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BY: CRISIS MANAGER The last days of operational markets (Part 1)
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We have experienced great decades of freedom and growth. If one looks back in the history of mankind this is a very unusual combination. Rarely such a long period of freedom was experienced in Europe and the rest of the western world. Enormous wealth was created by people and through the security and viability of the system, this freedom could be maintained for a very long period of time. One should keep this in mind, when looking at the recent financial and economic crisis.
Now, in the last days of March 2009, we experience a bear market rally. But there is an increasing chance that very soon this rally will turn into a disastrous downturn of the markets. For those who have forgotten about history, this will most likely become a costly lesson.
Remember what happened after the start of the First World War. Stock markets were closed around the world. Protectionism and attack of capital rights shocked investors – and if the war itself would not have come as a greater concern to many, it would have cost outrage in the streets. You might also recall that it took years for the stock markets to operate again.
Last year Nouriel Rubini predicted that markets would have to be closed. With his blunt statement he scared many people. Now he was amongst the first ones to warn of a bear market rally. In case he will be proven right, then we can anticipate that the markets will experience severe and more trouble than in 2008.
Another prediction which comes to match Roubini´s prediction somehow was my prediction on server market turmoil between April 7th and 5th of May 2009. There is little time left to go and the signs seem to confirm my deepest concerns.
The issues which piled up the last days are so massive that no one half way intelligent should consider this bear market rally as a sign for economic recovery.
1. We have utilized unprecedented expansive monetary and fiscal policies.
2. So far stimulus and bail outs show no sign of slowing down the deflationary pressures. Even the UK goes into deflationary mode, after having had negative deflation in Q1 2009.
3. The UK was also the first large country where central bankers and the prime minister got into discussions about the end of fiscal policy options. That means there is no room to maneuver.
4. Citizens in all western economies are increasingly unsatisfied with socialism for the rich. Some pessimists can even hear the sound of the Marseilles and the run on “la Bastille”.
5. The latest declarations on GM and Chrysler will significantly reshape the landscape of business and the bond industry. If these companies go into bankruptcy, as I predicted back in 2007, then a horrible mixture of losses in Bond markets and forced selling will hit the markets.
6. In this situation bank failures will be the consequences of the game, leading to the worst depression in western history.
Hold, one might say. Don´t be so pessimistic about the future. In reality, I have lost hope that anyone can solve the crisis from getting worse at this moment of time. Policy makers have maneuvered their economies directly into a no return situation. The spending of resources on failed banks and businesses drained the economic resources, which would have been of great help in the "real economy". It further drained trust, motivation and destroyed room for political maneuvers and joint actions. Protectionism will be a result of this.
What will happen in April?
Expect the bond markets to tank. Huge redemptions will strike hedge funds and drive down the leverage in the system, even further. This will create the need for banks to ask the government for more money. The money injected in the financial system to have stabilized the financial system will vanish like a drop of water on a hot stone. The funds the financial system will need to survive will make the former bail outs look like peanuts. In the first phase of the crisis, equity markets became insufficient in helping companies to raise fresh and adequate funding. In April the fire will jump to the bond markets sucking the last oxygen out of the lungs of the financial system. Within an environment where governments have already guaranteed commercial paper, this will collapse the chance for any kind of governmental support to businesses.
Most governments themselves will feel the heat, especially the Anglo-Saxon ones. The amount of debt which has to be issued and bought this year is exceeding demand by far. In an environment where the bond market collapses, investors will hold back even further, as they will expect the bond yields to raise within the short term future. This will become the precursor of significant inflation and state bankruptcy.
Keep further in mind that it wasn´t the year 1929 in which the US faced the most bank failures. It only started in 1930. Bank failures started to spark off as resources got scarce! The fastest way to reduce your resources is to throw them into fire and burn them, instead of keeping them away.
In April investors will experience that their flexibility will be frozen. This It will change the landscape and break with another paradigm. Bank failures of too big to fail institutions will take place or will at least be discussed. Stock markets will tank along with bond markets. Large, known companies will go out of business. Massive lay-offs will be announced. Bond markets will eventually be closed, even though governments need them to work.
Originally posted by elston
reply to post by VelmaLu
Source Reuters: Now 1 in 10 Americans receive food stamps
Are you really seeing a silver lining?