Stock Market Capitulation

Just as there is capitulation selling to the downside, there is capitulation buying to the upside. That is, people just give in to their emotions and sell or buy, depending on the prevailing mood. There’s no real rational analysis involved, just a tremendous urge to join the herd. Humans have an innate desire to ‘herd’.

We think we’re getting close to a ‘capitulation to the upside’ moment. We don’t know why, it just feels that way. Maybe it’s because we think it’s insane to believe that stock prices will move inexorably higher from here, never to return to these levels.

If there’s one lesson to learn from the post-2008 stock market, it’s that it’s trendless. The natural tendency of the market is deflationary, which pushes asset prices lower. The natural tendency of a central bank is inflationary, which pushes asset prices higher. It’s a constant arm wrestle.

Since the 2008 bust, central bankers and their political brothers have been successful in their efforts to reflate global asset markets. But this ‘success’ has come with a massive price tag…an explosion of government debt that will never be repaid.

The most recent coordinated central bank reflation effort has proved very successful, if by success we mean juicing up global equity markets for a few months. They are clearly winning the short term arm wrestle. But we sense nature’s deflationary impulse is powerful and determined, and will fight back just as soon as the stock market sucks enough people back in.

This just goes to show the futility of central bank policy. It’s a policy designed to artificially boost stock markets. It’s easy to see the positive and immediate benefits of this….stock prices go up, and we all feel ‘richer’.

But what you don’t see is the damage to the ‘integrity’ of the markets. The damage to the global commodity we call ‘money’…the reward for speculation over hard work…the arbitrary enrichment of a part of society to the detriment of another. These things all have major, major long term implications. They will raise their head soon enough.

Overnight, some guy reportedly tried to blow up the New York Federal Reserve. The fool should have waited a few years and watched them do it themselves. Because that’s where we’re heading. Central banks are actively packing the dynamite under their own foundations. They’re sending us straight into another crisis.

But that outcome might still be a year or two away. In the meantime, how will you know that this stock market rally is nearing it end?

Don’t expect things to change in the years ahead. It’s just set to get more bizarre. Like today, with markets surging on scant new news. Capitulation to the upside? It sure feels like it.

Or it could have something to do with the soon to be released Chinese GDP figures, produced in a miraculous three weeks from the end of the quarter. We’ll have more to say on these numbers, and China in general, tomorrow.

But suffice to say they are useless for the purposes of economic analysis. They are politically motivated numbers designed to portray the image that China’s Communist Party is completely in control.

So here’s an outlandish prediction: Today’s GDP figures will come in very close to the governments’ target of 7.5%, if not bang on it. In fact, consensus estimates expect Chinese GDP growth in the three months to September to be 7.4%. Judging by BHP and Rio’s strong share price performance this morning, we’d wager it might ‘beat’ those expectations.

Although meaningless, Chinese GDP is a ‘tradable’ number. It dominates the headlines for days and provides trading opportunities. But it really is meaningless in a centrally planned economy. Empty and unproductive cities contribute to it, as do the cleaning and maintenance of these empty cities. And in case you were wondering, the ‘ghost city’ of Ordos is still pretty much ghost-like, as this very cool video shows.

Meanwhile, beneath the noisy headlines, the structural slowdown in China continues as it attempts to correct its imbalances.

More on that tomorrow.


Greg Canavan
for Markets and Money

From the Archives…

Still Bullish on China?
12-10-2012 – Greg Canavan

Global Economy Health Check
11-10-2012 – Satyajit Das

Super Clueless For Your Retirement
10-10-2012 – Nick Hubble

An Investment Strategy for the End of Australia’s Lucky Run
09-10-2012 – Dan Denning

How The Fed’s Forecast Fallacy Leads to Stagflation
08-10-2012 – Nick Hubble

Greg Canavan
Greg Canavan is a contributing Editor of Markets and Money and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails. For more on Greg go here.

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