Thursday, August 4, 2011

So Prove Me Wrong

On Tuesday, after the nefarious Beltway Bozos passed the largest debt increase in American history -- a 16.78% increase which the greedy spenders will utilize to its fullest extent -- the stock market reacted with its sharpest loss in months. I said then that worse was to come; that the Asian markets at midday were down about 2%, foreshadowing a continuing Wall Street decline.

Wednesday morning the slide from Tuesday afternoon continued until the afternoon, when the tide turned and the market began to rise. The Dow clawed its way back to +26 for the day, and I began to wonder what had happened. I think I know.

Wednesday afternoon the heaviest volume came from heavy buying of Standard & Poor's industrial fund. That fund deals mainly in the 500 top industrial stocks on the exchange (most people have at least heard of the S&P 500). When money is pumped into the S&P 500, the fund managers must deal with it; they buy industrial stocks. This creates a feedback mechanism, driving the market ever higher. This feedback is enhanced by computer trading, since the computers are not programmed for fear.

All you need is a catalyst, and it is my belief that the catalyst was the Fed's private member banks -- a sinking stock market was the opposite of what their political masters needed, so they began buying to shore up the market. Without doubt, the need for a "sucker rally" was also a powerful motivator. The industrials rose on the coattails of that buying.

This morning the outlook was a bit bleaker. The Asian markets did not follow Wall Street; they continued to drop. Standard & Poors was the top loser of the day in terms of volume. Apparently the rallyers from Wednesday also got cold feet, and the sell-off began again in earnest. Traders wanting to retain relative liquidity are moving to cash in anticipation of rising interest rates. This is putting a strain on the banks, which, while paying minimal interest, are still being hurt by having to hold funds which they dare not place in the market.

It is no wonder that instead of paying interest, banks are starting to charge large depositors a fee for holding their cash, as announced by BNY Mellon today. "The northern lights have seen strange sights...", but we are about to fall down the rabbit hole.

I have digressed. Today, the Dow dropped over 500 points, down 4.31% in a single day. At this writing (10:30 PM Thursday here, 10:30 AM Friday in Hong Kong), the Hang Seng is down over 4%. It could rebound, but the threat of a weekend, and worries over the U.S. unemployment figures pointing upward, make an Asian rebound very tentative.

So, to the geniuses in Washington, I say, the worst possible thing you could have done to our economy was to increase the President's credit card limit. Prove me wrong. I'm waiting.

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