Braced for the global downturn
It’s the calm before the storm. Last week’s market volatility was ostensibly triggered by the US-China trade conflict turning into a full-blown currency war. But at heart, it’s about the inability of the Federal Reserve to convince us that its July rate cut was merely “insurance” to protect against a future downturn. As any number of indicators now show — from weak purchasing managers’ indices in the US, Spain, Italy, France and Germany, to rising corporate bankruptcies and a spike in US lay-offs — the global downturn has already begun.
Asset prices will undoubtedly begin to reflect this, and possibly quite soon. China may have temporarily calmed markets by stabilising the renminbi. But we are in for what Ulf Lindahl, chief executive of AG Bisset Associates currency research, calls “a summer of fear.” He expects the mean-reversion in the Dow that started in January 2018 to turn into a bear market that lasts a decade.
It’s an opinion based on data, not on emotion. There have been only 20 months since 1906 when the Dow’s deviation from its trend line has been 130 per cent or more, as it is today. Those periods cluster rather frighteningly around the years 1929, 1999 and 2018. “US equities are at the second most expensive period in 150 years,” says Mr Lindahl. “Prices must fall.”
I don’t think it’s a question of whether we’ll see a crash — the question is why we haven’t seen one yet. After all, there are plenty of worried market participants, as best evidenced by the $14tn horde of negative-yielding bonds around the world. When this many are willing to pay for the “security” of losing only a little bit of money as a hedge against losing quite a lot, you know there’s something deeply wrong in the world (full disclosure — most of my own net worth is now in cash, short term fixed-income assets and real estate).
My answer to the question of why we haven’t yet seen a deeper and more lasting correction is that, until last week, the market had been wilfully blind to three things. First, the fact that there will be no trade deal between the US and China. Both sides are desperate for one but China will only do a deal between equals. Donald Trump is psychologically incapable of accepting this — his entire history demonstrates his need to feel that he has crushed the other side. It’s a pathology that will only increase as the market goes down.
We’ve all known this for some time. But I think fear of what Mr Trump might do has been masked in part by algorithmic trading programs that buy on every dip that results from his erratic actions. This has diminished any lasting signal about the unsustainable current market paradigm.
Lipper Alpha Insight: massive move into money market funds and bond funds continued. pic.twitter.com/Xv5Bd4zwMy
— Alastair Williamson (@StockBoardAsset) August 11, 2019
a recent exodus has been seen in equity etfs pic.twitter.com/8efjiVwS8x
— Alastair Williamson (@StockBoardAsset) August 11, 2019
very interesting pic.twitter.com/NZD5Qh4Fwx
— Alastair Williamson (@StockBoardAsset) August 11, 2019
it's happening again pic.twitter.com/0e6wgP0ooa
— Alastair Williamson (@StockBoardAsset) August 10, 2019
— Alastair Williamson (@StockBoardAsset) August 12, 2019
A Potentially Serious Mispricingt.co/p4pX0TnkoQ pic.twitter.com/yEAbMzTB0k
— Eric Basmajian (@EPBResearch) August 11, 2019
October
10: Japan sales tax boost
14: US Q3 Earnings
15: Italy budget to Brussels
16-29: Italy Elections
21: Canada Elections
24: ECB
29: Trump WTO deadline
30: FOMC
30: Draghi exit
31: Brexit Decision
31: BOJvia @BearTrapsReport
— Lawrence McDonald (@Convertbond) August 11, 2019