UPDATE: Well the national day parade was interesting, but the turmoil in the stock markets worse a roller coaster ride with 360 degree loops. On Tuesday night, after the US Fed released its statement just less than 2 hours before the close of the trading session the DOW Jones Index plummeted then rebounded to close up 400+points. Well you have to take that as the rebound...like it or not. However, these violent moves I believe is a preview to problems ahead in the actual global economy. I believe we might see some calm in the financial markets after the wild ride of the past few days - but it is a market waiting to react to evidence confirming the problems it suspects. ..and there are many brewing. Besides the US economic slowdown which now looks more like a coming recession, the European debt crisis and the inability of central banks and leaders to convincingly address the widening debt crisis....we also see problems popping up else where - China's inflation hit the highest level in recent years as food prices soar and Hong Kong's property bubble looks like it is bursting judging from the results of the recent land auction which saw land plots going for 30% lower than previous auctions. It is hard to be optimistic given the current state of the global economy.
When they start using word "violent" on stock market moves, you know you're looking at market swings that are extreme. We saw just that yesterday when the Dow Jones Index fell by 600 points. After getting external shocks from the European crisis. US debt ceiling debacle and S&P downgrade of US sovereign debt, the market is generating its own shock. With markets convulsing, confidence is falling fast and that creates a self-fulfilling prophesy of double dip recession that caused the initial falls in the stock market. If the markets keeps falling, the negative wealth effect will cause a recession the fear of which was causing markets to fall. It is something like a sick person getting worse because he gets overly stressed about his poor health. A recession like I explained 2 postings ago will make all the debts countries and individuals piled up over recent years harder to pay for and we will almost be in it for the long haul.
Yesterday's fall of US stock market is quite stunning. Analysts attributed it to S&P's downgrade of US sovereign debt. Ironically, when fear grips investors they flee to US treasuries - instead of falling after the downgrade, they actually rose and interest on treasuries fell.
With govts unable to spend money, it is left to central bankers to print money and flood the system with liquidity to calm the markets. Like I explained in my earlier posting, such moves can buy some time and hope but are likely to fail. Over the weekend, the ECB announced it will start buying Italian and Portuguese debt by printing money. In the earlier round of money printing, the ECB would sterilise the money printed to prevent almost certain inflation [Link]. This time they won't bother. They will do what US Fed do and just print their way out of trouble.
With the markets in turmoil threatening to sink the global economy faster than it would if things take a more normal course, it is very likely for the US Fed to announce or hint of QE3 tonight. There is really no more choice left. ...and no more time left. This however will be the last round of QE possible. The earlier round kept financial markets calm but resulted in commodity and oil prices going up rapidly. When QE2 ended, these markets fell...along with the stock market. QE causes inflation but is one of the few remaining tools left to buy some time and hope for a recovery. One led by either recovery in US housing market or emerging market growth is possible - but unlikely. After QE3 we are likely to have inflation and therefore unlikely to have QE4. They will have to let the system go if it does not recover by then, We will probably spend years to sort out the excesses of the last 2 decades of rising debt, rising inequality and unfulfilled promises of globalisation.
So will there be a short term rebound? ....Hmm...lets put it this way - there better be one soon or the market turmoil will put us into recession faster than the European debt crisis can. Right now the best move is for central bankers and govts to do all they can to calm markets and restore confidence. Otherwise, they advance the day of reckoning....we probably don't have to wait until 2012 if they don't do anything soon.