Stock market bears takeover as rally ends
Posted on 30 June 2010 with 2 comments from readers
The stock market resumed its downward trend yesterday all over the world with very little reason for the bulls to be optimistic. A full on stock market rout between now and the end of October looks very likely.
European banks returned as a cause for concern with their emergency facilities in question. But in the US the reality of the non-recovery of the housing market and its impact on consumer spending revived as a very obvious worry.
China crisis
In China stocks also tumbled as investors withdrew cash for the very large upcoming agricultural bank IPO. Increasingly the only optimists about the outlook for China are foreigners which is what you would expect at the top of a bubble boom. Locals are leaving the market and have been since last August.
The G20 summit last weekend also showed a clear macro economic split between the US diehard spenders and the European austerity kings. The only problem is that neither racking up even more debt or slashing public spending seems much of a recipe for resumed growth.
Markets are perhaps belatedly waking up to the fact that this is a zero sum game. Governments cannot magic growth from a declining market. That is the Keynesian fallacy.
When the global economy has a decade of above average growth due to artificially low interest rates it then has a price to pay in sub-normal growth for the next decade, and presumably with interest rates higher as a consequence.
Bond markets
For that is surely going to be the price of US profligate spending. Ultimately the bond market will not take this level of debt and require higher rates of interest. The US is pushing at this boundary until it snaps. But we know from the history of financial crises that this is what must happen.
Then those with big debts will be in real trouble, and asset prices supported by cheap borrowing will tumble. This market decline is therefore the start of something big. Nothing less than the third leg in the three phase sell-off.
Markets will go to new lows and very few portfolios will be ready for this, and that will be another factor compounding the downturn. If May looked bad for stocks you ain’t seen nothing yet.
2 Comments posted by readers:
Dear Peter,
as this downward trend continues in the global markets do you think we will see a weakness in Gold? As investors exit markets they will buy Dollar, do you think we may see gold weaken and a buying opporunity for gold below $1200 an ounce in the next few weeks?
Ed Note: I would hope so but cannot be sure – gold seems well supported.
Some things, people in developed countries can’t live without. (And some of the stocks of the providers of those things, usually pay nice dividends.)
1. Telecommunications. (Companies like Vodafone, AT&T and Verizon won’t
disappear overnight.)
2. Electric Utilities. (Consolidated Edison has paid dividends for a long, long time.)
3. Fuel from the super major international oil companies. (I would stay away from BP, but some of the others usually pay a nice dividend.)
Now is not the time to buy stocks. The budget balancers in Europe could cause another recession within a year. They are taking a great risk by cutting spending at this time. Maybe they studied under BP.
If the Europeans end up causing another recession, I would be shocked to see the price of gold rise a lot more during the next couple of years.
Then again, some say Ben Bernanke is warming up his helicopter. That might generate $1,400 an ounce, within a year or two.