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    Brave New World

    Is the Financial Krakatoa Finally About to Blow?

    Brave New World
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    John Harrison
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    It's been 10 years since Lehman Brothers collapsed and many say that another crisis is inevitable. The last two weeks have been ruthless on the markets. Is what we have experienced in October just pre-tremors of a massive Krakatoa type eruption and disputation in financial markets around the world?

    Richard Knight, a British client advisor at Key Investments in Moscow tells it straight.

    Richard says that the recent losses are indicative of a very serious trend: "This is very serious. The first clue came in February, as we know. We had the fastest correction in history; a full 12%, across all markets. When a correction happens, you are looking for the bounce, and where did the bounce go? What was interesting was that the European markets did not recover from the bounce; they only recovered 80% and then continued selling over the summer period… All we have had over the past few years is up and up and up, but what has happened now, is a sideways move. The S&P will probably finish the year flat. That's a massive signal, if you finish flat, that is a fundamental shift in sentiment, and like any cycle, we see expansion, we have just seen the peak, and now we are going to head towards recession."

    This is not the first time that Richard has talked about an imminent crash. To the question: why do you think another crash is about to happen he says: "The downside is now so huge; because its over-extended, it's like a rubber band, the further you pull it, it's going to catapult back. And that's what's coming. I think what we are going to see is going to make 2008 look like a speed bump….The important thing is that the sentiment has shifted. If you are going against the sentiment, you are going to get burnt…"

    Richard sees a crash of about 50%. "It'll go down in three stages. 2008 was actually about 55%, and we are looking at the same thing, but the emerging markets are probably going to go down further, about 65%, because they are smaller, but they are already in a bear market and they have been for some time… The Hang Seng is a good example. The peak was 33,000, and it looks like it is going to finish at about 10,000. We are currently at about 25,000, and it is still falling. As far as America is concerned, it will not go down in one hit; it will go down in three. There will be a strong move down, which is what we are going to experience over the next couple of months, then a move up — it is an ABC — then the last leg, that's the one you want to be buying in on….Everybody is expecting the U.S. to go into recession. Nobody's arguing against that. Consumer confidence is at a peak. Hello! Flashing red lights danger ahead!"

    Richard sees trade tariffs as only making things worse: "at the end of the day, one of the key indicators in consumer confidence. What are trade tariffs, going to do? They are going to destroy confidence levels. Because that is what this is all about. The consumer pays for tariffs. Interest rates are going up in the U.S. and they have been going up fairly substantially. Normally interest rates go up to control inflation, now the consumer has a double whammy. He has more expensive goods, and if he is buying it on finance, he's got to pay more for it. The trade tariffs are bonkers; nobody wants a trade war…"

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