2008 is going to feel like a picnic in comparison

The worst economic crisis of my life was the 2008 financial crash. As readers will know, we had long forseen a crunch coming in the credit markets due to lax Government regulations and arrogance of those in power both at the banks and the Governments.

However, 2020 feels like it will be worse. For one, those immidiately affected are the old, the poor (retiaers, coffee shop owners, airline workers etc) and the needy; not wealthy bankers losing their jobs in Canary Wharf at Lehman Brothers as the first stage.

Moreover, because this crisis is so visceral and real, the Fed last night dumping $500 billion into T-Bills and dropping interest rates by 100 basis points has made no difference. Markets are down about 6% at time of writing. Pumping more fiat money only helps the Banks and traders, it will not make people fly again nor can a coffee shop owner survive when the Government has ordered them to close.

The 3 to 4 month hiatus in the economy we are about to experience will be very hard to manage. I can see UK Government debt ballooning by £100 billion for this year and maybe next year too - there is just so much to subsidise and try to keep going. In the round, this in and of itself won't kill the Country financially (unlike Italy) but it does mean higher taxes will be coming in the 2020's to pay for all this - and who is to say this is a one off, quite the opposite, Covid-19 is a successor to H1N1, so is already not a one-time emergency.

We will have to see where things go but airlines and all forms of travels, sports and events and retail food (incidentally all amongst the big winners economically of recent trends) are all going to be smashed to pieces. Whatever world emerges by the mid-summer will look very different to the world as it was on Valentines day in the West.

Recession incoming?

 I Know I am like a broken record now, but this is a very tough morning economically for the the world and for the UK. Don't fancy being the Chancellor trying to draw up a budget.

The Ftse is now down near 6000, having been at nearly 7500 a few short weeks ago. We started the year quite optimistically thinking getting Brexit Done and Trump pump priming the US economy ahead of an election would make for a strong year.

Now we have 3 simultaenous, but related,  crises:

1 - Supply shortages for finished goods and materials as a lag from a 3 month closure of the Chinese indsutrial heartlands.

2 - A new shock to the West as Covid-19 impacts every day life and travel with a potential for a China style shut down for a couple of months. 

3 - Saudi Arabia getting tired of the Russian approach to OPEC and decidig now is the time to start an oil war (Oil price fell 33% in one minute overnight) - just as oil demand is dropping due to lack of travel and shipping. 

Of the three above, only point one is under control with China starting to get back to work last week. The second point is on a knife edge, as the virus gets into Europe at the end of winter - so much will depend on the weather in the coming weeks.

The oil war should be a shot in the arm to the economy at a desperate time, but as we know it is good for some sectors and terrible for others.

UK Gilts are all negative now, the sign of a real crisis if there ever was one.

We still might see this as an over-reaction and there could be a fast recovery if Governments get a grip on the Virus, but there are few signs of that. UK still, after 2 weeks, had planes landing constantly from Milan for example. EU countries with their endless virtue signalling abou tinclusity and openness do seem to struggle with scenario's like this, as does the USA.

Fun week ahead

Market calm - what does this fortell?

One thing that has surprised me is the reaction of the markets to Brexit. Given that over 50% of market activity is driven by short-term trading algorithms, all programmed to try use data about everything including political risk, it is a surprise I would think to many that  really they are so calm.


Of course, last year was a bad year for the FTSE 100 and FTSE250, a bad losing year in terms of value, but it was across the West. The NYSE is also down 9% over the last 6 months, the FTSE at 12% is within a margin of error. Even the Shanghai composite is down around 5%.


