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by Al Martin

Collapsonomics (Part 4): The Market Correction Cometh – How Soon? How Much?

(3-13-13) In a CNBC interview last week, market analyst Nouriel Roubini, dubbed “Dr. Doom” for his pessimistic outlook, said “I think the markets will be surprised by how much the U.S. will slow down even compared to last year and the second half of the year. The U.S. stock market could correct somehow.” Now everybody is just trying to make a guesstimate of how it plays out.

      Central banks will continue to inject pabulum into the Hopium cloud into 2014 and continue to expand their balance sheets accordingly and after that they would have effectively used up all the tools in their toolboxes.

      Roubini also said that investors should prepare for disappointment later this year. However he and many others are assuming that the central banks led by the Fed can successfully Japanize the world’s economy. How much of that assumption comes true bespeaks of the timing of global economic collapse because the only thing the central banks are doing now is creating a second speculative bubble in asset prices, most notably equity prices. This hasn’t happened with real estate prices and it is unlikely that they will be able to create another speculative bubble with real estate.

      The central banks have already created a speculative bubble in equities and to a lesser extent in commodities. However what they want to do is create a speculative bubble in as many asset classes as possible as had occurred in 2005-2006. That’s why Fed Governor Bernanke talks about housing prices so much. They know that’s the key to the “wealth effect” for the Great Unwashed.

      Simply creating a speculative bubble in equities doesn’t do as much as it once did for consumer sentiment, since ownership of stock is the lowest in forty years. Therefore you have to create a second speculative bubble in the asset class that the Unwashed can understand and have an interest in, namely housing prices. It hasn’t happened – but that’s what they’re trying to do.

      However the only thing they’ve been able to do is to ensure that housing prices have risen off their 4th quarter of 2008 lows. In fact median home prices have increased about 13%, but lest we forget the median home prices fell by about 50% -- from its highs in August 2006 until the 2nd quarter of 2010. This is when they reached their absolute lows. It’s true that they’re off the bottom – but that’s all…

      As far as the market correction is concerned, I think a near-term correction has begun today on March 12, 2013. Why? Because all the stars or the technical indicators, as it were, are aligned the right way. Investor sentiment peaked about twelve days ago. The S&P is now trading above its 200-day average. That is a classic warning sign.

      Of course the most recent correction occurred when the S&P was 8% above its 200 day moving average. Last March 2012 it occurred when the S&P was 10% above its 200 day moving average. It’s clear that “momentum” is still out of the markets.

      So why did the market go so high? It’s a liquidity driven market. This means that economic fundamentals are not supporting this rally and this rally – which is a global event – is what’s called in old fashioned terms a “liquidity-driven rally.” The Fed and the central banks keep pumping out money and keep ensuring that interest rates are in a negative number, i.e. negative interest rates, so it becomes very cheap to own stocks. And there are no real alternatives to owning stocks…

      Nevertheless volume continues to decline. What the Fed and the central banks are trying to do – and they’ve done it before – is to try to jump-start the planet’s economy by “easy money” and cranking up the printing presses, as well as negative real interest rates.

      So who’s pumping up the numbers? Now it’s mostly the institutional buying because until the last couple of months you still see what’s called “retail participation” was continuing to fall until the first of 2013.

      The influx into mutual funds is a warning sign because we know that the Unwashed start to buy at the end of rallies – not at the beginning. That’s why they’re called “The Great Unwashed.” And they are the Ultimate Bagholders.

      Roubini has also assumed there will be recovery. And that’s a bad assumption that people make. They are also saying that QE is no longer effective as a stimulative tool. This is incorrect…

      As long as you can maintain negative real interest rates and keep inflation to continue to move lower, then you are creating an economic stimulative effect and it’s wrong to say that QE (quantitative easing) is not creating that effect – because it is. And this concept that the shills keep touting that comes out of the Bond Bears. They put the Fear of God into the Unwashed that the minute the central banks scale back on QE that interest rates are going to the moon.

      But that’s not true. That’s never happened before – and won’t happen again. Why? Because for interest rates to go the moon indicates that there has to be some demand for money. But there isn’t any. You can see that in retail sales, durable goods, mortgage applications, consumer installment debt, etc. The net demand for money continues to decline. They are wrong in thinking that there’s going to be a dramatic near term drop in equity prices. That isn’t going to happen.

      There is going to be another correction though, so the S&P gets down to 1475, where it has corrected before. But it goes on as long as the respective central banks keep their feet on the economic accelerator otherwise there will not be a substantial correction in equity prices. It is wrong to assume that you need economic fundamentals to support equity prices. It’s true that ultimately underlying economic fundamentals have to support equity prices, even as equity prices have in the past engineered rallies that have lasted five years or more.

      It should be noted that in February Roubini also said that his view on the market was that we are now in “the mother of all asset bubbles” and that his conclusion is “short-term bullish, long-term catastrophic.”

