>>I think we are in a situation where almost all the asset classes will be under pressure or are under pressure and the main reason for that is the reduction in liquidity.<<
World markets were injured by the Bank of Japan this year. Starting in March, the BOJ started withdrawing liquidity from the system. This liquidity had helped pump almost all markets up after the deflationary scare of the early 90's. Excess cash had been used to fund "Yen carry trades" where money was borrowed in Japanese Yen, converted to other currencies and invested. The interest rate on borrowed Yen was zero, so any positive return in other currencies was likely to produce fabulous profits as long as the Yen didn't appreciate. And, the Yen did not appreciate because the conversion of Yen to other currencies meant that Yen were sold to buy those other currencies, keeping the Yen under downward pressure.
With the decline in World Markets, the BOJ has retrenched somewhat and that has helped ease the pain the markets are feeling. And, the stock markets are bouncing back and forth from the top of the trading range to the bottom and back up again in a dizzying spectacle that has both volatility and lack of trend direction. However, the BOJ has not reversed their policy and there isn't much hope the markets will go back to the carefree days of yesteryear. The markets have to get used to a much more "normal" kind of environment without that excess liquidity pumping up all manner of investments. It will take time for the markets to adjust. The interesting thing to investors is to recognize when the markets have adjusted and are ready to start moving up again. That's where the aspect of time comes into play.
It would be normal to expect a relief rally for the market at this stage. While the bear is not dead I am seeing signs the overall market may be oversold.
On the earnings front, although many of the earnings reports are good, many executives are singing songs of caution as they do not expect this rate of growth to continue. Please take note of the UPS earnings warning this morning. That has extremely ominous implications moving forward.
Currently, I'm 70% Cash, 10% long, 20% short.
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