Second GFC Shoe

Summary:

The probability of second down leg in the Global Financial Crisis is rising.  Three charts tell the story on a world-wide basis

1.       Standard and Poor Industrial Index – 85 Year Chart

2.       Volatility Index Chart (of Standard and Poor)

3.       Shanghai Index Chart

Analysis:

The 86  year stock market chart is back in overbought territory

The only alternatives available to authorities are:

1.       Allow market to breathe out

2.       Rampant inflation

Q: Are our authorities stupid?

A: No. They understand as well as you and I that rampant inflation will rupture the entire system

Interim Conclusion: The market is edging closer to a second down leg

Note from the Volatility Index Chart below just how complacent investors have become – against a background of 9.8% US employment, falling house prices in October 2010 and Baltic Dry Goods Index showing weakness in freight prices against background of rising oil price.

Note falling bottoms in PMO of 86 year chart. (Momentum of price rises is slowing)

Only “reasonable” outcome might be sideways movement in stock prices for 10-15 years.

(Chart source: decisionpoint.com)

Q: How will a second down leg in GFC affect China?

A:  Shanghai Chart at a decision point. Only if $SPX rises in face of rampant inflation will Shanghai Index break up. If $SPX pulls back, Shanghai Index will undoubtedly break down.

Overall Conclusion

Pure logic dictates that it is not possible to pull the world economy up by its own bootstraps. Wealth is created by value add, not by an avalanche of money and credit.

We need to start the healing process by rebuilding infrastructure in the industrialised nations – an infrastructure that is geared to support a new (base load) energy paradigm.

But this time around, the “structure” of the energy industry needs to be carefully considered. The process of rebuilding will take 10-15 years.

Author Comment:

Because of the structure of the oil and coal industries, the failure of the USA and Australia to ratify the Kyoto protocols in 1998 blocked the March to Market of new energy paradigms for a decade. That is why it will be so important to get the structure right of the next energy paradigm.

Brian Bloom

Author, Beyond Neanderthal

beyondneanderthal.com