Calm before the storm like last autumn?
Posted on 14 September 2009 with no comments from readers
The quietness is almost deafening in markets this month. The stock markets continue to climb, albeit slowly and with little conviction. The dollar is weakening and the gold price and bonds strengthening.
Such complacency in the face of the worst recession in two or three generations. The World Trade Organization says global trade will be down 11 per cent this year, and shipping firms warn that trade shows no sign of picking up, indeed the position is worsening again.
Chinese puzzles
China has produced some dazzling figures for GDP growth. Do we believe them? We do know that Chinese exports fell 20 per cent in the first eight months of the year. Can a country really make good a hole that size in its economy that quickly?
If so it must be doing it by reckless lending and inflating a bubble in property and stocks. And yes that is what has happened. What happens when that bubble bursts as it must, bubbles always do?
The obvious safety valve waiting to blow open in the global economy are stock markets. Liquidity from government bail-outs and supposed liquidity to come have fueled an amazing rally.
This is now so completely out of synch with global economic reality that stocks obviously have to come back to earth, and no more so than in the banking sector now kept alive on government handouts with strong banks penalized by the continued existence of the weak.
What will it take to prick this latest bubble? The insiders all cashed out last month with sales outnumbering buy orders by a factor of thirty. The mad panic for the exit can not be far away.
The final phase of a stock market meltdown is characterized by an over-sold condition in which the participants give up on equities and stay away from the market for a long time. We have not seen that phase yet in most markets but it is almost upon us.
Bonds and equities up
The rise in bond prices over the past five weeks – not something that usually happens alongside rising equity prices – is a sign of the smart money moving out while the stupid money is still moving in.
Gold might be seen in the same light, but here the professional traders appear to be trapping the stupid money into a short trap as the historically large commercial gold short position today would seem to indicate. It is worse for silver.
A flight to cash or short positions looks a good move. Just look at the graph above comparing the current rally with the 1929-32 crash. What if global government spending is actually far too small to stop this process unfolding?
no Comments posted by readers:
You’re essentially describing the best case scenario, equities are allowed to fall which would almost certainly be concomitant with more bankruptcies of “too big to fail.”
The pessimistic scenario would be a sort of extension of the present, where no major bank or market is allowed to fail ever again. Nearly 90% of new mortgages originated in the US are done so by the government.
Now the government is even rewriting huge numbers of mortgages, surreptitiously forcing the entire taxpaying population to pay for their neighbor’s mortagage default. No matter if you played in the bubble game or not.
The real wildcard is this situation with Iran. The Israeli PM’s secret unscheduled visit to Moscow looks quite serious indeed.
One might imagine that were war to break out gold and bonds could rise whilst equities crumble. Then again, many times in history war has actually seen equities rise, WWI a prominent example.
On world trade, you might apprecieate this article…
Ghost Fleet
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Thanks – more than 1,000 merchant ships are idle around the world!
WOW… That is a lot of ships just sitting there. Any pictures of the Gulf waters??
Hi Peter,
Be interested to know your thoughts on FXP as a position on the China bubble? It seems to be falling with the gradual up-tick in the HK + Shang markets. Not looking for a recommendation – just your thoughts.
Ed Note: difficult to know if short ETFs will perform as advertised so do not put all your eggs in this basket and diversify into other short ETFs where possible. But this should work as markets come down, and may work very well.