We are approaching for year end. Year end closings are very vital to the technical analysis and in forecasting market movement of following year. Year 2011 closing would be of significant importance in analysing US and European markets. If year closes around these levels for most of the markets then it gives quite contrary signals. We have Asian markets India, China, Hongkong, Japan and Singapore mainly in firm downtrend and have corrected more than 25% this year. On other hand, you have US quite firmly holding upper levels and Europe mostly in middle, have given up tops but showing some resilience at current levels.
This makes it difficult to forecast. Even fundamentally, we have no clear signals weather Europe would be able to solve its problems, Would US cut more fiscal deficit or would resort to print more? In Asia, too, we are passing through difficult situation. Japan’s debt has kept rising and growth falling, China just passed through inflationary period and real estate bubble is still unanchored, at home-policy paralysis and governance deficit continues to widen. G-20, which constitutes 80% of GDP are in one or other(fiscal or monetary easing) problems.
These all nations has tried their best to contain the crisis but they have miserably failed. More to that, world has shot all the bullets they had to fight the crisis. The question looming large is, if crisis worsens as expected, would these nations just surrender and let markets fall in their natural course? Or would reuse old bullets(printing more) which hardly works.
Let me share thoughts of some prominent figures to come near to the conclusion
Last 10 economic advisors to president in US were interviewed on this subject and they said next crisis will “ Dwarf 2008 “. – Imagine the magnitude of crisis they are expecting. In 2008, everything had come to standstill. We were just hours away from wide spread Financial Collapse ( Banks go bankrupt, accounts are freezed, bank holidays are declared). These experts are seeing far severe crisis in coming years which will DWARF2008.
IMF chief recently warned “Beware of the clouds that are accumulating at the European skies and make sure that you have enough reserves, enough resistance, enough cushion to actually weather the storm ”. She also said “And what we see is stalled growth in advanced economies with potential recession in some of the European Union countries, including my own country of course ( France), and channels of contagions which can be different”.
In their coming Financial Stability report, IMF is expected to lower world GDP forecast to sub 4% from 4.5% earlier.
After having gone through such reports and analysing technical in similar context, I expect two outcomes next year.
1. World experiences severe depression.
If Europe fails to reach an amicable resolution-European banks default-Spain and Italy defaults as Greece did-Germany opts out from Euro zone,
US forced to put severe austerity measures-China, Japan stops buying US treasury bills, Derivatives bubble blasts( Which caused this crisis at first hand and from 2008 till last year it has increased 40%). According to BIS, size of derivatives market is $600+ tn. More than 10 times of world GDP. These derivatives are speculative bets largely among banks and financial institutions on interest rates, mortgages etc..
China’s growth slows down as expected and fears of real estate bubble and resultant inflationary period re emerges,
India’s reform process halts, rupee devalues further and inflation ghost keeps dancing — world is sure to get into depression.
These fears are real, indeed real!!. Keep close watch, these are probable events of next year.
2. World experience modest recession followed by massive printing by US, Europe or by G-20 as coordinated measure.
If Europe continues to fight with the problem but nothing moves and finally Europe decides to give free hands to European Central bank to print massive Euros to monetize the debt. During continuing fight, world markets will fall further and after massive printing markets will adjust with the infused liquidity.
US resorts to QE 3 – recently Q3 GDP was revised to 1.8% from 2% and you must be knowing that US revised last year GDP from 3% to just 1% in second quarter of this year. You may have ugly GDP numbers in next few quarter sending Dow to 9000 and then FED comes to an aid with massive QE3. Or situation in US and Europe continues to deteriorate and G-20 decides to take coordinated actions and they decide to print more.
Put all thoughts together, I can conclude …
We have very difficult 2012. In first half, we may go through severe fall in all markets specially commodities, energy and precious metals and US, Europe equity markets. In second half or late 2012, FED and ECB prints unprecedented massive money re inflating everything under the sun.
This time it is very likely that when US and European markets crashed, funds will to India and China because these markets are quite cheaper to their European counterparts and even passing through crisis India-China will keep growing around 6 and 7 percent respectively against 1% or minus GDP growth in US and Europe.
I would advise to remain away from markets for next few days. Let market settle out and decide its direction.
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