At best you could say there is a little topper on the downside from Brexit but the trend is the trend. Without Brexit the FTSE would undoubtedly still be significantly down. As usual, there are a number of factors at play, here are my top 3:


a) "Buy the Rumour, Sell the News" - the reality of the hit to the FTSE from no deal will perhaps only happen the day that no deal is agreed, just as the bounce for a withdrawal or revocation of Article 50 must await the act, not the discussion.


b) Given the FTSE is full of dollar based multi-nationals, the real drivers are global macro such as the China-USA trade war, general slow down in the world economy, the rise of digitisation in every aspect of company life, uneven growing global population and resource extraction. Brexit is a long-way down this list.


c) No one knows what  the effect is of even a Hard Brexit. Clearly some industries with just in time manufacturing have issues, but many do not - take lawyers for example, Brexit means more productivity not less, how it works out in the round is hard to fathom in the era of project Rapture and Fake news - even for the algo's.


It will be interesting to keep an eye on the markets though for signs of economic stress over the next two months.

Where are thou Santa Rally?

Stock markets are funny things, they give the right record of the state of the economy until they don't.

They rise and fall on specific company issues, but somehow reflect the whole market.

They are run by machines, but driven by human emotions and greed.

They are rigours beasts but follow obscure folk law rules like 'sell in May and don't come back to St Ledger's day' - which actually work most of the time.

And then you have the 'Santa Rally' nearly every year without fail the stock markets rise into the New Year, and then nearly every year they give up all the  gains in the first two weeks of January.

This year though the Santa rally is yet to kick in, even if it does the year will be a losing year on the FTSE - dragged down by its high resource sector composition.

A losing year on the stock market when the economy is in reasonably fine fettle is quite a rare trick, not something seen since 2001/2 when the tech bubble burst; perhaps the resources sector bubble is the same type of effect on the market overall which means a slow re-build from here as happened in 2003-2007?
 

So much for the Santa Rally in 2014

 

So much for the Santa Rally this year. Normally Fund Managers and other asset investors are keen to lock in their gains for the year  to get their all important bonus' paid. This means that quite often the FTSE and other world indexes end the year at their highest point - often only to have a bad month in January when the managers come back to work and take a look at reality. 

This year though the collapse in the oil price, trouble in Ukraine and across Syria and Iraq, together with slowing growth in China and no growth in the Eurozone has well and truly spooked the markets.

Instead of a Santa Rally, we have a Christmas collapse, with little sign of much news getting better as the above intractable situations are no closer to being fixed. Indeed, all may get worse before they get better.

Having said that, Oil prices will feed through to growth in the West as they act as a benign deflator of goods and services - it will take one or two quarters to feed through so we won;t see it until March or so next year, but it should be worth up to 0.5% GDP for an industrialised Western country. 

With the markets more or less closing at the end of this week, there is not much time for a turnaround so it looks like it will be a losing year on the FTSE with UK GDP growth at 3% - a very odd turn out that. 

Beware the Ides of October?

It is an easy post to write every year, that stock market crashes happen in September and October. The major ones nearly always do, but the evidence is more mixed in years when there is not a major crash. The 3 largest declines in  recent times though are 1987, 2001 and 2008 - all those happened in September or October as did the Wall Street crash.

Since the beginning of September 2014, the FTSE and other markets have been hit pretty hard, as can be seen on the chart above. After a peak at very nearly 7000 in early September the FTSE is off to no only a year low, but touching the low for last year too. In fact you have to go back to the tail end of the Euro Crisis to find the FTSE performing so badly.

There are, as ever, many causes for this, one of the main ones is the FTSE still being resource stock heavy so the fall in Oil and Mineral prices - generally good news for the world in terms of inflation and prices, turns into bad news for the FTSE.

However, it also shows that finally the geopolitical effects of ISIS, Ebola and Russia are having an effect on the global sentiment. The latter is more or less forgotten, but in reality the sanctions are causing major dislocations in the oil markets - which is what the West aimed for, but still, the world is not harmonious.

Worse for the pension investors and others is that none of the above 3 issues is going to go away. Nor are the falls in resources prices, although they may level off - albeit another 10% down or so from here.

We'll just have to hope the Santa rally kicks in from next month as per usual!
 

Prospect of is already Independent Scotland already boosting the UK economy as a whole

The Pound has dropped to a low of $1.61 to the Dollar - its lowest for 3 months. it year low is at £1.57 so it is well on the way to being at this level or better with just 10 days until the Scottish referendum result.

