In the post published on this blog earlier I was predicted that in October the market will test July lows. It is always difficult to precise estimate the “critical“ point when the market will turn but I feel that it may happen within next few days or even today. Here are my arguments:
1) Blogosphere is full of doom and gloom stories. Number of posts in blogs with some including the word ”crises” jump to 350
2) IMF is turning to more gloomy tone. Just 3 Months ago IMF revised up the GDP forecast for US and EUROPE but now in the latest WEO they suggest that US economy will tank
3) Politicians around the globe are not only calling for actions but they already advanced in legislative process (US). Even in Europe politicians woke up and will meet on EU mini summit this weekend. (politicians are always well behind the curve)
4) All my colleagues are bearish, Now most of CNBC ‘s guests predict recession
My general point is being that I feel like only optimist isle surrounded by ocean of pessimism and gloom. It sounds like classic contrarian argument which may sounds odd in the eve of US earnings season. But financial markets are far beyond supply and demand curves. This is very misleading picture of the market. It implies that the investors base their decisions on the fundamentals, whereas the goal of the market participants is to make money. Only if the market prices reflected the fundamentals accurately would it make sense for them to be guided by those fundamentals and in that case nobody could make money than anybody else – this is an absurd conclusion!
Long time ago John Keynes formulate his beauty contest thought. He was arguing that the stock prices are not only determined by “fundamental” factors but mostly how the crowd of investors will behave in the future. In Keynes’view, the optimal strategy is not to pick those faces the player thinks the prettiest, but those the other players are likely to think the average opinion will be, or those the other players will think the others will think the average opinion will be, or even further along this iterative loop. Beyond a certain point this self-validating feedback loops become unsustainable and market crash (this is valid for both boom and bust cycles) (This type of cooperative behavior may be bay be model well by Ising model )
We were in the negative feedback loop since the beginning of September and we are approaching the “critical” turning point. It obviously doesn’t mean that reality will change. Still the deep recession is ahead of us and but that’s different story. The end year rally is just ahead of us.
