Global stock sell-off could last until October
Posted on 16 June 2011 with 12 comments from readers
The impending default in Greece, whatever it is called, is the immediate cause of six bad weeks for global stock markets. When it happens financial markets will take a big lurch downwards, although the European authorities are the masters of fudge.
But the global stock market correction has a long way to go. Markets have overshot on optimism about a weak, or in many cases non-existent recovery, and share prices have gotten ahead of economic reality and then some.
Future profits
Stocks only look cheap on historic profit measures, the future outlook is rather different as bailouts wind up and interest rates go back up. At the same time the oxygen of QE2 money printing is coming to an end and equity prices have been the biggest beneficiary of this process.
Will the Fed ride to the rescue like the seventh cavalry coming over the hill? Well, the problem is that a cavalry rescue has lost its surprise by the second or third attempt, especially if its effectiveness was dubious anyhow.
Thanks to the QE program the US has higher inflation, low interest rates and a weaker currency, although with the euro in trouble even that last advantage is fading now and the second is threatened. Higher inflation erodes the real debt burden but at a cost to savers.
US equities have gone nowhere for a decade, and have lost money if adjusted for inflation. And there should now be an increasing realization that stocks just are not a good place to invest your money. There is every prospect of a second lost decade.
Alternative assets
Investors have made more in gold and silver over the past year than in 10 years in US stocks. Perhaps commodities ETFs are going to replace equities as the investment class of choice, perhaps this has already happened.
However, it is clear that stock market investors should either dump their equities now or prepare for a grinding fall to a new bottom in October, most likely with a final climatic sell-off then. It does all look a bit like 2008 with the Greek default replacing the failure of Lehman as a catalyst, and a repeat of the same problems with high oil prices.
Under these circumstances sell-offs build momentum and continue for many months. It is not only rallies that can extend over protracted periods and of course after a long rally you might well expect a longer than usual downturn.
The next edition of the ArabianMoney newsletter will look at how to profit from falling stock markets (sign-up here).
12 Comments posted by readers:
There is no way the EU will let Greece default. They will do some kind of last minute deal. If they don’t, it will cost the Germans & French 100X more than bailing out the Greeks by writing them a check when they have to pour a trillion euros into their banks. They learned their lesson from letting Lehman go under. How many trillion did that cost ! Get ready for a big relief rally as soon as the big announcement is made in a couple of days.
What good sense you write, Ed., and clearly written too! The clairvoyant 13 June went by without fufilment, but that was a bit of fun to watch and wait for. Your prediction of a progressive collapse of stock markets between now and October is serious, ie not fun, and not based on the guesswork of the soothsayer.
Your comment that investors in gold and silver have made more over the last year than holders of shares have in the last ten, and that the latter are facing a similar decade up ahead of returns less than inflation, still makes me wonder why there was so much objection to my proposition that putting more than 35% of investable wealth into bullion was wise.
If you group bullion ETFs with physical bullion, it does seem to me that there is little else safe for the average small investor, who is not wealthy enough to buy agricultural land for example, to invest in these days for a return that is above inflation.
So why limit bullion investment to 35% maximum? Where, for goodness sake, do you put the remaining 65%?
The Chinese premiere is going to Europe next week. He will tell the Europeans that they will buy all the new ‘Euro Bonds’ to be created to bail out the Piigs. In five years, they will be taking orders from the Chinese, just like we, here in the USA, are now. Ever hear the words ‘Communist’ China used in the US media anymore? Nope, the truth might offend our bankers.
In support of Ed.’s prediction regarding the stock markets, the Daily Telegraph is giving a live and running commentary on the Greek debt crisis, rather like they did for the recent royal wedding, as if something profound is expected at any moment.
The FTSE 100 has fallen today to a three month low, and the profound thing has not yet happened!
Very sobering commentary, Ed.
@ John Mark:
As I’ve suggested a number of times on this blog, the “other 65%” or so is better off in cash… i.e. in a combination of currencies that are stronger than the USD, British Pound and the Euro. Take a hard look at the track record of the Swiss Franc, when compared against the gold price. You’ll find that for the past 8 years, it’s been remarkably stable, while gold has consistently been going up against the USD, Pound, and Euro. In the case of the latter two currencies, gold is at or near its highs.
