Navigating the ‘most unstable market ever’
Monday, 12 February 2018
By Bernd Struben
- ‘Continued sloppiness’ ahead
- Buy the dip?
- A vicious feedback loop in the making
There’s been a lot of bubble talk lately.
Bitcoin, stocks, bonds…
Leaving cryptos out of it for the moment, global stock and bond markets have been driven into bubble territory by one overriding factor.
After a decade of central bank driven ‘cheap money’, the world is awash in debt.
The Australian Debt Clock lists total government debt — state and federal — at $774 billion…and counting.
Total private debt — business plus household — is a staggering $2.8 trillion. Household’s bear the brunt of that burden, at almost $1.9 trillion. That makes Aussies among the most indebted citizens in the world. One record we could do without.
Reserve Bank of Australia (RBA) governor Philip Lowe tried to soothe the nation’s nerves last week. The RBA kept the cash rate at its record low 1.5%. And Lowe said it would likely stay there for the foreseeable future.
That’s all well and fine. But living on our own continent in our own corner of the world, it’s easy to forget that what happens in the rest of the world has a big impact Down Under.
The Australian government and banks, after all, depend on foreign lenders to fund part of our insatiable appetite for debt. If international investors can get better returns overseas, borrowing costs in Australia will have to go up to lure those investors back.
And with the US opening up the spending floodgates while cutting taxes, the US deficit is racing into uncharted territory. And bond yields are heading higher.
From The Australian Financial Review:
‘Last week the Republican-controlled Congress, with the support of Democrats, added $US320 billion of spending over two years, mainly for defence and emergency disasters. Over a decade the package will add $US1.7 trillion to federal debt.
‘Combined with the recent passage of $US1.5 trillion deficit-financed tax cuts, the US is on an unsustainable budget path. Federal debt is projected to hit 100 per cent of GDP in a decade.
‘Investors in government debt noticed, sending the 10-year Treasury yield to a four-year high of 2.88 per cent. Stocks swooned.’
But the debt problem goes way beyond Australia and the US.
According to the data from the Institute of International Finance, global debt hit US$233 trillion (AU$298 trillion) in the third quarter of 2017.
To put that in some kind of perspective, global GDP (gross domestic product) in 2016 was approximately US$75.4 trillion, according to Statista.
That means if every person on Earth put every cent they earned into paying off the world’s debt, we’d be at it for three years. Hypothetically, of course. Because the world would shut down under this scenario.
So what’s an investor to do?
The debt fuelled time bomb has drawn the attention of some of the world’s most successful financial thinkers.
More, after the markets…
Over the weekend, the Dow Jones Industrial Average closed up 330.44 points, or 1.38% following a day of volatile trading.
The S&P 500 gained 38.55 points, or 1.49%.
In Europe, the Euro Stoxx 50 index finished down 51.31 points, or 1.52%. Meanwhile, the FTSE 100 lost 1.09%, and Germany’s DAX fell 152.81 points, or 1.25%.
In Asian markets, Japan’s Nikkei 225 is closed for the National Founding Day holiday. China’s CSI 300 is up 1.30%.
In Australia, the S&P/ASX 200 is down 11.37 points, or 0.19%.
On the commodities markets, West Texas Intermediate crude oil is US$59.38 per barrel. Brent crude is US$62.86 per barrel.
Gold is trading for US$1,317.08 (AU$1,684.46) per troy ounce. Silver is US$16.38 (AU$20.95) per troy ounce.
One bitcoin is worth US$8,188.55.
The Aussie dollar is worth 78.19 US cents.
‘Continued sloppiness’ ahead
If you attended Port Phillip Publishing’s ‘The Great Repression’ conference in Port Douglas, you’ll be well familiar with Jim Rogers.
Jim was a keynote speaker at the two-day event. He shared his insights into what he was doing with his own wealth. As well as sectors and commodities to keep an eye on. Like sugar.
He also sounded the alarm on what the next financial meltdown would look like. Because of the world’s record debt, his prediction wasn’t pretty. And it’s only gotten worse over the past year.
By the way, if you missed ‘The Great Repression’ conference, we recorded the entire two-day event. Not just the presentations, but every breakout and Q&A session as well. (Details here.)
Even if you didn’t get to see Jim Rogers in Port Douglas, you’ve likely heard of him.
He’s the creator of the Roger’s International Commodities Index, and the author of numerous best-selling books. Oh, and he co-founded the Quantum Fund with George Soros in 1973.
Last week he was again warning of the calamity facing global markets.
