Shares going back down as race to the bottom gets its second wind

Has the next wave of stock market falls begun?
I sold everything about a month ago on the expectation of a big sell-off in the markets.
The FTSE100 is now below when I closed my position.
The situation looked like a competition on who could play the bull run longest.
I am not an investment professional, so I have to trade on longer term shifts in the market.
I am expecting a rocky road now to a place well below the currently very over-hyped market levels.
Companies have temporarily improved their situations by reducing workforce costs.
Now there is a smaller consumer base as a result.
Public sector redundancies are going to exacerbate their problems.
The quickest companies to shed more staff will be in the best position to survive.
The race to the bottom is not over.

Share selloff

Starting last Friday and ending today, I sold every share I own.
I believe that the markets are so well ahead of the economic situation that even the losses I made on many shares will be worthwhile, because soon I can buy them all back at much lower price.
That 7 month bull market bubble is about to pop!
Why am I so confident? Three main reasons: Firstly, the unemployment situation is still getting worse, and unlikely to improve for a long while yet. Secondly, the government has drastically overspent to try to make the situation look better than it is. Thirdly, the increased the money supply increases inflation.
On the first point, one of the most important things any economy can do is obtain high employment. As long as everyone is fulfilling needs and wants then the economy has a good chance of prospering. As long as the economy is paying people to be idle, taxation must increase for no benefit. Increase taxation and spending slows, along with economic recovery. Delay the taxation and the interest on the debt must be paid, so the total cost of the debt goes up, but is spread over a longer period. Always living on loans is an inefficient way to run an economy, and should not be necessary. Indeed legislation should prevent the idiot politicians from doing it, only being allowed to do so after a referendum.
On the second point, politicians are always willing to wreck an economy to get back into power. Their power obsession is only rivalled by their greed. Their massive overspend on the public sector is creating a huge public debt. Their gambit was to offset the decline from private sector expenditure, in the hope that confidence would return before the debt grew too big, or at least while an election was held. Well it has failed, and public sector redundancies (always crazily expensive) will restart the private sector collapse in confidence. Expect an election soon, before everyone realises how bad things are.
On the third point, inflation makes savings less valuable. While it also reduces the real value of debt, it decimates savings income, penalising the thrifty and the many and growing population of retirees that depend on it. Those at the margins will need help, further increasing the burden on the public purse. Inflation also causes prices to rise, reducing the ability of people to buy, slowing output, and so losing jobs. In addition, expenditure tends to go to cheaper goods, and they come from abroad, worsening the balance of payments and so increasing debt again.
This is not the beginning of the end, but the beginning of the second fall.

Prognosis for the Economy

What is the prognosis for the economy?
There are three fairly obvious possibilities:
Firstly, some people think that most of the problems for the financial services have happened and so are we are near to a turnaround. This sentiment is evidenced by the current vacillating of the share markets.
Secondly, other people think that the financial services have precipitated a wider economic recession and now that will take over to drag down the economy into a deeper hole. As the economy is enabled by financial services that could certainly be true and consumer spending is changing, showing increasingly parsimonious spending patterns.
Thirdly, others believe that recent activities by central banks have staved off a potentially deepening crisis. Certainly, making more credit available to banks reduces the risks of further banking problems, which would pique the lack of confidence. However, has enough been done and are there other techniques that could be employed.

Which View is Correct?
The fact that the financial services sector was jointly at the heart of creating the problems and the fact that they are vacillating now over its depth means that they don’t have a clear vision of if we are at an economic low point, even though they are the ‘experts’. Central bankers seem to be at least as much in the dark as the financial services gurus, because they didn’t see the problems coming either. They have made increasingly strong efforts to avert a cascading of the problems into the wider economy and this indicates they too don’t know how far this will go. A preponderance of others have commented that they expect things to get worse before they get better. It would seem that the ‘clever money’ would be on a deepening of the current macro economic problems, exasperated by falling property prices along with rising food and fuel prices.
The full effects of problems on this scale do take time to ripple through an economy, so it is likely that even if we have reached the nadir of the original problems for the bankers, they may yet be revisited by their wider effects. So although none seems to have a full understanding of this problem plexus, we can expect the shockwave to ripple through the economy for some time. An important question is: will the after shock feed back to the financials strongly enough to initiate a new vanguard of problems.
My own view is that this crisis will deepen. Lending is constricted by tightening positions in financial services leading to tighter loan conditions. Many people have become comfortable with living at the edge of financial solvency and have started to find their newly restricted position forces them to cutback hard. This pruning of expenditure will denude businesses at marginal operational viability, which in turn will feed costs to the economy through unemployment. Fortunately, the businesses that are least viable and able to ride out a slowdown will tend to be small and although there will be a constant flow of them, they will have less of a confidence damaging effect than mass employers making redundancies. Also, people love to buy stuff and have a short memory for problems. As soon as their positions stabilise they will be back with what credit they can get and there will be creditors with money to lend. Further, service dominated economies are quicker to respond to demand, so for example the US and UK economies should bounce quicker than manufacturing based economies. Therefore, although I expect things to worsen, I also expect that they will flip back quickly to growth. Financial stability and solvency are less of a concern for many today and that combined with faster and more free flowing information than ever will resolve to a faster turnaround in the economy. We will soon return to the consumer dream, not because I want it, or think it is a good idea, but because most people want it. Given the desire for something and the opportunity for others to make money from that desire, there will be a race to make sure they get it, as soon as possible.

What should central bankers do?
Firstly, they must restore confidence. Confidence is the most important factor for a healthy financial services sector and central banks have moved to improve it. So much of the economic success of a country now depends upon its financial services sector that it must be unencumbered. Therefore, improving the stability of financial institutions with government backed loans is a possible scheme. However, this tardy tactic is essentially printing money and hence inflationary. Central banks know that the excessive valuations placed on residential property must be normalised. Price growth has exceeded wage growth and that leads to a bubble that draws in a disproportionate percentage of overall income to service that debt. This is not good balance and balance, after confidence, is most important. The central bankers should be encouraging the rapid normalisation of this over valuation to quickly restore parity. Drawing out normalisation will only delay the return to a balanced growing economy and I am concerned that a government statement about preventing people from losing their homes could do just that. They have not detailed how they plan to do this and it could be empty rhetoric, but if not and they start to intervene at this point they could stifle recovery for some time. An interventional strategy would have been much better to prevent the bubble. Intervention now should be to encourage a property market decline.
Secondly, they must address the root causes of the original crisis. They are manifold, but two stand out as significant: Excessive speculation using residential property, especially by people who do not understand investment markets. A poor pension system which encourages people to look for other ‘stable’ savings vehicles, in this case property investment was used.

What can we do as individuals?
As a general strategy, buck the trend. Be a saver when all about are spending big. The best time to spend big is when everyone else is not, you get the best deals then. Particularly, you should be looking at the big things: buying a house or moving to a better one, buying shares and a nice car at a bargain price. So, property will soon be a much better deal, shares already are, but will probably become better still and slightly used luxury cars will soon be everywhere at great prices. Simple really, just difficult to do.