Why the Dow will Fall by 750 Points in October

Stock markets globally had another turbulent session last week.

Unfortunately, these difficult trading conditions are now the new normal…

As we head into October, stock markets will keep living up to their promise of volatility. And as investors, this action doesn’t make our job easy.

But if you can anticipate what’s on the horizon, you’ll stand to become a more successful investor than others.

I’ll explain…

 Greece’s nightmare has just started

As you’re likely aware, Syriza won the Greek election eight days ago. It was by no means a great win for the political party.

45% of the country didn’t bother showing up to the polling booths. A signal that hope is gone. And further proof that politicians act in their own interests — not their country’s.

Looking forward, after signing an €85 billion bailout package in July, the first Greek ‘bail-out review’ is set for mid-October. According to the Guardian:

‘“The new government has no time to waste on trials and experiments. The third memorandum [bailout accord] leaves no space,” warned the leftwing daily Efimerida Twn Syntaktwn.

‘“Within three months, 56.4% of the measures, or 127 actions, have to be taken, of which 15 have to be enforced in October.”

In the coming weeks the hugely sensitive issues of pensions cuts, tax increases on farmers, recapitalisation of banks, privatisation of state assets and liberalisation of closed markets must all be tackled.

‘The measures, expected to spell further hardship for the long-suffering middle class, have to be enacted before international inspectors conduct a review of the economy – key not only to unlocking €3bn in badly needed aid, but also to addressing the crucial issue of debt relief. 

Greek Prime Minister Alexis Tsipras has a tough road ahead.

The other major question hanging over the country is the banking system. The European Central Bank (ECB) calculates that €25 billion will be needed to recapitalise the banks.

This isn’t going to be easy… Athens banks are suffering from a significant lack of deposits. They’re also riddled with bad loans on their balance sheets.

The clock is ticking. As it stands, this is likely to turn out an absolute disaster…

Ashoka Mody, the IMF’s former bail-out chief, said ‘achieving the programme objectives will require a miracle’.

No doubt, Tsipras’ team will need a herculean effort to pass the ambitious reforms next month. Already, Europe has warned that there’s no second chance for Athens — a Grexit will ensue if commitments aren’t achieved.

Nevertheless, Syriza was employed to do a job — a job that means more austerity. Although, ironically, Syriza came to power in the first place with the anti-austerity policy. And many of its party members remain opposed to strict austerity. Meaning that there’s risk that Syriza won’t get the job done in time. And that the world may be looking at a Grexit in October.

Although I’ve long argued that a Grexit is inevitable, I expect these reforms should pass.

Of course, only time will tell…

Now, with market volatility and uncertainty assured on the Greek front, let’s turn to issues arising in the US.

The US government about to shut down…again

Do you remember the US debt ceiling crisis in 2013?

Looking back, the US government endured a 16-day long shutdown that year. It ended with a bill that extended the debt limit until February 2014. Congress then approved the most recent extension, which expired this past March.

Unsurprisingly the can was kicked down the road. That is, until now.

Officially, the US government will run out of money in mid-November to early December.

There are now growing concerns that Capitol Hill will shut down on 1 October — the same date it closed down in 2013.

Again, US government must raise the debt limit which currently stands at around US$18.1 trillion. A figure which should blow out to US$21.7 trillion by the end of this year.

This is just another debt problem that many US politicians don’t take seriously enough — they seem to believe that money grows on trees.

It doesn’t.

And no doubt, while arguing whether money does grow on trees, a US government shutdown seems likely. This is, of course, extremely bad management.

With the shutdown looming, many ‘leaders’ worry that investor sentiment could change rapidly. Epically if such episodes become routine.

But perhaps, they’ve already become routine…

Governments will never change

Every government is dead broke.

At the moment, they’ll do whatever it takes to keep the lights on and party running. This includes coming to you asking for help (i.e. more taxes) and borrowing more money (i.e. issuing bonds). And it will continue until the public says enough is enough.

Indeed, eventually these lights will turn off…

And the world will see a sovereign debt crisis like never before. Governments will outright default or delay capital payments on their bond commitments. Meaning you’ll either lose everything or — in the best case scenario — you’ll be unable to access your capital for years to come and end up taking major capital losses on your bond portfolio.

Fortunately we still have a year or two to prepare before this happens.

That said, with the combination of Greece’s nightmare and a US government shut down next month, the smart punters will start to wake up to this financial crisis.

This minority will start thinking: ‘why am I investing in debt? It makes absolutely no sense’.

But because no one expects a crash in the bond market, the majority will panic and sell stocks.

Get ready for another stock market correction

Studying the charts, the Dow Jones fell about 750 points during the October 2013 US government shutdown. However, factoring in Greece’s issues, the correction could well exceed this number next month.

Especially considering the uncertainty surrounding the US Fed interest rate decision. I’ve long said that the US Fed would look to raise rates for the first time this or next month. With a second raise in December. In this case, you have another month to prepare for the first US Fed rate hike.

And this means one thing: expect another roller coaster ride in the stock market next month. It’s more likely that we’re going to see a deeper correction in the stock market before the crash in the bond market.

Over at Resource Speculator, I’ve been guiding readers through these turbulent times. They now understand that this stock market correction isn’t the real crisis ahead — it’s the sovereign debt crisis. If you want survive and prosper during these times, click here.


Jason Stevenson

Resources Analyst, Resource Speculator

Join Markets and Money on Google+

Jason Stevenson

Jason Stevenson

Jason Stevenson shares his extensive knowledge of Australia’s mining sector as Markets and Money's dedicated resource analyst. Whether it’s iron ore, gold, copper or lithium, you can rely on Jason to give you in-depth analysis of the biggest and most important sector of our economy. Jason provides in-depth research to Resource Speculator, Australia’s premier resource investment advisory.

Leave a Reply

Be the First to Comment!

Notify of
Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@dailyreckoning.com.au