Mario Cavolo

...who's to say how long and deep the worldwide stock market decline will be....first solid target on the DOW is around 9500. Meanwhile, between now and the end of the month, we're packing up down here in tropical paradise and moving back to Shanghai. Consumed with all of that, please forgive a bit less content posted here.

We'd been short the China markets since a month ago and finally the world markets are following, for whatever "reasons" the talking heads come up with. One could easily suggest "sell in May and go away" and have a very high chance of being right for 2010. The puzzle is the recent hard decline in gold along with the risk assets. It seemed gold was finally being tracked as a risk averse asset, moving up in synch with the USD, but that relationship broke down along with the U.S. equity markets.

Never forget that control and manipulation IS very much part of the markets, so when they don't do what we expect, don't be surprised. Just follow the trends and the price action which right now is down in virtually every asset class except the USD, which is, like it or not, the world's reserve currency.

Cheers, Mario

World markets are getting more and more volatile, financially and socially, with the China/HK indexes continuing to lead the way down toward the bottom of the ocean where we find a massive ecological disaster and to the bottom of the sovereign savings account where we find zero cash and mounting trillions in printed IOU's that will in history never be paid back...pray tell what the future holds is a continuation of steadily and ultimately radical transformation in the socio-economic landscape worldwide?

Indexes worldwide including the Australian, HK and others are down a further 2-3% with the Shanghai and Shenzhen indexes down over 5% for the day. Meanwhile Europe has opened soft with the Euro hitting a new four year low; the U.S. markets are threatening a bounce, short squeeze rally...any rally would still be regarded as opportunity to add to short positions...any pullback in gold toward 1220 would be regarded as opportunity to add to long positions in gold. However, consider the extreme volatility which will most likely continue to create exaggerated swings and test your nerves. Good luck...Cheers, Mario

....As of noon today down an additional 1-2%, the HK and Shanghai and Shenzhen stock market indexes continue selling off...yesterday saw the U.S. and European indexes consolidate...with nothing special going on and continued threat of rising interest rates on sovereign debt, I maintain the short position for a continuing correction...gold and silver moving up to new highs shows a serious shift in investor psychology...Cheers, Mario

....While the U.S. and European indexes enjoyed their 4-7% giga-bounce yesterday, the Hong Kong and Shanghai indexes continue selling off, both down an additional 2% as of 3:00pm...one can assume there will be a reasonable bottom at which it will be a good time to buy, but most of us are getting a clear sense that the market correction is going to run quite a while longer...Cheers, Mario

Tonight we'll be up on the 50th floor of the new Pullman hotel with a spectacular view of the Expo running along the Huang Pu River for the opening ceremony of the Shanghai Expo. The mania and money in Shanghai is a sight to behold quite reflective of the economic boom energy and riches in the air all around and knowing the Chinese, the event will be as impressive as one could imagine and more. Yes the rich are richer than ever and while that's nice for them, it is also a stark reminder of the fragile state of global economics.

Bearish analysts seem to keep mistakenly discounting the fact that there are plenty of people out there in both China and the United States with plenty of money. They're spending it. They're enjoying their lives. The "have nots" are suffering and struggling more than ever. More importantly, approximately 100 million Americans have joined the ranks of the struggling "have nots" which is a fundamental and deeply disturbing shift in the state of the American society and culture which includes 40 million Americans on food stamps. Authors such as Nicholas Taleb and Malcolm Gladwell eloquently remind us of the power of random probability much more so than we wish to believe. Simply being in the right place at the right time or wrong place at the wrong time along the time line of happenings in the society around you is completely out of your control, an uncomfortable but not new reality.

Rallying stock markets facing a myriad set of unstable conditions doesn't make sense to most. While the financial underpinnings of European Union collapse, airlines feeling a 2 billion dollar loss from the volcanic ash cloud and an assortment of other powerful instabilities have markets teetering on the edge of the cliff, the markets and media simply slap on the blinders and manage the news. It just doesn't make a lot of sense until you understand why. It's their game, not everyone's game. Who's game do you think it is? They designed it. They make and modify the rules to suit their own interests and they are playing it. Do you expect to understand when you don't even have the rule book? Wall Street, with GS leading the march, has become not much more than a private club and playground for the power rich, a symbol of all that both wonderfully good and miserably bad about capitalism and free markets. Be careful out there.

Expect market volatility to increase in the coming weeks and don't forget to laugh every time another advisor says for the 10th time "we're really overdue for a pullback here". We're happy to see that yes, gold is lining up with the dollar as a safe haven asset as the financial instabilities unravel. There are many who would also like oil to be even more of an asset store than it is but that will drive the price of oil up which in my analysis, the fragile world economy cannot afford. The scenario of rising interest rates worldwide continues.

Item #1 excerpt...(Bloomberg) Foreclosure filings in the U.S. rose 16 percent in the first quarter from a year earlier and bank seizures hit a record as lenders stepped up action against delinquent homeowners, according to RealtyTrac Inc. ...RealtyTrac is forecasting more than 1 million bank seizures this year and at least 4 million foreclosure filings, both potential records. Foreclosures won’t level off until next year, Sharga said.

Item #2 The U.S. stock market continues one of its strongest, longest rallies in history with corporations looking to continue reporting quarterly earnings far exceeding expectations along with a variety of other good news statistics indicating economic recovery...

How do we resolve these two alarming and contradictory pieces of reality?

It is easier than you might think to explain it, however sad it may be. I've been arguing for months that the U.S. economic recovery is in fact taking place but not in "America". It is taking place in the new demographic America which consists of a population of 180 million Americans. The lives of 180 million Americans are as good as or better than ever and they are immersed in a recovering, relatively healthy economy. For around 50 million of them, they are richer than ever in fact. This population segment of the American economy IS the new reality of America, IS spending plenty of money and IS thriving without being overly stressed or financially indebted. Again, millions of them are richer than ever as the economic and societal fundamentals of the country have shifted. The "America" which is the population of 180 million thriving, richer people is the new America that is economically stable, except for the issue of the expanding government debt which will come to roost at some point in the future as part of the now confirmed global inflationary boom taking place. The new America is a Keynesian economics low interest rate dream come true. For now anyway. And more than at any other time in history, the American government is now a massive, driving force in the economics of the American society. We could say the Democrats are truly victorious, with the government infiltrating and influencing the lives of it's citizens to an unprecedented degree. For these 180 millions Americans, its fabulous thing; they were all in the right place at the right time in history and the economic cycles.

If you think that hard work and good attitude and education and the law of attraction and all those other virtues of life enable you to control your destiny and get richer, please think again. Taleb's classic Fooled By Randomness and Gladwell's Outliers are must reads to make sure you understand the random probabilities of cold, hard reality as you look around and assess your life. Much more than you and many others wish you to believe is far beyond your control and influence. The explanation is as simple as realizing sometimes you're just on the right side of the fence; you happened to be in the right industry or right city or right sector or right career in the economy at the right time.

Meanwhile, unfortunately for the "other" 100 million Americans, the "American way of life" has become their new nightmare. They were in the wrong place at the wrong time in history starting around 2006 and it has only gotten much worse for them. The quality of their lives, their career paths, their ability to earn, to pursue opportunity, to cross the chasm from poor to rich by effort and value has all been shattered. This is not hyperbole. This is not headline rhetoric. This is the cold, hard realistic picture of societal, economic and government shifts which have taken place in the United States.

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