December outlook - equity markets and reality

America        I have felt for some time that the US equity market has made its high of the year, and that the move to the lows of November were the first part of the decline in a new bear market, and the rally in the second half of November was in effect a wave two counter trend bounce, before the next phase of the decline. These bearish patterns are very clear in the NASDAQ, and the bellwether Apple stock. There is also a pattern to the SOXX which indicates that, if it moves 5% to the downside, it will break levels that could herald powerful declines. Interestingly copper has a similar pattern to the SOXX, which I believe will break to the downside and result in the price declining by up to 50% over the next 3 to 6 months.

The focus in the US will remain during December on the fiscal cliff, and I have no doubt that, as before, negotiations will go to the wire but be concluded at the last minute. However, even if President Obama and his Republican opponents do succeed in resolving their differences on this particular issue, they will not solve the long term US problem. This is because, unless America can grow dynamically and consistently over the next decade it is, in effect, a dead duck waiting to picked off by China, the moment it moves from an export driven economy to one that is self fueled by its own consumers. A goal that has been clearly set by the new Chinese Premier is his desire to build a middle class. One thing is certain and that is that America continues to print money and increase its money supply at a staggering rate of some US$300 Billion per month that will in the long run will devalue both its economy and currency.

The European Union        Meanwhile, in Europe, whilst there is a possibility that we might see a marginal new high during this first part of December, this will most likely also be the end of the recent corrective rally. We are moving closer to the time when we will see another impulsive decline to new lows in all European indices. Meanwhile, Bonds and Bunds look to have been forming a corrective pattern since June 2012 that could precede the next bond rally to new highs that would be associated with a bear market in equities. The politicians came to the only decisions possible if they were to keep Greece in the Euro, and that was to allow it to default, but also allow the banks with Greek debt on their balance sheets not to have to mark it to zero, by calling it a restructuring. Whatever spin is put on it, the northern nations have taken a massive hit, in the hope that, by doing so, they will have stopped the rot.

The focus must now be on Spain and the Iberian Peninsula. Spain’s economy is gripped by an accelerating depression not dissimilar to that which overwhelmed America in the 1930s, with falling employment, industrial production and a run on the banks. Despite this the Spanish government claims that the economy is only declining at 1%, which is frankly impossible to believe. The inescapable conclusion is that it is only a matter of time before Spain could go into meltdown, as Greece has done. It looks very much as if the Spanish government will cover up the disaster until it’s too late. But even if they were pre-emptive, the problem is so big that it is unrealistic to believe that it could be solved by the ECB or EU, especially when Italy looks like being the next hospital case that will also need the same intensive care.

Amazingly European politicians seem to believe that the euro will hold together. This is a demonstration of self-confidence that can only be described as hubristic. There are only two honest counters to the headlong political charge of the dream of Europe, both of which derive from a healthy dose of realism and will be manifested from within the markets and by the electorates around Europe who are affected by these misguided policies. One example, is the drive for Catalonia to secede from Spain is now overwhelming, a clear statement of a lack in confidence in the Spanish state by its people. With Spain's 55% youth unemployment, major civil disobedience as seen in Greece will be inevitable.

In general terms, whilst Germany is the strongest country in Europe, its central bank asset portfolio, which was once strongly invested in German banks and assets, has been replaced by a portfolio of assets in southern Europe which can only be described as weak. As such the cost of attempting to hold Europe together is the transfer of wealth from the northern to the southern nations. As things stand, this process will not ultimately save the southern nations but will provoke the demise of those in the north, as the whole of Europe suffers from the consequences of the politicians' dreams of a unified Europe.

The Rest of the World       It looks increasingly likely that, within the next few months, Israel will make a pre-emptive strike on Iran and that the situation generally across the Middle East will deteriorate relentlessly. Meanwhile, we must surely expect to see a continuation of Chinese expansionary dynamics in the East with its immediate neighbours, Japan being the prime example, being forced to become more nationalist as a natural defence mechanism, in response to this trend. In both of these regions we should therefore expect to see a risk of negative shocks to the market place .

 

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