Will the Driver of the World Financial Markets Please Stand?

``Since the 1970s, the US has experienced five outright recessions and two mid-cycle slowdowns (in 1986 and 1995). Most of the US recessions that led to sharp slowdowns in the RoW were caused by common shocks such as oil shocks and the bursting of the IT bubble in 2000. The 1991 recession, for example, did not have much of an impact on Europe; emerging markets actually accelerated. At the same time, the two mid-cycle slowdowns were associated with a very modest growth slowdown elsewhere. Countries’ business cycles are primarily driven by global shocks or idiosyncratic factors that affect the region or the countries in question, and tend not to originate from a single country.”-Stephen Jen, Morgan Stanley, Assessing the Collateral Damage from the Crisis

The gist of today’s debate on the financial markets can be narrowed into three fundamental variables: an economic growth slowdown, a US recession and a global depression.

On the surface, none of them looks positive for global equities, yet it is odd how many have turned some scenarios into a positive spin in support of their biases.

For most of the bulls, the core of their arguments amidst the slowdown scenario centers on the sustained strength of the global economies that may cushion the US economy from a hard landing or a “decoupling” (the premise of which we will not question but rather observe on how they would react under the unfolding events).

And most importantly, the expectations that global central banks led by the US Federal Reserves would effectively steer away the present crisis from a disaster with the much needed elixir.

For instance, a favorite bullish analyst of ours, while acknowledging the rising risks of a US recession, which he places at 30% (double from the past!), says the reason to be bullish is that ``it isn’t a good idea to fight the FED”, where the FED is expected to institute a “monetary bailout” and cut interest rates aggressively, which should prompt for an orderly turnaround.

As you can see, such bullish premise focuses entirely on the success of the authorities to execute bailout measures on market participants, one of the principal beneficiaries of the inflationary process (money and credit expansion) in today’s Paper Money Standard.

In short, FAITH if not HOPE determines his winning formula! This is dangerous stuff. Looking for justification to confirm one’s bias is known as CONFIRMATION Bias or (wikipedia.org) ``the tendency to search for or interpret information in a way that confirms one's preconceptions.”

As an aside, this clamor for rescue reminds me of the “socialization of the rich” to quote James Grant, an op-ed writer for the Forbes magazine.

If one were to argue about the yawning income gaps, then the Fed’s future action should bring into light how inflationary activities boost “special interest groups” or inequality.

Oh please, bailouts are bailouts in whatever form…

…since “money is created via thin air” in spite of some “sterilization” efforts

…still “who pays for the losses via wider collateral acceptance by Central Banks?”

…and “how does Central Banks know how to value illiquid assets held by institutions in trouble?”-ain’t these outright subsidies?

Eventually these will be paid by the citizenry via higher taxes or reduced value of the currency or through diminished purchasing power which translates to a lower standard of living.

Well, the financial markets priced in such scenario which led to the breakdown of the US dollar trade weighted index BELOW 80, a multiyear low! More below…

Nor can we argue with technicians who say that the US markets are playing out the same patterns seen during the past bottoms. One thing technicians tend to overlook is that the operative conditions before and conditions today are patently dissimilar.