Stock Market Rally Warning, Investors Should Adopt a Defensive Posture

By: Richard_Karn

Markets worldwide have been rallying on the assumption that more of the very same interventionist policies and malfeasance that caused the global financial crisis can in fact cure it.  Our analysis of recent events concludes this assumption is misguided for a number of reasons, not least being:

• The vaunted return to ‘normalcy’ in credit markets masks the concentration of available credit in fewer and fewer hands and is hitting small business, the backbone of the US economy, especially hard; further, S&P’s recent blanket downgrade of corporate credit ratings threatens the continued viability of any company with less than a stellar credit rating and will undermine the nascent recovery attendant to the inventory rebuild.

• For the wider economy, credit will continue to contract as it becomes apparent that the application of more of the same old interventionist policies, ‘only harder,’ is not working: nothing in the financial sector has been changed to prevent the misbehavior that led to the global financial crisis—in fact, as is witnessed by the rapid growth of OTC derivatives, such misbehavior is now being actively encouraged and promoted as systemic salvation.

• As consumer frugality loses its cachet and becomes an oppressive necessity, the savings rate will continue to increase and a reversion to the historic mean of consumers accounting for roughly 60% of the US GDP, as opposed to its current 72%, implies a nearly 3.5% contraction in the global economy China cannot replace without a nearly 40% increase in their GDP; the resumed decline in the Baltic Dry Index, which tracks the flow of bulk commodities worldwide, is suggesting the hiatus in the global slowdown may be over.

• The fiat dollar has replaced the Japanese yen as the currency of choice for the leveraged carry-trade, which in our view will only serve to increase exchange rate volatility going forward and further destabilize currency markets, especially in times of crisis.

• And as it stands, US markets are now pricing in a level of economic growth that is simply not occurring and which is unlikely to occur in the current environment because money is not reaching those who need it most—small businesses and working Americans.

Against this backdrop, the Obama administration is stridently pushing a range of expensive agendas most people do not fully comprehend but which make them decidedly uncomfortable because too much is happening too fast: the rhythm of events is building toward a crescendo.

If the ‘more of the same, only harder’ approach fails, which appears increasingly likely, it would be historically consistent for the growing skepticism we are seeing today regarding our leaders’ political and economic policies, as well as their integrity and intent, to deteriorate into a broad loss of confidence in the administration, and trust will be the latest casualty of the global financial crisis.

We strongly advise adopting an overall defensive investment posture and a more furtive, ‘hit and run’ trading approach to these markets.

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As always, any questions, comments or suggestions you may have regarding our work are welcomed.

By Richard Karn/ETR

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© 2009 Copyright Richard Karn / ETR - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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