Given the Greek debacle, no doubt we will see increasing volatility in the financial markets in the months ahead… we may even get the opportunity to use that reserve cash to buy PM mining stocks at a real bargain.
Obewon, I suppose it depends on what I mean by investable wealth. I tend not to think of cash as investable wealth but what one keeps in a deposit account of whatever currency. Perhaps I’m wrong here in that I have not ventured into other currencies beyond sterling.
However, I’m yet sure that I would see a deposit account of Swiss francs as being an investment but just somewhere to put the cash for the time being. Should one put the “65%” into cash? Seems an awful lot of cash! What about 65% in bullion and 35% in cash?
Ref Bill near sidell
He who controls the debt, controls the game
Only cash-riich china holds the solution to save the euro + the piigs
The choice is stark; chinese domination of euroland or disintegration thereof
@ John Mark:
Perhaps I didn’t explain myself sufficiently. At the current time, I believe it’s best to have approx. 35% inphysical gold and silver, and another 35% in gold and silver mining stocks. There are a number of mining stocks that represent a bargain (though they are also at risk if the general market tanks). That would then leave 30% in cash, waiting for the right opportunity.
You’ve correct by saying that “cash” is not an investment. Placing money into other currencies is not an “investment” per se, but simply a hedge against currency risk. All currencies rise and fall against other currencies, but there’s always a few that are the “top dog”. And we gotta keep in mind the fact that currency risk will get really bad in the months ahead, due to a Greek default.
Every astute investor knows that the ECB and IMF are just playing silly games with Greece (and Portugal, Ireland, Spain), and nothing constructive is really being done to address the Greek problem; the FED, together with JPM an GS, are behind the scenes selling CDS derivatives every week to Europeans, in order to “contain” the seriousness of this problem.
But another thing we gotta remember is that “the bond market” is the strongest power in the world, and it is getting fed up with these shenanigans (e.g. Greek 2 year treasury bonds are now yielding 30% interest; who do they think they’re kidding?). Greece will soon default on their bonds, setting off a chain reaction globally and causing another global financial crisis. Currencies will fluctuate wildly (i.e. high volatility), the Euro will sink, and the USD will suddenly appear like it’s the top dog . . . but only for a short time.
But over the long haul, there’s a number of currencies that will remain strong. I believe the Singapore dollar is the best, followed by the Norwegian Krone, the Swedish Krona, and the Swiss Franc.
@ John Mark:
More Thoughts on Where to Park Cash Temporarily:
Here’s another view regarding the stability of fiat currencies. I agree with most of what is contained therein, and after looking at the Swiss Franc, I agree with this author (and others) that the Franc is overbought. Go here:
http://www.thedailybell.com/2501/Ways-to-Invest-as-Faith-in-Fiat-Money-Withers.html
I even agree with his bullish assessment of the USD, although my own opinion is that the rush into the USD will be a temporary one.
chinese bond involvement will be token…..not real
papandr____ gets no confidence and gov. changes…..no austerity and no trance eur.
merkel walking the line on this trying to stay elected…..
people in the streets of greece crack this whole deal up look at history of greek politics.
dominoes will start falling….PIIGS+belgium are wayyy bigger than lehman and wayyy harder to bailout politically.. ….place your bets…..
miners the big deal 3 days before QE3 hint…….i will have that trade wrote in advance.
@ boatman:
Good points, all.
But today is The Big Day for Papandreou’s “vote of confidence”, and there are not too many hours left in this day in Athens.
But I look at this vote of confidence in a different way;
a) since the Central Banks of the world, together with the big global banks are adept at manipulating everything, and
b) since these same scoundrels won’t be able to tolerate a vote of no confidence,
Then
what’s to prevent them from manipulating this “vote of confidence”???
So I believe TPTB will be successful in kicking the “Greek can” down the road for a few more days or weeks.
i shudda known no politician calls for a vote he doesn’t already know the result of.
they get voted out down the road some, and all this is for naught…..big back-up.