WHY!?!?

That's the million dollar question. Why have the markets all of the sudden decided to correct so sharply. I contribute this to several factors. Realize that none of these factors have anything to do with the real problems in the U.S. economy: housing market, lending sector, inflation, and government debt. The media has refused to acknowledge these things, so I assume the average investor doesn't look at them as seriously as they should. The markets relay this information. We wouldn't see the DIJA, NASDAQ, and S&P as high as they are today if the general consensus thought there was something to worry about. Albeit, there has been lots of negative statistics coming out over the last month or so, Bernanke continues to say that everything is A ok.

I have mainly contributed a couple of items. The Chinese government cracking down illegal trading which retracted a market that needed retracting. The U.S. stock market was well over due for a correction after 18 months of unprecedented growth. Greenspan's talks of recession were conveniently timed with the market correction. Those are all fine and dandy, and probably have contributed in some way shape or form to the correction that came and is still coming.

But I think the real reason is drying up liquidity due mainly to Japan and its carry trade. As each day passes, I feel stronger and stronger that this is the driving reason of the correction. I have beat to death the notion of the huge amount of liquidity on a global level and talked of how the Yen carry trade is a large driver of this force.

The day before the correction, the Bank of Japan raised interest rates to .50%, with talks of further rate hikes in the future. This will result in the further strengthening of the Yen, making the carry trade more risky and less profitable. What have the actual results been? The Yen hit an 11-week high and is continuing to strengthen against all of the major currencies of the world. The carry traders have been cashing in on the investments abroad. Which is ripping liquidity from the markets. As these markets artificially push higher and higher, it takes larger amounts of liquidity to keep them afloat.

I believe that this is the driving force of the market correction. I look to see how high the Yen goes to see how low the markets will go. This makes me believe that the BoJ will be under large pressure to NOT raise there interest rates any higher. This is a very interesting situation to me. We will see of the central banks of the world try and off set this retraction in liquidity by creating some of there own in the form of printing money or lowering interest rates. The saga continues...