Stock Market to crash again in 2009?

Stock Market to crash again?

Bob Janjuah, chief credit strategist at RBS, is predicting that we’re heading for another stock market crash this autumn.

Before the bulls cry “doomsayer!”, let’s note that at a similar time last year Bob Janjuah successfully predicted the stock market crash for the autumn of 2008.

Coverage is highlighted by Ambrose Evans-Pritchard at the Telegrah: RBS uber-bear issues fresh alert on global stock markets:

The key indicators to watch are business spending on equipment (Capex), incomes, jobs, and profits. Only a “surge higher” in these gauges can justify current asset prices. Results that are merely “less bad” will not suffice.

He expects global stock markets to test their March lows, and probably worse. The slide could last three months. “A move to new lows is highly likely,” he said.

He certainly isn’t the only person to think so - Felix Zulauf and Nouriel Roubini are some of the more reliable and accurate commentators by public record who have long maintained the March rally is a bear rally.

Which is just plain common sense, really.

Anyone following chart trends will have seen stocks over sold and due a correction before March of this year - the big question was when it would happen.

But it was always underlined that any such correction would be a bear rally. Economic conditions could not support a true bull rally.

The astonishing observation is how many people were reportedly trying to claim otherwise in the investment press.

Unfortunately, popular media has been playing up the rally at every opportunity - reflecting on the gains as if they underscored economic recovery.

Economic reality, however, appears very different.

Here’s an insight for you - the Baltic Exchange Dry Index is declining fast again. Follow the preceding link and you’ll quickly notice that both the FTSE 100 and the Dow Jones Industrial Average follow the chart closely.

But note the key point - the stock market trend follows that of the Baltic exchange.

The Baltic exchange leads, the markets follow. And the Baltic exchange is plunging back down.

That means if the relationship continues to hold true, then we are looking at a significant downturn in the stock markets for the Autumn.

Of course, few serious investors will look at a single chart to determine their strategy. However, it does provide an interesting illustration to economic news that continues to come in.

While Germany and France in Europe are reportedly out of recession, and Hong Kong has also climbed out of it in Asia, the headlines do not scream “Economic recovery” but instead “W-shaped recovery!”.

If so, it means we’re due a lot more pain, and that this year’s bounce has been nothing but a repeat of events early in the Great Depression.

Granted, some degree of normality is returning - banks are recapitalising, helping to secure the financial sector against further shocks. But they are doing so by restricting lending, resulting in very limited consumer spending.

Commercial markets remain very restrictive, and while LIBOR rates are relatively stable, they preside over a diminished money supply by comparison to the proceeding years.

So at best, the UK, European, American and world economies are all quietly chugging along - greatly weakened, but not collapsed.

And yet, even in this diminished state new asset bubbles are already fast developing - especially the credit bubble in China.

A W-shaped recovery is looking increasingly likely - take care if you’re still holding on to equities.

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