Just a blip along the way

Monday, 14 August 2017
Melbourne, Australia
By Selva Freigedo

  • An anomaly
  • Investors wary
  • 10 years on…

From Bloomberg:

Worry emanating from an escalation of tensions between the U.S. and North Korea showed signs of easing Monday as shares in Asia outside Japan climbed together with U.S. equity-index futures.

Last week, the VIX volatility index — also known as the ‘fear gauge’ — spiked to its highest level since US President Donald Trump was elected in November last year.

The reason?

Escalating tensions between the US and North Korea, which have spooked investors.

The back-and-forth between the two countries involved President Trump tweeting that the US military was ‘locked and loaded’ for use, with North Korea warning that their army is ‘capable of fighting any war the U.S. wants.

Yet, after a couple of days of radio silence, fears have already subsided.

As Bloomberg reports:

The yen weakened a fraction and gold halted its advance amid efforts from U.S. officials to tamp down fears of imminent nuclear war with North Korea. South Korean and Australian shares rallied, while equities in Tokyo declined as traders returned from holidays during which markets sold off. Futures indicated a higher open for U.S. and U.K. equities. Bitcoin rose in early Asian trading, and is now about 20 percent since Wednesday.

Crisis averted?

More on this after the markets.

Markets

Over the weekend, the Dow Jones Industrial Average gained 14.31 points, or 0.07%.

The S&P 500 gained 3.11 points, or 0.13%.

In Europe, the Euro Stoxx 50 index closed down 27.20 points, or 0.79%. Meanwhile, the FTSE 100 lost 1.08%, and Germany’s DAX index fell 0.24 points.

In Asian markets, Japan’s Nikkei 225 index is down 183.55 points, or 0.93%. China’s CSI 300 is up 0.75%.

In Australia, the S&P/ASX 200 is up 34.36 points, or 0.60%.

On the commodities markets, West Texas Intermediate crude oil is US$48.78 per barrel. Brent crude is US$52.00 per barrel.

Gold is trading for US$1,287.82 (AU$1,629.09) per troy ounce. Silver is US$17.09 (AU$21.62) per troy ounce.

One bitcoin is worth US$4,063.30.

The Aussie dollar is worth 79.06 US cents.

An anomaly

Tensions between North Korea and the US may have quieted down for the moment, but a potential conflict looks far from over.

Washington keeps trying to employ the diplomatic route in dealing with North Korea. As for North Korea…well, it doesn’t look like they are backing down.

North Korean newspaper Rondong Sinmun recently reported that 3.4 million people requested to enlist in the army in the three days following 7 August — the day the United Nations imposed severe sanctions on North Korea.

Meanwhile, markets have forgotten the North Korea blip and continue to climb higher, especially tech sector stocks. In fact, the tech sector has had an amazing run, reaching new highs with every passing day.

But, as Bloomberg reports:

One glaring anomaly is that companies topping expectations on both sales and earnings aren’t getting rewarded with immediate stock market gains, Bank of America’s Hall said. That’s the first time that’s occurred since the second quarter of 2000, just before the technology bubble burst, she said.

That is, even though companies are hitting expectations on earnings, they are not seeing immediate stock price gains.

Why?

The most likely reason is that the stock market is already overvalued. Prices are too high, even if earnings look good.

As Fortune Magazine reports: 

The only other time in the past half century that stock prices have been so highly priced was during the tech bubble. Yes, they’re even more overpriced now than prior to the 1987 market crash.

If you have any doubts as to why the market is at an all-time high, President Trump recently explained that his so-called ‘Trump effect’ caused the stock market to pick up in value by almost $4 trillion since last 8 November.

That’s a lot of money.

The thing is, many companies that have grown in value are not making money. That’s why, in my opinion, we are due for a stock market correction.

How much steam does this bull market have? It could collapse today…tomorrow…next month…or next year. Trying to guess the timing of a market correction is nearly impossible.