The Scottish referendum is the gift that keeps on giving, not only may the UK soon be shot of its Socialist extremists, but also the 20% over value of the Pound (its trade weight is currently 83 against a basket of currencies, this implies a near 20% over-valuation) will come off.

This will cause imports to be more expensive and so drive inflation, but at the same time will help an export sector that has run into a wall in 2014 in the face of an over-expensive currency rate driven not by fundamentals but by the choice of the Pound as a safe haven currency.

Perhaps the loss of Scotland will permanently diminish the Pound (I doubt it really, Scotland is 8% of the economy at most) as a reserve currency. This would have good benefits for the economy with almost no downsides - those only being that larger corporate transactions would have to move to dollars or euro's, but not matter. The status of long-dated gilts will in reality underpin Sterling's utility for decades to come.

Moreover, the FTSE is harmed by the earnings of so many of its companies being in dollars which is then reflected into poor returns due to currency exchange. The move down of the Pound will improve the overall PE ratio of the FTSE. Of course a high priced FTSE will lose some lustre too in the run up to the referendum.

We can only hope this continues and the whole show is not ruined by a 'No' vote in the election on the 19th September which will return us to the status quo position and represent a significant detrimental adjustment.

CU

FTSE nears 1999 highs, but for how long?

Of all the times to do this, at the beginning of September, on anniversary of the Wall Street Crash no less.

As most people know, September is traditionally when we have big stock market corrections, macro conditions in the world at the moment are the most perilous politically in my lifetime. Economically, China is slowing, the Eurozone really feeling the effect of sanctions whilst UK and USA run along on QE funded property fantasies.

Whilst it seems unlikely there should be a huge crash now, a correction is certain in September and October - will the FTSE finish the year at all time highs - it should on any kind of historically analysis (on an inflation basis we are 30% off real highs anyway).

Somehow I doubt it though, I can see the year ending for the market at around 6700-6800 after an Xmas recovery from a very rocky patch later this year.

Next year I foresee being very bearish.

*And this is without a Yes vote in the Scottish referendum which would be around 5% off the FTSE in the short term I would imagine.

Friday - What will the weekend bring?

Above is the YTD FTSE graph, poor reading it makes. This month has bee an unmitigated disaster though in particular. After an OK start to the year it has all gone pear shaped. In an exact re run of 2011, oddly enough - albeit for different reasons.

With the endless euro-mess there has been a move out of equities into safe haven bonds - quite irrational when you think those bonds are of UK and Germany in part both of whom will get wiped out in a major euro collapse as their Banks fail. Hey ho.

What intrigues me at the moment is the euro-denouement re Greece is approaching. Probably it won't be this weekend. However, it will be a weekend as it always is. the markets are closed and Governments can conspire against us (or maybe even for us?) freely.

Then one Monday in the next 6 weeks Greece will be in or out of the euro and a huge liquidity stream from the Central banks will be with us. It's quite likely there will be a strong equity rally after this for some time, until again people realise the problem is not fixed but has been kicked down the road again.

In the meantime, my equity portfolio is destroyed, again.

Round-up: FTSE, Rover, GM/Vauxhall

Quick round up of C@W views on a few issues of the week, heading into the weekend:

- MG Rover - I can't believe the report cost £16 million. All that money to accountants and lawyers to tell the Government the Directors were a bunch of shysters - exactly the conclusion of the last report! Now Mandy is preparing for the Sunday Newspapers to splash on it and making noises about having them banned a company directors. Boo hoo - how hard is it to get round that, ever heard of nominees etc. In the picture that is Peter Mandelson looking for someone other than himself to blame, as per usual.

- GM/Vauxhall - Lots of panic about GM closing the Luton Van factory which seems overdone to me. Is only 800 jobs when our dole queues are growing at tens of thousands a month. Economically, the vans will be better to be built in Russia. Forward thinking workers should consider going with the plant perhaps? No doubt the Government will hose some more cash at this deal though, copying the German's. Sadly for us, they have the money and we are printing ours still....