      The problem is that Roubini is not a trader and his service is not trading analysis. If you’re a trader, you’re looking at what’s going to happen next week, not what’s going to happen 6 months from now.

      In fact it is likely that there will be another correction now in equities – plain and simple. But it’s not going to be a large correction.

      What Roubini is saying – as are so many others – is that in Q4, the fourth quarter of 2013, you’re going to see a much more substantial correction in equity prices. Why? This is based on the assumption that the global central banks led by the Fed are going to trail off, as it were, on quantitative easing by the end of 2013. However I wouldn’t believe that for a New York minute.

      In other words, everyone who is predicting a more sizeable correction in equities, are all making the same assumption to make that forecast, namely that global central banks are going to allow QE (Quantitative Easing) to run out.

      So why do they believe that? Because the principal central banks, the ones that make the planet run – the ECB (European Central Bank), the Bank of England, the BoJ (Bank of Japan) and the Fed all have these QE programs which all have target ending dates. It’s true that the target ending dates for the current round of QE, whether it’s QE 2, 3, or 4, depending on which central bank you’re talking about, is scheduled to end at the end of 2013.

      However if you don’t think that they’re going to immediately replace that with a new QE program in 2014, then you’re dreaming. Of course they are. Why? Because they can still “afford” to do so.

      So, there will be a near term correction in the S&Ps of 5% and a near term correction in the commodities, particularly in the industrial commodities, which have “lagged” the financially sensitive commodities.

      Also the fungible commodities – what people eat and what makes the planet work – as well as the industrial commodities are already declining. The problem is that commodity prices are already overbought relative to their underlying economic fundamentals.

      Another problem that the commodities face is that we are already seeing global surpluses in aluminum, steel, nickel, tin, copper, etc., and you are going to see enormous grain harvests in the 2013 crop season, including soft and tropical commodities, because high prices bring out more production. This is true in both grains and metals. This then becomes an additional depressant on economic sentiment and markets because it is likely that commodity prices are going to move lower, simply because supply/ demand fundamentals are turning increasingly more bearish. Commodity prices are not supported by quantitative easing to the degree that equity prices are supported. Therefore, if you’re looking at six months down the road, it is likely that there will be a much sharper correction in commodity prices than in equity prices.

      Those like the Bond Bears, who pooh-pooh the bonds, are also wrong because the first thing out of their mouths is “Don’t fight the Fed” -- and then they say “Be bearish the bonds,” which is obviously fighting the Fed.

      In conclusion, those that believe that US Treasury Bonds are going down the tubes are wrong. We continue to trade the Bonds from the long side on dips because we believe in the adage “Don’t fight the Fed” and those who are looking for substantial decline in equity prices in the near term are also wrong because as long as there is the pedal to the metal at the central banks, you’re not going to see a substantial decline in equity prices because liquidity-driven rallies can last for YEARS. They don’t need the economic fundamentals right away.

      Central banks can make a liquidity driven rally last for as long as seven years – as they have in the past. That means an equity market which continues to rise, whilst underlying economic fundamentals continue to go the other way.

      At this point we are five years into this rally.

      And as we have mentioned before, the central banks have to fight what continuously diminishes the salutary economic effect of quantitative easing which is that the underlying governments are sapping the effect by not allowing incipient deflationary pressures in asset prices to be felt by the consumer.

      This means that consumers are not enjoying lower prices of goods and services because of the deflationary effect or the deflation that is still incipient in the economy because governments continue to fill the so-called deflationary void and weakening the stimulative effect of quantitative easing with ever higher taxation.

      In other words, a gallon of gas should already be a dollar less than where it is. If you use a continuous ten year equator – that is the equator between the price of a barrel of crude oil – West Texas Intermediate and a median gallon of RBOB (Reformulated Blendstock for Oxygenate Blending) in the United States, you see that gasoline should already be 50 cents to a dollar lower than it is. Also, cigarette prices, liquor prices and food prices should all be lower than where they are, but it’s government taxation that is keeping these prices inordinately high…

    * AL MARTIN is an independent economic-political analyst with 25 years of experience as a trader on NYMEX, CME, CBOT and CFTC. As a former contributor to the Presidential Council of Economic Advisors, Al Martin is considered to be a source of independent analysis for financially sophisticated and market savvy investors.

After working as a broker on Wall Street, Al Martin was involved in the so-called "Iran Contra" Affair as a fundraiser for the Bush Cabal from the covert side of government aka the US Shadow Government.

His memoir, "The Conspirators: Secrets of an Iran Contra Insider," (http://www.almartinraw.com) provides an unprecedented look at the frauds of the Bush Cabal during the Iran Contra era. His weekly column, "Behind the Scenes in the Beltway," is published weekly on Al Martin Raw.com, which also publishes a bimonthly newsletter called "Whistleblower Gazette."

Al Martin's new website "Insider Intelligence" (http://www.insiderintelligence.com) will provide a long term macro-view of world markets and how they are affected by backroom realpolitik.



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