Thursday, August 20, 2009

All About Confidence And Gullibility

Why Today's Stock Markets Are All About Confidence And Gullibility

By J. S. Kim | 11 August 2009

Historical precedents illustrate that the public is easily deceived, but I still have a difficult time comprehending how any intelligent person can possibly buy into Abby Joseph Cohen's statement that "We do think the new bull market has begun". (Cohen is chair of Goldman Sachs' investment policy committee.) Given that global stock market behavior seems to reflect so well the Consumer Confidence Index with particularly close correlation between the US Conference Board CCI and the behavior of the US S&P 500 index, perhaps the CCI should be renamed the Consumer Gullibility Index.

The last time I specifically wrote an article about an imminent US market crash titled, "Will US Markets Crash Now— or Later?" on April 23, 2008, the S&P 500 peaked just 17 business days after I made that call, at about 1,440, and then proceeded to fall until it bottomed at 666 in early March of the following year. I think that we would all agree that a plunge of more than 50% aptly qualifies as a crash, yet if you visit that article, you will see that the bulk of comments that followed my article ridiculed my prediction back then, even though I was supremely confident that my prediction would manifest itself. Today, by my estimation, there are just two possible dénouments to a global stock market rally that has occurred on the backs of government deception and financial industry executive prevarication. [[But, of course, financial industry executives are paid to lie! : normxxx]]

(1) Once the low summer volume trading ends and the computerized trading programs of Goldman Sachs et al cannot manufacture fake rallies, the market will crash; or
(2) The bulls will be right about US and other global markets rallying another 10% to 20% higher from this point, as anything is possible given markets that are driven by fraud; but this surge higher will ultimately end in a crash as well.

So which scenario do I think is more likely? At this point, I believe scenario (1) is more likely, though it is entirely plausible that scenario (1) may coincide with scenario (2)[!?!] Though Abby Cohen calls for a new bull market, any intelligent person will tell you that a sustainable bull market is not possible when unemployment in the US is hovering at about 20% and likely going to worsen, at least in the near future; when foreign institutions have not only stopped buying US Treasuries, but have been dumping Treasury debt on a net basis for many months now; when the US manufacturing base has contracted and exports of real goods have fallen at the quickest rate in decades. [[And this after contracting for decades now, through bull and bear.: normxxx]]

Of course, there are "official" government statistics that will refute what I just stated here, but since I have already written extensive and detailed articles about why the bulk of all key economic indicators released by governments worldwide are fake and unreliable, I'm not going to re-hash these issues here. To understand why people like Abby Cohen make such bold public predictions as of a new bull market developing now, just refer to the Consumer Gullibility Index chart below and it should be immediately apparent why fraud and deception is the number one export of governments and financial executives worldwide. And should this market eventually crash as I believe will happen, I am also quite sure, despite Abby Cohen's very public call of a new bull market, that Goldman Sachs will be on the right side of this trade and make significant profits from the downside as well.

A true bull market should produce a sustained rally for several years with periods of moderate, not steep, corrections. If, when I dug well beneath the surface of the mindless "expert" banter that broadcasts 'signs of economic recovery are everywhere', and I had seen significantly improving economic fundamentals, I would be the FIRST PERSON to state that the economic crisis is over and a new bull run is on its way. Unfortunately, I cannot make this call because this is NOT what I see right now. I see a 'confidence bubble' forming that when reality causes it to burst, will drag down stock markets once again.

In the above chart, the solid red line represents the CCI and the jagged S&P500 chart has been superimposed over it.

Steep corrections in markets happen after Central Banks create huge 'bubbles', i.e., distortions, in markets through the creation of artificially low interest rate/easy money environments and when investment firms use TARP [[and other freely created Fed: normxxx]] money and computerized trading programs to manipulate markets against their normal tendencies. We live in an investment environment of unprecedented and systemic fraud, and one can quite successfully argue that it is foolish not to account for how this fraud will affect the behavior of stock markets.

