at 777. That was one of the strangest oddities in stock market history. On Friday the 13th, August 1982, the Dow bottomed at 777.
The S&P 500 arrived at 777 in a most intriguing way. It closed below 800 in mid-2002. Then it soared back to about 950. Then it fell back to 777. Then it soared again to about 950. Then it fell back below 800. Only in the first quarter of 2003 did it begin its long trek back up. It peaked in late October 2007. Then the rout began.
The bulls are waiting for the final sell-off. They tell people to stay in this market, yet they also predict a final sell-off.
It seems to me that it is better to sell your shares – all of them – and short the market. This way, you profit from the final sell-off. But the analysts never mention this strategy, let alone recommend it.
http://www.lewrockwell.com/north/north662.html
There seems to be a disconnect between the stock markets of the world and the world economy. The Hang Seng index of Hong Kong is down by two-thirds over the last year. Yet the Chinese economy, while slowing, still seems to be growing above 7%. These are government-supplied figures. We should not take them too seriously. But the trend is still positive.
Are the Asian stock markets not forecasting really bad news to come in 2009? This is what bullish analysts ought to argue. We are told that the Hang Seng index is selling off because profit projections had been wildly optimistic a year ago. Maybe so, but the question remains: Why?
The answer is the Austrian theory of the trade cycle. The economic boom is created by rising monetary inflation. The bust occurs when the rate of monetary expansion slows. The Chinese central bank is slowing the rate of monetary inflation. It had pumped in money (M1) at a rate of close to 20% per annum for several years. Year to year in September, M1 rose at less than 10%.
In June of 2007, I predicted what I thought was going to happen in China.The bubble in China resembles the bubble 1995–2000 NASDAQ in the United States. The Chinese stock market is trading at a price/earnings ratio above 50. Some stocks are trading at 80. In a speech on June 12, Alan Greenspan commented, "Some of these price-earnings ratios are discounting Nirvana." But let us not forget that the NASDAQ reached a p/e ratio of more than 200 in December, 1999.In late January, I wrote this:At some point, China's central bank will be successful in slowing price inflation. The economic boom requires ever-larger percentage increases of the money supply. By merely following the policies of the previous year, the central bank will produce a recession. If the central bank is serious about slowing inflation through interest rate increases, it will see its goal achieved. Price inflation will in fact slow. The cause of the slowdown will be a recession in China.China is now where I thought it would be. China is cutting jobs in the export sector. The government is intervening to save jobs – the standard approach of governments all over the world.
What could trigger this? A recession in the United States could. Falling demand for the goods produced by China's export sector will produce bankruptcies in China. They will order no more goods and services. These effects will ripple through the Chinese economy. In the absence of the recessionary efforts of central bank policy, these ripples could be contained by growth in the other sectors. But a reduction of Chinese economic growth is already in the pipeline. The central bank's policy of letting interest rates rise is sufficient to create a domestic recession.