Bloomberg quoted Jim as saying:
‘When we have a bear market again, and we are going to have a bear market again, it will be the worst in our lifetime.’
And by ‘our’ lifetime, he means his lifetime…which encompasses 75 years now.
Though he admits, as he likes to do, that he’s got a terrible record at timing the markets. So he’s not sure when the proverbial will hit the fan. Just that it will.
Shorter term though, it sounds like he’s expecting a bounce back after the US Fed goes through with its next rate rise ‘But maybe there will be continued sloppiness until March when they raise interest rates, and it looks like the market will rally,’ Jim said.
Definitely not a good time to bet against the Volatility Index (VIX).
Buy the dip?
Nearer to home, our in-house market veteran, Vern Gowdie is keeping close tabs on the latest ups and downs.
If you’re thinking about buying the dips, as the mainstream is chanting, Vern has a word of advice.
Vern is the editor of The Gowdie Letter and Gowdie Family Wealth. He’s also the author of The End of Australia. This book details how Vern sees the next financial collapse unfolding. And how you can prepare yourself before it’s too late.
If you haven’t read it yet, do yourself a favour. You can click here to get a copy of The End of Australia today.
Here’s an edited excerpt of what Vern wrote to subscribers of The Gowdie Letter on Friday:
‘The following chart is all you need to know on how the positive GDP numbers have been achieved in recent decades. The pause in the trajectory of global debt — between 2008 and 2011 — was what created the greatest economic crisis since 1929.
Source: Business Insider
Click to enlarge
‘What’s going to happen when that ascending line starts arcing downwards?
‘Whether they realise it or not, in forecasting ‘stronger’ growth, global business leaders are really saying that debt accumulation can continue, not only unchecked, but at a greater pace.
‘How can that be in a world where interest rates are supposedly on the increase (making the cost of debt more expensive) and global competition is suppressing wages growth?
‘Something doesn’t add up.
‘But that’s what it’s like at every euphoric market top…logic is abandoned…
‘Those who’ve been around long enough know the current situation is highly unstable and is destined to end very badly…
‘Markets crash because they are fundamentally unstable.
‘And in the history of share markets, this is the most unstable market…ever…
‘The only way you’ll get a more unstable market, is if this one keeps on rising.
‘We are either at or very nearly at the peak of euphoria. The US market may well go higher…but this is pure emotion.’
When the market does crash, Vern expects it to lose 60% or more in value. That kind of market rout will be devastating on almost everyone with an industry super fund. And it won’t bring any joy to casual investors either.
A vicious feedback loop in the making
Strong economic news out of the US is widely credited with the recent falls in global stock markets.
‘Good news is bad news’ has become the new normal over the past decade. As you know, much of the global recovery was driven by central banks’ policies of record low interest rates and money printing.
Have another look at the global debt versus GDP chart above if you’re in any doubt.
With the US economy strengthening, interest rates are going up and the easy money days appear to be nearing an end. That reality has seen markets tumble.
But in a vicious feedback loop, the tumbling markets may in turn take the steam out of the Aussie economy.
The Australian economy is hugely dependent on its consumers. Consumer spending makes up roughly 60% of GDP.
With unemployment down to 5.5% and predicted to trend lower, consumer confidence levels in early January were at the highest levels in five years. Despite flat wages.
That’s good news for the Aussie economy. But the loss of tens of billions of dollars on the ASX may well shake that confidence.
As the AAP reports:
‘The Westpac-Melbourne Institute consumer sentiment report for February, which is due on Wednesday, will have been surveyed over the weekend.
‘“Sentiment is likely to be affected by increased financial market turbulence in recent weeks with a sharp sell-off in global equities,” Westpac economists say in their weekly outlook.’
If consumers tighten their wallets as stocks are falling…look out below.
And finally, on a completely different note, if you thought crime was running rampant in Australia, you’ll want to read this…
In Today’s Australian Tribune: ‘New Data Trashes Need for Tougher Gun Laws’
‘If you believe the mainstream media, Victoria is descending into crime fuelled chaos.
‘African youth gangs rule the night.
‘Muslim terrorists are poised to strike at any moment.
‘Ice-fuelled gun battles rage from Melbourne to Ballarat.
‘It makes for frightening headlines. Like this one from news.com, “Australia facing up to Christmas terror threat as country enters ‘peak season’”.
‘There’s just one problem. It’s not true…’
If you’re fed up with sanitised, politically correct dogma cut and pasted from one mainstream source to another then The Australian Tribune is for you.
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