Complacently taking the plunge
"Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot. What really concerns me is that there seems to be so little willingness or capacity to do much about it."
Former Federal Reserve chairman Paul Volcker, as quoted April 8 in theWashington Post
The behaviour of the markets around the Ides of March (Tuesday, March 15) indicated that a rapid change in perception, or what George Soros refers to as "reflexivity", was upon us.
On that day the best performing market in the world (Pakistan's Karachi Stock Exchange KSE 100) peaked at 10,303. Since 2000, the Pakistani bourse had risen by 480 percent, exploding skywards once American benevolence began to support President Musharraf. Then, in only nine trading sessions, it lost over 3,000 points or almost 30 percent and the army had to be called in to restore order as panicking investors rioted outside the exchanges, as they were unable to sell their investments.
Talking nonsense
A jabberwocky in the Pakistan Times wrote: "The massive slide has offered buying opportunities of the sound corporate players with a promise of lucrative profits as soon as the bourse comes to its normal track." The implication was that the normal path of equity markets is onwards and upwards. Unfortunately, the State Bank of Pakistan began to reduce liquidity and the anticipated bounce did not occur. At the time of this writing the KSE 100 stood at 6,899.
Since The Ides of March the flight away from risk into more secure investments has continued. By the third week of April all the major US indexes were well below their 200-day moving averages, a measure respected by institutional fund managers and programmed trading systems. More ominously, all US indexes broke below their January lows, as too did the Dow Jones World Stock Index. The latter has confirmed that the decline is occurring on a global scale.
No fear
Yet complacency rules and fear is absent. Perhaps Corporate America is anticipating that the Plunge Protection Team will support the markets or that the effects of the American Jobs Creation Act 2004 will support the dollar and provide easy pickings.
On March 18, 1988, President Ronald Regan signed Executive Order 12,631. It created The Working Group on Financial Markets, referred to by the press as the Plunge Protection Team. Its specific purpose is to avoid another stock market crash such as that of October 19, 1987. Executive Order 12,631 specifically authorizes the Group to coordinate buying: "The Working Group shall consult, as appropriate, with representatives of the various exchanges, clearinghouses, self-regulatory bodies, and with major market participants to determine private sector solutions wherever possible."
However, if the private sector solutions are inadequate its source of funds is unlimited as: "To the extent permitted by law and subject to the availability of funds therefore, the Department of the Treasury shall provide the Working Group with such administrative and support services as may be necessary for the performance of its functions."
Under the radar
While the media concentrated on the outcome of the Presidential election, on October 22, 2004 President George Bush gave corporate America yet another tax concession. This was hidden within the American Jobs Creation Act. From that time on a one-year window of opportunity was granted for Corporate America to repatriate profits earned in foreign subsidiaries at a tax rate of 5.25 percent instead of the normal 35 percent. Billions stashed in tax havens are being repatriated.
Although the money brought back has to be used for a limited menu of activities it does not have to be ring-fenced. This means that the list of activities is a disguise. If $15 billion is spent on an activity that is listed, such as takeovers, it frees up another $15 billion to be used on activities that are prohibited under the law such as filling the pockets of executives and shareholders.
The effect of this repatriation will support the value of the dollar over the next year and stimulate mergers and acquisitions, which, as everyone knows, reduce competition, reduce employment and redistribute wealth into the pockets of the 'facilitators', namely the banks.
Phase II
But the activities of men can at best deflect or delay the effects of the natural laws of the market. These natural laws are rooted in our biological imperative and are formed by human psychology and human interaction. The motive force is the prevailing social mood, and this mood changes. As it changes its effects can be seen in the most dispassionate barometer ever invented - the stock market - in particular the major indexes. Over the past few weeks these indexes have revealed that a mood change is occurring. The glass is being seen as half empty instead of half full by an increasing number of participants. As Phase II of the bear market unfolds and the indexes sink to new lows, be prepared for a financial crisis of major proportions. Cycles repeat.
