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May 23, 2013

A few days ago on this blog I questioned whether Japan might be our forerunner to possible unintended consequences of “bubble economic policies.” I admitted that I did not know how our poor monetary and economic policies would affect equities, but said that Japan should be watched closely because everything we have done, they have done to a greater extent and for a longer period.

We awake this morning to this headline: Global shares sink, following 7.3 percent drop in Japan’s Nikkei. That is a 1,143 point drop in the Nikkei in a single day! What this headline doesn’t tell you is the fact Japan’s intraday losses were 9.2 percent. In other words, what started off as another rather nice up-day for the Nikkei abruptly reversed itself. Abrupt reversals, while extremely difficult to invest in, are a sign of our times. Better put, maybe an unintended consequence of massive market manipulation is extreme volatility!

The thing that strikes me as odd is all the noise we have been hearing from the financial experts justifying these extraordinary gains in equity markets around the world (Japan up 70 percent in six months). What will you hear today? You may hear this is a buying opportunity for those who have been on the sidelines. I would also expect to hear this event used as justification for why the Fed cannot exit their quantitative easing/stimulus policies, maybe even justification for more free money — I’m sorry, I should say stimulus! And certainly we will hear how this market correction is justified in Japan, but not other places around the globe. While other markets seem to be yawning at the Nikkei malaise with their own relatively small losses in comparison, the bottom line is that there is beginning to be a lack of confidence in this monetary experiment and Japan will be the test case because of their willingness to out-do the rest of the world in manipulating markets.

There was a headline about two weeks ago that in essence read: “The Greatest Risk for Investors is not Being in on this Market Bull.” I say, to the contrary, the greatest risk is buying into a bubble created by the greatest market manipulators of all time.

It will be interesting to watch how this all plays out, but take note that when things reverse in the midst of a bubble (in either direction), they do so with extraordinary speed, leaving the unprepared investors with extraordinary damage to their portfolios.

While the DOW initially went down 130 points, it’s already back up 130 points, breaking even. So there’s no reason to worry — right?


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