FTSE 5000 - Quite a shock to see the FTSE look like it may stay above 5000 at the end of this week. The chances of a retrace grow with such fast upwards movement. However, it does show QE money hitting the economy and being pushed straight into a new asset bubble in shares. House prices are holding much higher than expected too. This is good news all round, it means that we have enough QE for now and the bank should stop its programme.

The FTSE will still have a significant correction in the next 2 months and end the year flat - so 10% down from here is my expectation.

Bull Run

The image above perfectly describes the market situation today. The FTSE has had 10 straight gain days (assuming it is up today). It means the index is nearly flat year to date. Given all the bad news this is an impressive feat...for now. However, the sentiment of everyone I come across is that this is a blip and come September things will unwind again.

What has amazed me recently though is the lack of people on the bull run; so many seem out of the market. A good example of this is the gold and dollar price. Both these rise when fear is high and at the moment both of these indicators are showing a lot of fear of equities and bonds. Volumes too are low, although this time of year they always are.

All I can say, is what a miss for those who have ignored the equity rally. The party will end and equities will fall, but to miss the boat altogether is poor trading judgement.

New site to cause terror in Right thinking people

If Alice is not enough to keep our spirits low, in league with The Major, then here is another new website which has a lovely clock just showing what a truly terrible job our Government and politicians are doing:

Debtbombshell.com

Plus of course, today saw yet another big fall in the FTSE 3% in two trading days. Is the end of the bear market rally is upon us?

Will Brown sink the £ and FTSE?

Even as I write there is speculation of an emergency Cabinet meeting being held this afternoon ahead of the meeting of the Parliamentary Labour Party this evening.

Also the FTSE has been down well over 1% today, dragged down by State owned banks and mining companies on the whole. The £ too has shed over 5% in a week against the dollar on the back of UK Government instability (Now there is a short opportunity I should have seen!).

I think the meetings today are over-hyped and that the media storm will blow itself out and Brown will remain in office but not in power. However,I hope I am wrong and stranger things have happened in politics.

All the whole, the markets have been in a very low volume funk for the last week or so. The power of the bull run from March is clearly at an end as the Summer encroaches upon us. Now is a dangerous time for the rally to be exposed as a Bear Market rally and a new dive in the FTSE and £ could be very dangerous.

At this time, having an unstable Government is about the worst political thing we could have, even more dangerous than Ed Balls as Chancellor. Labour need to sort it out one way or the other. More dithering will chop 5% off the FTSE this week. My short will go on later today at this rate....

Any more legs to this market rally?

The FTSE ended up down today after a month of spectacular gains, it had the odd bad day last week too. The US markets were the same, as bank concerns reared up again. Some of the UK bank stocks have shot to the stars the past two weeks. How long can this last?

There are very few fundamentals to support the rally. In fact, there are only two:

1) People are bored with depressing news and market falls, they want rallies and optimism; it is spring after all. Sentiment counts for a lot, even in the face of overwhelming evidence.

2) Quantitative Easing, yup, printing money is so radical and its effects so unknown that it is messing with the markets. QE seeks to produce inflation, and with inflation coming, rational actors will want to own assets. Hence shares rising...perhaps?

On the easier side, Gold is falling quite rapidly now, back down to $872 (I sold at this level a few weeks ago, thinking it too toppy!). So at least with Gold back in some sort of normal range, it will be possible to switch out of stocks when the next bear hits.

I have a hunch this is going to be a lot sooner than we would all like it to be. The chart is a great prediction from Market Oracle lastyear.

We are saved? Right...Right?

This is the Dow Jones on Friday. This is the reaction to the bail out. A 157 point fall.

Is this a case of buy the rumour and sell the news?

Or is it a realisation that the plan is not the right one?

The FTSE futures are up 100 for Monday. That will be an interesting day....