But when it happens, companies with no earnings and high debt — like long-time Port Phillip Insider nemesis Tesla — will have a hard time. Don’t get me wrong, while there are overvalued companies in the stock market, there are also solid companies with good earnings that present good investment opportunities. 

That’s why publisher Kris Sayce launched Crash Market Investor recently — to prepare investors for an imminent crash potentially within the next few years. More details here.

Investors wary

Meanwhile, in Australia, the property market is slowing. As The Australian Financial Review reports:

Chinese property buyers are turning away from Australian housing as efforts by regulators in both countries to slow investment begin to bite.

Chinese buyers, who make up about 80 per cent of all foreign property purchases in Australia, have grown wary after being hit by Beijing’s tightened capital controls, local banks restricting lending and growing fears of an over-supply in the capital city apartment market.

The drop-off in Chinese demand for Australian property marks a noticeable shift from just a year ago when buyers from the mainland were seen to be dominating apartment purchases in many inner city suburbs.

The problem for Australian developers is that Chinese investors are dropping off just as a record number of new apartments are due to hit the market in the next year…and Australian households are holding record levels of debt.

What could happen?

Well, there are concerns that high house prices in Australia could cause a downturn that could damage the economy. 

And, if property prices fall, owners could be stuck with paying for a home that is worth less than what they paid for it, making the debt higher than the value of the property.

As reported by CoreLogic RP:

Across the combined capital cities this week, the number of homes taken to auction rose to 2,011, compared with 1,857 over the previous week. This was the largest number of auctions held since the last week of June 2017 and approximately one third higher compared with the same week a year ago. The preliminary auction clearance rate of 70.5 per cent has increased relative to last week’s final clearance rate, up from 68.2 per cent. However as more results are collected it is expected that the final auction clearance rate will revised lower to remain within the high 60 per cent range where it has tracked since the first week of June.

More properties are coming on the market. The more properties there are on the market to push up supply, the lower that prices will go.

How bad can it get? Well, pretty bad if you consider Spain’s example.

10 years on…

If you have ever wondered how bad the aftermath of a property bubble can be, Spain is perfect case study. I have just come back from a trip to Spain, where I witnessed firsthand the decade-long consequences of a property market collapse.

In case you are not familiar with the 2007 property crisis in Spain, here is a recap. During the property bubble of 2002–2007, property values rose six times higher than the average salary. An increase in foreigners purchasing property (from 0.5% in 1981 to 12% in 2012), low interest rates and excess credit combined to spur prices…sound familiar?

But it all came crashing down in 2008.

Since then, 60% of people who bought their homes between 2005 and 2007 have defaulted on their debt. The main reason: long-term unemployment. Unemployment reached a high of 27%, with youth unemployment hitting 55%. As many as 2.3 million people have left the country in search of work opportunities.

Property values have fallen 45% since 2007. The banks — many of which were bailed out by the government — hold a large stock of repossessed homes.

10 years on and the economy is finally starting to recover.  

For the first time in 10 years, Spain’s GDP is growing at pre-crisis levels, at 3% per year.

Yet most of its inhabitants are unaffected by this.

Unemployment and youth unemployment remain high at 18% and 38.6% respectively. According to the Spanish Democratic Union of Pensioners and Retirees, average household income has dropped 13% between 2009 and 2015, from 30,045 euros to 26,092 euros.

Mortgage and rent defaults from the crisis have meant that many of the properties have been left in the hands of the banks…and many of them are currently empty.

According to the Spanish National Institute of Statistics, there were 3.4 million empty properties in 2011…the number is likely to be larger today.

10 years on, banks are holding on to these properties to wait the crisis out so they can sell them for a profit.

But it is taking longer than they thought…

Instead, it has led to an increase in illegal occupations. Which is leading to a whole new underground economy for squatters…agencies, companies to evict squatters, you name it.

To learn more about the global property bubble crisis and other financial events taking place across the world, and how they could impact you, click here.

Regards,
Selva Freigedo