Yesterday's 3% or so drop in many indexes across the world made News Reports wake up to the fact that the markets are falling.
The Reports blame the slump on the Ebola virus and unsatisfacory reports on global economic growth. Alas, they are misinformed. These items in the news may have been an extra sitmulus, but the correction that is already under way. Zero interest and Quantitive Easing pressed prices to their present unsustainable levels, from which they must fall irrespective of economic performance.
However, if the economic report continue bad, the bottom of the correction may be lower than we would otherwise expect. Well-performing economies would arrest the correction at around 1300, whereas economic bad news could do as it did in 2007-8 and send the price crashing through the long-term support line, wiping more than 50% off prices at the apex.
The bubble in share prices reminds me of the bubble in Irish house prices leading up to the banking crisis in 2010. Two decades previously, government tried to stimulate a slack housing market by tax incentives. The incentives worked well, but were not discontinued when the housing market recovered, but continued in place, with the effect of over-stimulation and causing the housing bubble. The present high price of stocks and shares is a bubble: it is the result of Policies brought in by America in December 2008 (QUANTITIVE EASING and ZERO INTEREST RATE POLICY). Intended to rescue the economy, it rescued the Stock Markets. From the point of view of the Stock Markets, it would have been better if the stimulus had been removed as soon as the indexes moved above the long-term Support Line. Instead it was continued in place to cause the bubble.
See my previous post
Market to Bounce or Fall for further discussion.
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