There’s “just no good news out there”, said one trader this week as global stockmarkets tumbled. We’d probably agree.
But that’s not what he’d have said a few weeks ago if Britain had reported that first-quarter GDP had been revised up from 0.2% to 0.3%, as it did this week. Back then, he’d have said that the numbers proved the recovery was on course, and he’d have headed for his desk to buy more shares in banks and retailers.
The point? That the market mood swings very quickly. Hugh Hendry, who I interview this week, puts it well when he says that for a bull market to keep running, the market has to be feeling “forgiving” – it has to ignore bad news and seek out good. That was just about possible until a few weeks ago. Even as the Greek crisis kicked off, investors took heart from the size of the European bail-outs. We even tried to find a silver lining ourselves – hoping quantitative easing might give Europe’s markets a temporary boost, despite the grim state of the continent’s finances. But there is no way to avoid the bad news now.
The troubles of Spain’s savings banks have reminded everyone that the global banking system is still insolvent. There are already signs that the lending market is freezing up again: interbank lending rates are at a ten-month high. It’s suddenly dawned on the investing world that shifting debt from the private sector to the public sector isn’t the same as paying it down. The debt’s still there, as is the risk that always comes with it: default.
That’s why spreads on the sovereign debt of the likes of Spain and Ireland are soaring again; why banks’ shares across Europe are collapsing; and why, on Tuesday, every single share in the FTSE 100 fell. But the fear isn’t just about Europe. It’s about Korea and Thailand, both reminders that emerging markets often come with political stresses.
And it’s about the US too. Only a few weeks ago almost anyone would have told you that the US recovery was set in stone. This week we see that US house prices are falling again (the banking crisis isn’t over until they stop) and that Larry Summers is calling for yet more stimulus to keep depression at bay. “It turns out that we weren’t seeing light at the end of the tunnel at all,” Dr Suki Mann of Société Générale tells The Daily Telegraph, “but a train with a big light on it coming towards us.”
At MoneyWeek, we’ve always thought the light was a train. We’re pleased the rest of the market is coming to think so too. We’ve been waiting for the deflationary shock that CLSA guru Russell Napier has been warning us would presage a bottom in the markets (see our recent interview with him). If the last few weeks represent the start of that shock, the end game may be getting closer. At the start of this year we said we hoped to be bulls by the end of the year. We’re still stockpiling cash and hoping.