Today, Tuesday, May 25, 2010, we are seeing stock markets collapsing in the U.S., Europe and Asia. The falling indices are significant. In all parts of the world the falls are approaching or exceeding three percent of the value of each particular market.
To put this value into perspective, we remember that if a market falls three percent daily, its total value is gone in 33 days! This implies that the investors of the world are running away from ownership of equities, which are the paper representations of company ownership.
Investors evidently believe that the companies of the world will make less profit in the future than they did in the past. The investors are basically saying that the economic recession we have been experiencing since 2008 will be worse in 2011 than it is in 2010.
This is the beginning of a Bear Market.
DOW JONES AND NASDAK DURING GREAT DEPRESSION
As can easily be seen, the stock markets fell like the edge of a cliff in 1928, then rose and then fell again. All markets in the world, and all group activity, come in waves. These waves are unpredictable in exact time, but they are predictable in terms of probability.
Stock market waves reflect the confidence and fear of all the investors involved in the market. Like the molecules of water in the ocean, the waves is the sum total of all going up less all going down. At the present time, we are seeing a Global Bear Market, as investors lose confidence in their banks and, more importantly, in their governments.
They remember that the governments of the entire world supported an atmosphere of lending sleaziness, where the ability of the borrower to repay the loan was not as important as the quantity of new money that the loans generated.
In the U.S., for example, the famous Glass-Steagall Act of 1933, which forced banks to separate their activities and preserved the conservative nature of banking; was repealed in 1999. The repeal of the Glass Steagall Act was instantly followed by the Real Estate Bubble of 2000 to 2007, whose collapse in 2008 led to the devastating economic recession the U.S. is now in. In Europe, politicians in every country encouraged real estate lending and the entry of cheap labor from abroad.
Today, the Southern tier of countries is mired in debt and the banks of Europe are holding trillions in worthless paper.
WHERE ARE WE GOING?
The answer is quite simple: DOWN!
Hang on! It will be a scary ride!