Furthermore, it is prudent to predict that the majority of the public will be fooled by this activity. For now, deceptive earnings reports allowed by deceptive accounting techniques [[in accordance with 'relaxed' GAAP standards, i.e., no Mark to Market required for the foreseeable future…: normxxx]], combined with dishonest statements from government and financial executives [[both of whom are motivated to keep market prices high while the Hummongous Banks and Brokers (HB&B) 're-capitalize' on the backs of unsuspecting investors: normxxx]], and manipulative actions undertaken by large commercial investment firms [[eager to avoid that last walk down the aisle to BK: normxxx]] have created a massive rally. In fact, on June 2nd, 2009, I wrote an article whereby I expressed my belief of how the current fraudulent activity would affect US stock markets titled, "Telltale Signs that a Significant US Market Correction Won't Happen in the Immediate Future".

Though we are getting much closer to the next crash, I still need to see more signs and conditions develop before I will say that we are on the brink of the next crash. And sure, this rally could continue even beyond the expectations of the bulls. But is this scenario likely?

Again, the failure of the general investing public to realize that they were being fleeced in early 2008 was quite evident from the reaction to my "Will US Markets Crash Now— or Later?" article written in late April, 2008. In response to Goldman Sachs' alumnus Abby Cohen's prediction of a new bull market, the only way I can assign any credence to her prediction is if you define a bull market as one that is driven higher by market manipulation bordering on, if not actually, fraud— and one that will certainly end in massive failure. If that's your definition of a 'bull' market, then it is possible we may have a new bull market.

However, if your definition of a bull market is a strong market built on a solid foundation of a healthy, recovering economy that doesn't wipe out the wealth of its participants with a big future crash, I guarantee you that what we have today is not that situation. If you wonder why Abby Cohen predicted a new bull market, just sneak another peak at the CCI chart above and realize that financial executives and high government officials are the biggest purveyors of deceit-manufactured 'confidence' in the world today.

But one thing you must realize is that though HB&B are the biggest purveyors of deceit, they are also the biggest profiteers of this deceit, and will once again be properly positioned to take advantage of the bursting of this "confidence bubble". Since they manufacture these confidence bubbles, they are the best positioned to know when they will burst as well. That is the irony of this whole game. They benefit on the upside and downside because they help create the upside and downside.

If you are interested in seeing just how the financial elites manufacture false confidence bubbles that inevitably must burst, watch US Congressmen grill ex-Goldman Sachs' CEO Hank Paulson about his behavior when he was US Treasury Secretary at this video blog.

To reiterate, I can only see two future outcomes of this current rally: (1) a big failure or (2) a massive failure. I just don't think the odds of a moderate correction in the midst of an ongoing rally that takes markets to significantly higher heights are favorable or likely unless somehow (1) Wall Street has figured out how to use their computerized trading systems to permanently rig markets on an unending path higher; or (2) economic fundamentals drastically change in an unforeseen fashion by the end of this year. And if this rally continues unabated (especially in US markets), the steeper it climbs, the [harder] it will likely fall.

As I stated above, it is foolish not to consider how manipulative financial behavior can cause a disconnect between stock markets and economic reality and thus produce irrational rallies that last for an irrationally long period of time. [[The year 2007 comes to mind.: normxxx]] However, it is equally foolish not to consider and account for the multiple factors that can and eventually will cause a sharp reversal in the same aforementioned irrational market behavior. Account for and closely watch these factors, and if you've been on the long side of this rally, you will know with a fair degree of certainty when it is appropriate to bail out of this hot-air balloon ride.

The last time I called a market crash in April, 2008 and it happened, I basically made the call because I saw nothing fundamental that could sustain that rally despite the load of hot air that the financial media was distributing throughout the mass media about "recovering" fundamentals (sound familiar?) This time around, I'm quite certain that the same people that were fooled and hurt in Round One will be fooled and hurt in Round Two of this iteration of the investment and monetary deception game.

It is a shame that those that purposefully fuel such games of deception and fraud, and ruin the financial lives of millions, end up on TV instead of in jail. Yet, it is truly up to each individual investor to dig deep enough to discover the facts for oneself. The truth about this economic and monetary crisis will never be freely offered through the mainstream media. When considering what to do at this point, if I were an investor that still believed in investing in the major indexes of world markets, I'd rather be on the sidelines now and miss that last irrational 15% higher climb (if it happens) rather than remain on board and experience that initial plunge during the scary ride down. [[Alternatively, you can buy enough puts to hedge most, if not all, of any gains you have realized since March… But buy at least 6 month puts; and don't be greedy, buy out of the money puts.: normxxx]]

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