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A 10% market slide…No!

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by Peter Switzer

And now for something entirely different — the stock market could fall 10 per cent! No, it’s not my call, but the view of expert Doomsday merchant, Dr Marc Faber, who is the author of The Gloom, Boom & Doom Report. I don’t think he’s right, but it’s a possibility. I just wanted to put it on the record for www.switzer.com.au so when he’s wrong I can bag him.

Of course, if he’s right I will praise his good call but frankly I hate the way the media introduces people like Faber as expert market callers based on a few good calls. The media is lazy and too busy doing day-to-day interviews to record all of his calls — positive and negative — to work out his strike rate for being right and so he dines off the memorable good calls in the past.

So, I want to start noting these guys on the public record and revisit their calls.

Nothing on Wall Street

Overnight, Wall Street had another do nothing session as markets wait for the European Central Bank’s (ECB) move in early September and a possible third round of quantitative easing (QE3) from the Federal Reserve. Later this week Fed boss Ben Bernanke speaks at a Jackson Hole conference, where he has been known to drop a few big hints that have moved financial markets.

For the record, the Dow was down 7.36 points to 13,164.78 while the S&P 500 was up 1.6 points to 1,405.53. See, nothing happened, market-wise.

Losing steam

Faber thinks technicals are saying this rally is losing steam and I think he could be right if the ECB disappoints in September. They have a history of under-delivering, and so you have to think he could be on the money, but if they surprise we could see the market move up solidly.

On the other hand, we could see the market sell-off on good news based on the old adage “buy the rumour and sell the fact”. However, I think we will see a rally if the Europeans come through.

In the USA, there’s been some better economic data recently and this is making some traders think that a QE3 won’t happen — this could create a sell-off but I don’t think it would be a 10 per cent wipe out. After all, a weak US economy needing QE3 can’t be better than a recovering economy in no need of extra money supply that could feed future inflation, could it? The rational answer is no but markets can be irrational.

The good news

On the better economic news front for the US, the following was revealed overnight:

Inflation was flat
Homebuilder sentiment hit a 5-year high
Industrial output was up 0.5 per cent in July — that’s two months on the trot — and was better than expected.

Jackson Hole summit

Mind you, the US economy looks to be improving but only slowly and there are conflicting signals, so when Ben Bernanke speaks at Jackson Hole on August 30, every word will be analysed and there will be reading between the lines to see if QE3 is alive or likely to be dead and buried.

If Jackson Hole disappoints and the ECB doubles the disappointment, then Faber could be right. But while the Yanks could easily live without QE3, we all need the ECB to come good in early September.

In fact, if I were Bernanke, I would want to keep QE3 up my sleeve in case his ECB buddies screw up again. That’s when the Fed would have to move to increase the US money supply and our RBA would have to cut rates by at least 0.5 per cent!

I want another rate cut but I don’t want one under the above circumstances.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Watch more from Peter on SWITZER TV.

Published on: Thursday, August 16, 2012

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