You're a legendary poster Voltaire. I am learning so much from this thread and will continue to read every post. Thanks also to Wink, Redbacka, Robb, Paulbooma, Jamesdorran, Ninelives, Brivegas, Atlunch and all the other regulars here for their great contributions.
Anyway I have an uneasy feeling about the speed of the recovery to date and I find myself regularly asking the question what event (or events) could cause the markets to turn down significantly in the near term.
The most likely trigger that I believe exists is the possibility of a second wave of mortgagae defaults, probably more focused on prime mortages [or even the possibility of a wave of commercial defaults]. These sorts of headlines in recent months don't exactly fill me with confidence. Basically it is indicating that many private consumers have balance sheets that are in serious trouble and this severely impacts their ability to maintain, let alone increase, consumption.
23rd June, 2009, "Nearly one in six "prime" mortgages in the UK have fallen into negative equity, according to ratings agency Fitch."
8th May, 2009, "The percentage of properties “underwater” is forecast to rise to 48 percent, or 25 million homes, as property prices drop through the first quarter of 2011, according to [Deutsche Bank] analysts Karen Weaver and Ying Shen."
Since housing is the single largest investment many people make in a lifetime one can expect that if house prices and therefore housing capital falls significantly [or even moves into negative territory] that this would have a severe psychological effect on consumers state of mind translating through to declining levels of consumption.
The flow on effect from a second wave of defaults could be devastating to confidence levels. A second recession could begin in a relatively short space of time leading to another wave of lay offs at the worlds' largest global companies which would lead to further falls in confidence and consumption; and so the vicious circle continues.
Personally I believe we are currently in the eye of the financial storm, and believe me, I am enjoying the rejuvinated optimism, but I think it is prudent to be on alert for further signs of deteriation in the global economy. One leading indicator currently flashing amber is the Baltic Dry index which has declined from 4073 in mid June to 3051 on the 5th of August. It is now not far above its lows from earlier in the year. It is a leading indicator of global trade activity and any susbstantial decline is a cause for concern.
Whilst I hope we are through the worst, I just can't see how a global financial system that was on the brink of total collapse less than a year ago could turn around so quickly. So in 2009 I am operating my business very differently, trading only in shares that I understand very well and am constantly on the lookout for a reversal of trend at which time I'll take out a substantial level of hedging to protect my trading capital. I am also learning more about trading other derivatises such as currencies, indexes and commodities so that in times of share market routs, I can switch my focus and earn a decent living elsewhere. I must say that thanks to this thread I am in a better postion to identify a reversal in the trend of the market at an earlier point in time and for that I thank all contributors.
Keep up the great posts and I wish the best of luck to all posters on the XJO thread!
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