With yesterday’s news of the Fed’s decision to Taper the pace of QE3, markets and economies that have benefitted the most are jittery.

The Fed countered the Taper decision with an announcement that they are likely to ignore their previous threshold target for unemployment and keep their Zero Interest Rate Policy (ZIRP) for longer than expected. This was likely the main reason for many equities markets rising. ZIRP can be viewed as a longer-term source of liquidity and was enough to counter the reduction in shorter-term liquidity (the Tapering of QE).

The problem for emerging markets such as India and China is that the benefits from the ZIRP policy had long since faded. They had become passively reliant upon the immediate potency of Quantitative Easing. This was the high-octane fuel that instantaneously drove a number of international property bubbles and convenient current-account surpluses as capital rushed in. (The irony is that earlier this year India and Brazil were complaining about too much excess liquidity and capital rushing into their economies).

Initially, the emerging markets’ problems resulting from less QE might not seem that serious. However, these areas, and especially China, have been a critical component to the global economy. Without their economic growth, it is unlikely that the North American economy would have grown much at all recently.

The unintended consequences of a Taper might be more than what the Fed bargained for.

The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. 

Richardson GMP Limited, Member Canadian Investor Protection Fund.

Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.

All markets go through cycles. Secular or long term bull markets are often interrupted by cyclical or short term bear markets. These short term bear markets often feel like they will never end, but they serve to refuel the bull market. The reason is bull markets are powered by new buyers. Any market that goes up too far, too fast, runs out of new buyers, and thus becomes more vulnerable as buyers are exhausted. Everyone gets excited that the market is going to the moon. But in reality too much buying has been pulled forward in time because too many people rushed in at the top. This is how markets fake out the majority of participants at the extremes. Too many people do the wrong thing at the top, leaving not enough people to keep the market going higher. The balance of power shifts to the sellers, which drives the market back down.

The chart below depicts this cycle and shows how the majority is wrong at the extremes. At the top is euphoria, where extreme buying fakes out the majority of market participants and produces a market top. Extreme buying feels good at the top, but counter-intuitively it is also what produces bear markets. Once the buyers are finally overwhelmed, sellers take control, and the market works through the bear market cycle.

After a period where anxiety turns to fear and panic, the bear cycle usually ends in capitulation, or extreme selling. At that point selling is actually pulled forward in time, sellers that would have sold in the future are suddenly flushed out of the market. But only brave buyers are stepping in to the market at this point, just enough of them to outweigh the sellers and produce a bottom. The fear at the bottom takes a while to dissipate, which is what produces the despondency and depression that really puts the floor in. The market puts in this floor or basing phase where just enough buying is keeping pace with selling, and then all of a sudden new buyers come back into the market. And wholla, the bull market cycle starts again as new buyers overwhelm the sellers.

Long term bull markets tend to go through this cycle multiple times before they eventually top. Think about what happened in the 1980 to 2000 stock bull market. Bear market cycles reset investor sentiment in 1987, 1990, 1994, and as late as 1998. These bear markets were just natural parts of the overall long term cycle. Resetting sentiment, refueling the bull market.

Now long term bull markets don’t usually top until they go into a mania. This is exactly what happened in the stock bull market when it ended. In a mania buying is so extreme it pulls forward future buying for years and even decades. The buying is so out of control once it dries up prices actually drift sideways in a long term sense. In the short term though it’s just another bear cycle and usually a vicious one after a mania. This explains why after the mania in 2000, we got a new bull market in stocks as early as 2003. But stocks still haven’t made significant progress over the 2000 high 13 years later.

If you look at gold, it’s had two bear market cycles now, one in 2008 and one from 2011 to 2013. A good argument could be made that gold did not go into a mania in 2011 either. The hallmarks of a mania, over-ownership, over-supply, and excessive sentiment just weren’t present in 2011 for gold. Therefore once the sellers and buyers reach equilibrium in gold which is getting closer by the day, all it should take is new buying to reignite the gold bull market.

Connect with me on Twitter: @nextbigtrade

The original article and much more can be found at: http://www.nextbigtrade.com

The views and opinions expressed are for informational purposes only, and should not be considered as investment advice. Please see the disclaimer.

