Bank Rescues: Capitalism Fails, Depression Coming.
On July 26th 2007 I predicted the current state of global markets in this post.
There is a false idea in the market now that the worst may be over but I promise you it has just begun. The long term support levels for the Dow Jones Industrial Average are in the range of 2,500 – 4,500 points. We are very likely to see the Dow Jones under 7,500 by Christmas – if not under 5,000. This may happen much more quickly than that – the ostriches have mostly lifted their heads from under the stand and are looking around them wondering what to do. Most seem to quickly turn into lemmings and jump off the cliff when they take in the landscape.
Every time the market rises a little the sellers will arrive.
The problems with the economy are structural, deep-rooted and will not be solved by each country nationalising it’s banking industry or part thereof. Though this surely marks Capitalisms’ greatest failure point yet it merely delays the inevitable in terms of economic downturn by a matter of days or weeks.
The current state of the markets recognises that – the gains made since the weekend are quickly being lost as wise investors are continuing to sell, whilst the sheep who think “it can’t get worse” pour good money after bad into the dying markets.
There will be significant global economic hardship over the coming two years.
Equities are still significantly overpriced in major markets, asset values having divorced from reality in 1992 or thereabouts and having never returned to an appropriate level.
What is an appropriate level? An ordinary family needs to be able to buy an ordinary house without being mortgaged to an impossible level. On this basis the UK and US housing markets are something like 50% overpriced.
The equity markets are going to yoyo for a while – but do not be in doubt – the trend will be strongly downwards, and for some time to come.
Super-Bank-Bail-Out-Rescue-Man will not do the job.