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(TDI Podcast #21 – Markets in Disarray)
“From tulip bulbs to 1929 through to Asian contagion and the dot-com boom, the bubble crash cycle can be traced back to novelty gone bad.” – Clem Chambers, ADVFN
That just says it all! He goes on to recently say:
“Hello there, trillion-dollar derivative debt markets. If in a couple of years time I’m writing a book called The Crash of 2007, the first chapter is going to be about how these marvelous new debt instruments ended up making a very large financial smoking crater of the world markets. There will be a large section on fraudulent dealings and how billion-dollar swindles were perpetrated and who got thrown in jail forever, who jumped off the skyscraper, etc.”
The problem now as I see it is the developing sinkhole. Underneath the “street” there is a gigantic fizzer that has been quickly eating into the underpinnings and support beams that have been holding up the road above.
The credit crunch that we are aware of has caused many to look around at the bad decision making that has gone on over the past few years by the financial companies involved in the mortgage markets.
Then, the perceived liquidity has started to change as sub-prime lenders have been sucked up by the earth. Early this morning, BNP hedge funds announced that redemptions on 3 of their funds will be HALTED . That is bad. This is on the heals of the Bear Stearns announcement last week. NEVER NEVER NEVER tell investors that they cannot have their money back from an investment. That is a sure fire way to start a classic “run at the bank”. Just a hint of this has been enough to historically create panic. This is now surely going to be the spark that will be heard round the world.
Now for more problems; The ECB announced that they are injecting, or at least is ready to add liquidity if need be to the European markets. How much? UNLIMITED according to the announcement. This caused the EURO to slide overnight. Said another way, the EURO slide will create problems for exports.
Remember, exports have been one of the main reasons that we have seen companies continuing to show good sales numbers. Shut that down and eventually there will be an effect on Earnings.
This and the share buybacks problem is going to sink this market. It is going to swift and painful. We have moved significant money from positions in equities to the sidelines starting July 27th. Each of the “dips” did not seem to be reason to buy, rather more hints that the markets are setting up for more, much more.
Tom Gardner, Motley Fool Co-Founder commented on CNBC this morning that (paraphrase) “even though the credit problems may cause significant problems related to the financial industry. He went on to say that “there are many other sectors that will not be affected by these problems.” HOGWASH!
That is the stupidest and most irresponsible statement I have heard of late. Is he proposing that if liquidity dries up and there is a implosion in the financial sector that it won’t be felt by other areas? Bombs blow up and cause significant collateral damage. The Financial sector is the heart of the entire market and economy. The rest of the economy will surely feel it as we continue to uncover the exact extent of this catastrophe.
Now, according to Dow Jones, there is a 100% chance of a rate cut in September. That is showing that the FED is still concerned about the inflationary pressures but is in need so something to help what appears to be a growing undercurrent of credit gridlock.
This is not going to be enough though as Bernanke has not been looking to stave off problems as was seen with Greenspan.
We spoke of the problems with this market in several podcasts and posts. Have you been reading or even listening? This is time to reassess, move towards safety from the most aggressive of investments, bring up cash and get out of the way.The sinkhole will suck down anything above it.
We have been pounding the table and writing about many of the problems that could sink this market. Do yourselves a favor and listen to his podcast which discussed the share buyback storm brewing:
Then read these articles we have written about this growing problem: