By MoneyMorning.com.au
I am just back from a family reunion in country NSW. I needed to take two days off work for the drive up and back. 16 hours driving in total. Not exactly my idea of a holiday.
I thought I could turn my back on this market for two days without the world ending but I was wrong. Since I left on Friday the ASX 200 is down 3.5% at 3868 having negated the whole short squeeze from the previous week.
We are now flirting with the lows from last Monday of 3862. Below there you can expect to see a quick move to the lows we visited briefly last month at 3762.
I won’t go into the technical reasons here why I continue to see further downside in the markets because it is far too confusing for all concerned to explain charts with the written word. I go into great detail in my free weekly video updates. So if you are interested in a detailed explanation of my technical reasoning, you should have a look at them here.
Last week on Wednesday 28 September I predicted that the S+P 500 would fall to 1100 if it closed below the Point of Control at 1155. Last night’s price action has reached my target in only three days trading.
From here the situation gets very interesting. Keep an eye out here for my new update in the next few days.
Instead of explaining the technicals, I thought I would spend today responding to a question I received on my YouTube channel, which asked:
‘Hi Murray, enjoy your analysis however why exactly are you so bearish? You always see the market going down and down but never really substantiate why… I think we’re way oversold. Where do you see the bottom?’
The first thing I would have to say is that the term ‘oversold’ would have to be one of the most overused terms in trading. When a market is in long-term downtrend, as we are now, it can remain ‘oversold’ for a very long time and can keep going lower and lower. To buy the market on this reason alone is a recipe for disaster.
To answer the query on why I am so bearish, I will have to go into some detail about the underlying macroeconomic forces driving this market.
A good starting point is a chart I found on ZeroHedge the other day:
The area of the chart that we are interested in is the red section. The red section shows you the European banks that have a weak liquidity coverage ratio and a high dependence on short-term wholesale funding.
These are the banks that are most at risk from the recent drying up of the wholesale funding markets for European banks.
There was plenty of talk recently about Dexia – the Belgian retail and commercial banking service – being in a lot of trouble (read: insolvent), a quick look at the chart shows you that Soc Gen and BNP Paribas (the big French banks) are also skating on very thin ice.
The news flow over the past few months has seen the American money market funds pulling out of short-term funding for European banks. Lloyds of London has lowered its exposure to Europe and Siemens recently pulled $500 million euro out of the banking system and deposited it with the European Central Bank (ECB).
This lack of trust in the European banking system has led to the major central banks of the world (UK, Europe, Japan, US) announcing they would supply unlimited US dollars in short-term financing to the European banks to fill the gap left by the private sector.
This may solve the European banks’ short-term liquidity issues but it doesn’t solve their long-term insolvency issues. Even the US Federal Reserve has balked in the last few days at supplying unlimited dollars without getting more detail from the European banks about the state of their balance sheets.
If the US Fed is worried about getting its money back, then you and I should be very worried indeed.
This situation is on the back of the losses that would be inflicted on the banking system from a Greek default. If the Greeks (with a population of only 11 million) have borrowed enough money to bring the European banking system to its knees if it doesn’t pay its debts… how do you think the banks are going to look if the dominoes start to fall in Portugal, Ireland, Spain, Belgium and, god forbid, Italy, with the second biggest government bond market in the world?
The losses that may be coming are staggering. And are, quite frankly, too big to bail.
The political situation in Brussels is to keep the Euro alive at all costs. The constant bailouts for Greece are not due to European solidarity. They are a desperate attempt to keep the leaky ship afloat in the knowledge that if Greece goes the ship may sink.
The politicians need to keep picking the pockets of their citizens if they are to continue kicking the can down the road. The current bailout money trail goes from taxpayers to Greece and back to European/US banks that hold the debt.
The bulk of the money needs to come from the only remaining place where there is any, i.e. Germany.
The whole of Europe is trying to stare down Germany in an attempt to open the purse strings of the German citizens further to keep bailing the banks out of trouble.
The Germans are finally waking up to this game and are fighting back.
The head of the German constitutional court came out last week and said that the European Financial Stability Facility (i.e the European bailout fund) cannot be expanded further – in any way – without a change to the constitution via a referendum. 60% of Germans are already sick of the continuing bailouts. How do you think that referendum will go?
The Germans have also kyboshed the ‘Eurobond’ farce, which is just another attempt by those in debt to get the rich nations to bail them out and guarantee all of their debt into perpetuity.
I think the chance of Germany pulling up stumps and leaving the Euro to return to the Deutsche Mark is increasing by the day. The political situation at the moment makes that unlikely right now, but Merkel’s days are numbered as are the political careers of many other European nations.
The people are going to start fighting back as they should.
The only thing that makes our markets rally is the constant rumours of the coming massive bailout by Europe of their banks. When you understand what I have stated above it becomes clear that any massive bailout is going to have to jump over many hurdles before it can get over the line. My feeling is that it will hit a brick wall with the citizens of Germany.
The banks use scare tactics to get bailed out. ‘You’d better give us a trillion dollars otherwise the world will end and you will all lose your jobs!’ This worked in 2008 when the government had the money and the power to do so.
Now governments are bankrupt and the people are wising up to the game.
The European banking system is basically insolvent but no one wants to admit the fact. Those in the know are running for the hills while the Government officials try to calm the market with soothing words about their power to fix everything with the wave of a wand.
In answer to the question about ‘substantiating’ my bearish view I would have to say that watching the European banking system crumble is more than enough reason for me to continue selling this market short.
There will be plenty of rallies along the way on the back of government intervention, but ultimately the markets will continue to sell off as people realise that there really is no money tree to fix the mess.
I will cover the technical situation in my next weekly update, which should be out in a day or two.
Murray Dawes
Money Morning Australia
