ASX 0.10% $79.75 asx limited

do not panic

  1. 3,134 Posts.
    The correction is inevitable. And it is good for us in the long run.

    Shares and properties prices have been going up because the "shadow banking system" has been providing easy money to buy them.

    Based on an LVR of 80%, $10 real money + $40 easy money buys CBA for $50. Easy money is created through derivatives, margin lending, share lending, CFDs, etc.

    Profits from these speculations are real money which is used to buy real assets. Much of the goods and services
    are made by the real economy. Real economy is unable to cope with the demand generated by increasing profits because resources were diverted from the real to easy. Hence inflation.

    Easy money is not real money and has to be guaranteed by real money. As the shadow banking system pumps more and more easy money into the economy, there would be less and less real money by comparison. It comes a time when an easy money bubble cannot find real money to anchor to, the bubble floats away. As it moves higher and higher into the atmosphere, the bubble bursts. When easy money is destroyed, the price of the asset has to be adjusted.

    Adjusting for the destruction of easy money, the equation becomes:
    $14 real ($4 inflation) + $20 easy (reduced from $40) buys CBA for $34. Market correction is inevitable. The size of the correction is a function of the reduction in easy money. Incidently, $34 is my entry price for CBA because I expect 50% of easy money to be eliminated.

    Cutting interest rate in this situation would not help as lower interest rates tend to support the creation of more
    easy money.

    Will the US stimulus package work? It depends where the money is directed to. If money is poured into supporting the easy money economy, then a bigger bubble is created and the price adjustment (based on the equation above) will be more drastic when it comes. Extreme caution required.

    On the other hand, if money is directed to the real money economy, standard of living rises, inflation slows down, and price stability will be achieved. Invest freely.

    Don't panic, a cleansing mechanism to ensure our survival. Market has gone higher after each cleansing.
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