With continued chaos around the world and uncertainty in global markets, today KWN is publishing a follow-up piece that was written by a 60-year market veteran.  The Godfather of newsletter writers, Richard Russell, discusses the big picture and what has China truly terrified.  Below is Russell’s tremendous piece. (ED Note: Here is the original piece: Richard Russell – Hyperinflation, Default, Bitcoin, Gold & China

Richard Russell:  “Everybody is now bad-mouthing gold on the basis of ongoing deflation or a lack of inflation.  But have these arguments been discounted in the current price of gold?  If they are already discounted in the price of gold — is that why gold is not breaking to new lows?  Or has gold already adjusted to all the bad-mouthing?

Below, GLD has gapped higher.  With all the negative talk about gold, why did GLD suddenly gap higher?  Has all the negative news been discounted, and is gold now looking ahead?

…continue reading HERE

With continued chaos around the world and uncertainty in global markets, today KWN is publishing an incredibly powerful piece that was written by a 60-year market veteran.  The Godfather of newsletter writers, Richard Russell, discusses hyperinflation, default, Bitcoin, gold and China.  Below is Russell’s tremendous piece.

Richard Russell:  “Today the US debt is $16.7 trillion.  The entire Gross Domestic Product of the US is $15.68 trillion.  This means that the debt to GDP ratio is over 105%.  History shows that a debt to GDP ratio of over 100% is dangerous.  With the debt now growing exponentially, we face a situation of inflation, hyperinflation or bankruptcy. 

On another subject, we hear that the hedge fund industry has not kept up with the markets.

…continue reading HERE

If you have children, you need to see these numbers

According to a recent survey by the Pew Research Center, just 33% of Americans think their children will have a better life than they did. On the other hand, 62% believe their children will be worse off.

They’re likely to be right.  The typical American family has seen its real income (adjusted for inflation) fall for 5 consecutive years now, and it earns less in real terms that it did in 1989.

According to the Census Bureau, median household income fell in 2012, and it languishes 8.3% below the pre-crisis peak in 2007. 

The Brookings Institution, meanwhile, calculates that real incomes for working-age men in the US have fallen by 19 per cent since 1970.

(Of course, if you’re fortunate enough to be a member of the super-rich who, thanks in large part to central bankers driving up asset prices, saw their real incomes rocket by 20% in 2012.)

In Europe things look even more dire.  Just 28% of Germans think their children will be better off than they were.  In the UK it’s 17%, in Italy 14%, and in France just 9%. 

In Britain, research by the Financial Times shows that those born in 1985 are the first cohort to suffer a living standard worse than those born 10 years before them. 

Contrast this gloomy picture with China, where 82% think their kids will have it better than they did. In Nigeria, the number is 65%. In India, 59%. 

It’s blatantly obvious that the West is in decline. And most people seem to understand this.

But this isn’t a bad news story. Wealth and power has constantly shifted throughout history. Five hundred years ago, it was the West that was rising and Asia in decline. Today it’s the exact opposite.

As Jim Rogers has said so many times before, if you were smart in the 1700s, you went to France. If you were smart in the 1800s, you went to England. And in the 1900s, you went to the US.

Today, it’s the developing world. That’s where the long-term opportunity is– Asia, Africa, and South America.

What’s happening in the developing world is nothing short of remarkable. One billion people are being pulled from the depths of poverty into the middle class… bringing with them untold possibilities for business, employment, and investment.

That’s one of the reasons why I travel so much, and why I spend so much time in Chile. I’m constantly amazed at the tremendous opportunities I come across in this country (which is still largely off the radar of most people).

It’s also what I encourage my students to do each summer at our entrepreneurship camps—seek out opportunities in countries that are rising suns, not setting suns.

If you have children, this is a great direction to influence them. Encourage them to learn another language, travel, and apply what they want to do to how the world is going to be in the future.

As Wayne Gretzky said, skate to where the puck is going to be.

Until tomorrow, 
 
Simon Black 
Senior Editor, SovereignMan.com