TRENDS THIS WEEK:
Stock market correction or market crash?
By Gerald Celente
Publisher, Trends Journal
KINGSTON, NY, 16 September 2015—Yesterday was the sixth anniversary of the greatest bankruptcy in American history – the collapse of Lehman Brothers. It was followed by the biggest drop in stock prices since the Great Depression.
In Economics 101, we were taught the basic principles of free market price discovery: Prices rise and fall depending upon market conditions affecting supply and demand. Those days are gone. The Lehman Brothers anniversary reminds us of that since it also marks the onset of a sequence of major financial failures and subsequent government bailouts, buyouts, rescue packages, stimulus plans and zero-interest rate policies that have not only reshaped the American free market system, but capitalism worldwide.
What has been extolled as “recovery” has proven nothing more than a cover-up; papering over historically unprecedented financial losses with historically unprecedented trillions of dollars, yen, euros and yuan spun out of thin air. Backed by nothing, and essentially producing only high-flying equity markets that benefit from free money carry trades, real global GDP growth has been tepid at best. In the US, for example, growth has on average sputtered along at barely 2 percent since the panic of '08.
Yet, even today, equity markets worldwide still rise and fall not on free market price discovery, but in great anticipation of whether or not the US Federal Reserve will raise interest rates for the first time since 2006. And depending on the time of day and where the sentiment lies, expectations and speculation count more than the fundamentals of the economy. For example, after the European markets closed Tuesday, the CNBC headline read, “Europe turns sharply lower as Fed dominates sentiment.” Several hours later, with nothing new to report on the Fed’s pending decision, “Dow up 229 ahead of eagerly awaited Fed news,” USA Today.
Around the world investors are bailing out of emerging markets, according to a Bank of America Merrill Lynch survey reveals fund managers’ allocations to equities falling to their lowest levels in three years.
Along with emerging markets’ risk appetite deteriorating, so too are EM currencies. According to Credit Suisse, EM currencies are back to 2002 levels, with an overall discount to the dollar beyond 60 percent.
Should the Fed raise interest rates this week, the dollar will strengthen, EM currencies will further weaken and inflation will rise as the cost of imports increase. To protect their currencies, governments will raise rates, which will in turn raises borrowing costs, thus dampening already weak economic growth.
And despite China’s unprecedented money pumping moves to shore up its sinking equity markets that are falling along with its slowing economy, the Shanghai Index is still off some 40 percent from its June peak.
Trend Forecast: Cheap money policies do not cure chronic global economic ills, they relieve the symptoms. Regardless of the Fed’s move tomorrow, we forecast an equity crash, not a correction, before year’s end.