Tuesday, September 2, 2008

ASX bearish

According to Jacob Greber, Australia May Cut Rate for First Time Since 2001, Signal More, and it signals a high probability of the market ending lower in the coming fiscal period. I'll try and explain this as simply as possible.

Common media pushes the idea that lowering interest rates induces equity market rallies over in the long run as investors may find debt instrument less desirable as result. The sentiment is true, among the newbie, uninformed investors; and the markets do tend to go up on the very days where interest rates lower, the momentum often loses air soon after.

However, reality (often far from conventional beliefs) lies through the perspective of the few consistent winners. The right question would be, what is the true motivation for the central banks to lower interest rates?

They do it because they believe things will get worse in the coming fiscal period, and lowering interest rates might produce a soft landing. As the Gods of central banks understand current economic conditions better than most of us, and unlike popular TV economists, they are CORRECT more often than not.

Pretty simple logic right? The financial institutions are not charity organizations. Every news release, publicized analyst opinion hold a specific purpose. Once understood, one could start finding real value off mainstream financial media.

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