Former Federal Reserve chairman Paul Volcker, as quoted April 8 in theWashington Post
The behaviour of the markets around the Ides of March (Tuesday, March 15) indicated that a rapid change in perception, or what George Soros refers to as "reflexivity", was upon us.
On that day the best performing market in the world (Pakistan's Karachi Stock Exchange KSE 100) peaked at 10,303. Since 2000, the Pakistani bourse had risen by 480 percent, exploding skywards once American benevolence began to support President Musharraf. Then, in only nine trading sessions, it lost over 3,000 points or almost 30 percent and the army had to be called in to restore order as panicking investors rioted outside the exchanges, as they were unable to sell their investments.
Talking nonsense
A jabberwocky in the Pakistan Times wrote: "The massive slide has offered buying opportunities of the sound corporate players with a promise of lucrative profits as soon as the bourse comes to its normal track." The implication was that the normal path of equity markets is onwards and upwards. Unfortunately, the State Bank of Pakistan began to reduce liquidity and the anticipated bounce did not occur. At the time of this writing the KSE 100 stood at 6,899.
Since The Ides of March the flight away from risk into more secure investments has continued. By the third week of April all the major US indexes were well below their 200-day moving averages, a measure respected by institutional fund managers and programmed trading systems. More ominously, all US indexes broke below their January lows, as too did the Dow Jones World Stock Index. The latter has confirmed that the decline is occurring on a global scale.
No fear
Yet complacency rules and fear is absent. Perhaps Corporate America is anticipating that the Plunge Protection Team will support the markets or that the effects of the American Jobs Creation Act 2004 will support the dollar and provide easy pickings.
On March 18, 1988, President Ronald Regan signed Executive Order 12,631. It created The Working Group on Financial Markets, referred to by the press as the Plunge Protection Team. Its specific purpose is to avoid another stock market crash such as that of October 19, 1987. Executive Order 12,631 specifically authorizes the Group to coordinate buying: "The Working Group shall consult, as appropriate, with representatives of the various exchanges, clearinghouses, self-regulatory bodies, and with major market participants to determine private sector solutions wherever possible."
However, if the private sector solutions are inadequate its source of funds is unlimited as: "To the extent permitted by law and subject to the availability of funds therefore, the Department of the Treasury shall provide the Working Group with such administrative and support services as may be necessary for the performance of its functions."
Under the radar
While the media concentrated on the outcome of the Presidential election, on October 22, 2004 President George Bush gave corporate America yet another tax concession. This was hidden within the American Jobs Creation Act. From that time on a one-year window of opportunity was granted for Corporate America to repatriate profits earned in foreign subsidiaries at a tax rate of 5.25 percent instead of the normal 35 percent. Billions stashed in tax havens are being repatriated.
Although the money brought back has to be used for a limited menu of activities it does not have to be ring-fenced. This means that the list of activities is a disguise. If $15 billion is spent on an activity that is listed, such as takeovers, it frees up another $15 billion to be used on activities that are prohibited under the law such as filling the pockets of executives and shareholders.
The effect of this repatriation will support the value of the dollar over the next year and stimulate mergers and acquisitions, which, as everyone knows, reduce competition, reduce employment and redistribute wealth into the pockets of the 'facilitators', namely the banks.
Phase II
But the activities of men can at best deflect or delay the effects of the natural laws of the market. These natural laws are rooted in our biological imperative and are formed by human psychology and human interaction. The motive force is the prevailing social mood, and this mood changes. As it changes its effects can be seen in the most dispassionate barometer ever invented - the stock market - in particular the major indexes. Over the past few weeks these indexes have revealed that a mood change is occurring. The glass is being seen as half empty instead of half full by an increasing number of participants. As Phase II of the bear market unfolds and the indexes sink to new lows, be prepared for a financial crisis of major proportions. Cycles repeat.
