It’s been a bruising week for markets. After hitting the 14,000 level for the first time ever just last week, the Dow Jones fell more than 200 points in a single day on Tuesday. The FTSE 100 also slumped by more than 100 points as America’s top mortgage lender revealed that even customers with high credit ratings were having trouble repaying their mortgages – a problem most commentators had hoped would be confined to ‘subprime’ borrowers.
Yet it’s all so obvious with hindsight. The current turmoil in the stockmarkets was eminently predictable. Not because of the collapse in the US housing market. Not because global equity markets had clambered to record highs despite a weak dollar, rising global interest rates, and surging oil and food prices. Not even because of the increasingly ridiculous multiples being paid for companies by private-equity groups, desperate to find targets to spend their money on.
No, for the clearest sign that harder times were on the way, market observers merely had to turn to the luxury car market. As Sean O’Grady pointed out in The Independent this week, “a rash of extremely expensive, extravagant motor cars often prefigures an economic slump”. One make in particular, the Bugatti, seems to herald disaster. The launch of the Bugatti Royale, one of the most expensive cars in the world, was “the most notable automotive event before the Great Crash of 1929”. The Bugatti EB110 GT arrived in the late 1980s, “just in time to bellyflop into the recession of the early 1990s”. So the arrival in showrooms last year of the Bugatti Veyron, a snip at £850,000, should have set the early-warning alarm bells ringing.
So, bad news for motor dealers aside, is this the start of something bigger? We think so – as Reuters columnist James Saft puts it, “the ‘subprime crisis’ may need to be rebadged ‘the housing crisis’ and eventually maybe just ‘the crisis’.” In this week’s cover story, we look at why the tidal wave of easy money lifting the price of everything from property to expensive cars is drying up and what it means for your portfolio. As ever, our City columnist, Simon Nixon has a more upbeat take, arguing that credit markets remain relaxed by historical standards. But the opposing view is that it’s not the level of credit spreads but the direction they’re heading that matters. It’s at key turning points like this that greed and fear grapple in the markets – and if fear takes over, the credit environment could rapidly become far less forgiving. As Bill Bonner points out in his Last Word column, we’ve had a very easy time of it in the past decade, but now it looks like real trouble could be just around the corner.