eranoz's  Instablog

It is no secret that the level of uncertainty in the markets has risen dramatically in the last few weeks and by reviewing the volatility index (VIX) and the main indices it is clear that there is a struggle between buyers and sellers.

Before we dive deeper into the details, the common John Doe will claim that the stock market always perform well better than any other investment toll out there over a period of time. well, I beg the differ, Nasdaq collapsed in 2001 (burst of the high tech bubble) from ~5000 points and hasn't recovered since, which makes it 50% down as of today, 10 years later for the same John Doe.

Some argue with me that the industries earnings are above and beyond and expectations are high and this is the best indicator for the population spending habits and therefore we expect the market to go up.
I strongly disagree with this statement and here is why:
1. Earnings are based on previous months and can not be used as a forecast tool
2. Low interest rates fuel inflation and this situation will not last

Now, lets try to analyze what is going on in the markets.
In 2007-2008 we experienced the biggest credit crisis ever which brought down giant companies and forced governments to rescue them for the sake of the job creation/maintenance.
Lehman Brothers had an exposure of 200Billion $ to the world in terms of assets and when they collapsed they created a domino effect that was stopped only by the US Federal government, or tax payer money if you will.
Today, 3 years later we face the same credit crisis situation, but with a big difference, governments are being brought down to their knees.
So the credit crisis is still here, but got escalated to a country level. Only Greece exposure is 400Billion $, Italy with an estimated 2.4 Billion $ exposure and the list is long.
Now, who will bail out these countries? Even if it was an option, uncle Sam owes 14 trillion $ mostly to the Chinese people, pays 500 Billion $ per year in interest for this debt and generate less than that in growth, which means he goes deeper into debt.

I will try to go deeper into details with past comparisons upon request for future articles, however, for this post one needs to ask in the absence of pessimism as per the above "what can drive the markets up?"
If the world has over reached and is in debt, the growth is minimal (in my opinion Europe is in a recession right now) and can not exceed the necessary rate to catch up with the debt why would the market go up?
Well, Mr Bernanke can come up with QE3 ,4 and 7 but one needs to understand that the money stops at the banks and doesn't get to the people ( no inflation).
sure, everybody will cheer up and wal street will celebrate for a day or two, however, QE and QE2 did not help us, so why QE3?
The answer is very simple, growth is the solution, and can be achieved by job creation. People working, spend money and drive the economy and in the absence of that, no viable growth will occur.

2 weeks ago, as a condition to the debt ceiling increase, the republicans asked to cut spending and opposed to raising taxes, in other words, the buildings,bridges, roads (infrastructure) should be built to provide jobs, and various projects will be put on hold, which will put people out of work and as we know will be the opposite of creating jobs.
What is the solution for this you might ask, well, Mr Warren Buffet summarized it this week in two words: "raise taxes". this will generate revenue necessary to fight debt.
Based on all of the above, I call to DJ , S&P and NASDAQ fair value at much less than what it is right now, hence, be careful, a big crash is ahead of us.

Disclosure: I am short DJ.