Monday, 25 February 2013

The Biggest Crisis to Hit the Stock Market Since the Last One

Guest post by Kris Sayce from Money Morning Australia 

The Biggest Crisis to Hit the Stock Market Since the Last One

What did we tell you a few weeks ago?  It’s impossible for the stock market to move up or down until the Wall Street whiz kids and mainstream media create a new catchphrase.

‘Debt ceiling’, ‘fiscal cliff’, ‘credit crunch’, and ‘Grexit’.  You’ve heard them all.  Each time one of those terms rears its head, the market falls. Then soon enough someone finds a ‘solution’ and stocks roar again.

Well, it looks as though we’ve got a new excuse for stocks to fall. And this one is the scariest of all.

It’s ‘The Sequester‘.

What does it mean and should you worry about it?  For an explanation of The Sequester, here’s the Washington Post:

The sequester is a group of cuts to federal spending set to take effect March 1, barring further congressional action.
    The sequester was originally passed as part of the Budget Control Act of 2011 (BCA), better known as the debt ceiling compromise.
    It was intended to serve as incentive for the Joint Select Committee on Deficit Reduction to come to a deal to cut $1.5 trillion over 10 years. If the committee had done so, and Congress had passed it by Dec. 23, 2011, then the sequester would have been averted.

In short, the US Congress and Obama Administration need to agree to cut a bunch of government spending, raise taxes, or both. If they don’t then it means a total of USD$85.4 billion in mandatory cuts spread across defence, discretionary spending and Medicare.

So, they’ve got just about a week to figure things out. Will they? Or will you see history repeat itself? Here, let us explain…

Stocks Fall Again, Will They Rise Again?

Last Thursday the Australian share market dropped 118.6 points…or 2.3%.  Investors are worried. They’re worried the US Federal Reserve may turn off the money tap. If that happens the stock market will have to fend for itself.

Add that to The Sequester and you’ve got a recipe for a stock sell-off.

As we said at the start, the market and mainstream investors are so insecure that they can’t buy or sell anything without an excuse. They need a big macro-economic disaster…and they need to give it a name.

They’ve done that before. So many times we’re bored of it. Here’s a chart of the US S&P 500 going back to 2007. We’ve overlaid data from Google Trends. The marks on the chart indicate the point at which each phrase reaches the peak in news headlines:

Click here to enlarge
Source: Google Finance, Google Trends

You remember the ‘Credit Crunch’. Headlines containing that phrase peaked in October 2008. The fear of a Greek exit (‘Grexit’) from the European Union peaked in May 2012.

And the Fiscal Cliff hit a crescendo in December…just before US stocks bagged a 9% gain in four weeks!

Each of these phrases has something in common – a short shelf life. The media reaches a frenzy,stocks sell-off and then…that’s right, politicians reach a bogus deal and the crisis is over…until the next crisis arrives.

That’s where we are with ‘The Sequester’…

That’s where we are with ‘The Sequester’. Use of the term has gone sky-high since the start of the year. Check it out for yourself on Google Trends (and sign up for Google+ while you’re there so you can follow our commentary throughout the day).

But we’re prepared to bet that you’ll see another eleventh-hour squib of a deal and they’ll avert the crisis…until the next time anyway. And you can guess what will happen then: stocks will take off, as we dare say part of the deal will involve more spending and/or more money printing.  And if we’re wrong? That’s why we hold dividend-paying stocks for income, cash for safety and gold for insurance. This volatility and fake crisis solving is why we’ve gone on so much about spreading your money around into various asset classes.  If you’ve followed this advice, then yesterday you should have just sat back and enjoyed the view.

Just because politicians and everyone else is irrational, doesn’t mean you have to be.

Kris Sayce is an Investment Director for Port Phillip Publishing and an editor for Money Morning Australia.


  1. The sequester is perfect term for the next market crash (that they will allow this time).
    The global govt/NWO has already bet on the crash this time, you can see this in all the big plays in the stock market. It is controlled by wall street, so why would you think crashes are random or uncontrolled .It is a fictitious market and you don't get your head around it when you think that a free market exists. Or thinking it would solve our leadership problems based on selfishness, greed, love of power and separatism.
    To separate/sequester means exactly that.
    Hold onto your ponies Libertarianz, its 1984 (unless you fight with all your heart for freedom from this totalitarian new world govt).

  2. When you understand that the crisis's are all made up by the "show managers" as an excuse for their actions, to raise taxes and create the environment for a complete totalitarian takeover.
    You betcha.

  3. The stock market is not "fixed". I can sell any time I like and buy any time I like. Bank holidays and 911 shutdowns aside. The people and computers who are deciding whether to sell or not are monitoring all news and reacting according to their previously formed ideas about what is going on and what they should do about the next thing that happens.

    A manifestation of that thinking process is the flash crash, which is computer models playing chicken with each other, seeing who blinks first. They explore market liquidity, short stops, stop loss selling, margin call levels and what all other parties do in reaction. The smartest and fastest computers are the winners.

    The flash creash goes like this. A computer thinks "Hmm, these shares seem a bit volatile, I wonder if there are a lot of margin calls potentially in the sector and how the stop loss prices are set and whether there is really much confidence in the company. I think I'll sell. Does so. The price drops in a fairly volatile way. The computer instantly sees the reaction so piles on a huge short position to see what happens and how far it goes.

    Other computers have seen the action [instantly] and figure there's trouble in the mine. Bering nervous nellies and not wanting to be left holding the bag and not confident that they know as much as the alpa computers, they quickly bail out too and initiate a short position as well.

    A swarm of short stops, margin calls and panic sales are triggered so the flash crash is under way.

    Related shares aare ditched too. The process spreads to a few more shares or even the whole market as nobody wants to be left holding the bag.

    The computers all "run for the hills". Some humans by now have noticed their screens going red and push a few panic buttons themselves, causing further falls.

    Then the selling slows and the smartest computers realize that the margin calls are pretty much cleared, the competing computers are cleaned out, the stop loss sales have been made and there really doesn't seem to be much more to happen. So it buys the lot, covering their shorts and buying heaps more back.

    The price starts roaring back up. The slower and panicked computers see what's going on [a fraction of s second later] and quickly pile in too. The humans who had gone to the toilet come back to find their positions have been cleaned out and the share price is back up to where it was, with their shares gone at 10% less price than the market is currently at. Some sadder humans had put in a "market sell" order and got the very bottom, down 80%, in a particularly illiquiid stock.

    The regulators come trundling along later, cancel a bunch of sales at the bottom and issue orders that flash crashes are not allowed - setting limits on how much markets can fall.

    As per the law of unintended consequences, that causes more volatility because now buying at the bottom becomes dangerous. So markets will fall further as people panic about the regulators as well as the markets. The smartest computers have tested regulators' reacions as well as market participants.

    Everyone has a lot of fun.

  4. No the stock market doesn't sound fixed by a computer and if one's computer has an edge is faster has a special program and is controlled by the controllers. What do you think these programs are designed to do.
    And insider trading isn't real either nor is the big black hole of derivatives. I didn't say you can't buy and sell as a punter.


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