It’s bear market time.
Stocks pretty much everywhere outside the US are either in or flirting with “bear market” territory. In other words, they’ve dropped by 20% from their 2015 highs.
That’s a fairly arbitrary line in the sand (10% – a correction – is another one), but if you’re going to have names for these things, you might as well have a definition too, so that everyone knows what everyone else is talking about.
Anyway. The question on most investors’ minds, I suspect, is “how much further do we have to fall?”
I hate to say it, but I can’t be mega-bearish right now
Let me be clear here. I’m not accustomed to being on the – for want of a better word – “optimistic” side of the argument when it comes to investment.
It doesn’t feel comfortable. Of course, being uncomfortable is usually a good sign when it comes to investment. But still…
Anyway, I’m finding it hard to see how the current shakeout becomes something a lot worse.
Let’s run through the problems that seem to be on everyone’s mind.
First and foremost, the US Federal Reserve is raising interest rates.
Oh no, how awful. You want to know the cure for that? It stops. And if it needs to, it reverses course.
I’m reading lots of stuff about central banks reaching the end of their ability to interfere in markets. There are few sure things in markets, but if there’s one thing I’m sure of, it’s that central banks have plenty more ammunition if they decide to use it.
If the Fed announced QE4 tomorrow, I really wouldn’t want to be on the short side of the market, put it that way.
Again, let’s be clear here: I’m not advocating QE (quantitative easing). I think it’s been a disaster. Nor am I saying that the Fed is planning it imminently. I’m just saying that anyone who thinks that central banks have lost their ability or appetite to interfere has not been paying attention for the last six years or so.
Second, commodity prices are tanking. OK. That’s great news for anyone who actually has to shell out to buy this stuff, which has been trading at grossly over-inflated prices for most of the current century.
But let’s put aside that massive boost to consumer economies just now, seeing as everyone else seems to be ignoring it.
Granted, it’s bad news for companies who produce commodities and had based their spending on profits that will now not materialise. Many of them will go bust. And some of those companies are backed by sovereign nations, who are also running into financial trouble.
In short, there’s a lot of emerging market and commodity-dependent debt that could go bad. And I suspect that this is what’s generating much of the concern.
However, while it’s something we’ll be examining in depth shortly, again, it’s hard to see how this turns into a 2008-style disaster. Certain banks might hold significant amounts of emerging-market debt. And they may well have bought it at rather over-exuberant valuations (Venezuelan debt, anyone?).
But this isn’t subprime. This isn’t chunks of toxic debt, tied to one of the biggest, most widespread property bubbles in history, that had then been rubber-stamped by ratings agencies, and distributed liberally throughout the global financial system.
If anyone blows up, it’ll be smaller than 2008. And we’ve done 2008 already. We know what the response is. Money printing. Woo!
Third, the US might go into recession. Oddly enough, talk of a US recession has grown louder now that the market is falling. Regardless of the data, it’s a classic feedback mechanism.
Trader 1: “The market’s falling. It must know something I don’t. US recession? I guess so. Better sell.”
Trader 2: “Gah, trader 1 has sold. He must know something I don’t. US recession? Might be. Better sell.”
Trader 1: “Trader 2 has sold. I knew I was right! Better go short.”
Etc, etc.
Anyway. Say the US does go into recession. Oh look, there’s the Fed with QE4. The Pavlovian mutts in the stockmarket will get their risk back on right away.
If you’ve got a watchlist, now’s the time to look at it
My point is, if you have stuff on your watchlist that you’ve been keen to buy, these are the times for which you have been keeping your powder dry.
I’m not sure it’s time to buy commodities yet – maybe nibble at the edges, but I’m hoping for a more definitive “buy” signal – like a big player announcing something absolutely shocking.
And I wouldn’t bother with US stocks. They’re still expensive.
But something like Japan, for example – this is a country that imports all of its oil. So falling oil prices are good for it.
A weak China isn’t so good for Japan. But despite the panic, China’s underlying economic data is not deteriorating. It’s been rubbish (relative to the stated growth statistics) for ages, for far longer than the market has been worrying about it.
As Diana Choyleva of Lombard Street Research points out, its own figures suggest China’s GDP growth has “averaged just under 5%” for more than three years now.
The biggest problem for Japan has probably been the fact that the yen is seen as a safe haven, so it’s been strengthening amid the panic. But then, that’s why we’ve suggested in more recent months that you shouldn’t be hedging the currency in Japan. It provides something of a safety net – if the market falls, at least you get the kickback of a stronger yen.
The next crisis will be different
Again, don’t get me wrong. I am worried in the longer run that we will face a crisis, and it’ll hurt more than 2008. But I think it’ll be an inflationary, not a deflationary crisis. And the more I hear panic about deflation, the more I think that everyone is worrying about the wrong thing.
I’ll certainly be paying a lot of attention to my colleague Tim Price’s thoughts on this. Tim has been writing a lot about what the authorities’ response to just this sort of thing might end up being, and frankly, it’s both scary and credible. You can find out more here.
Oil – heading for a 50-year low?
Just before we go, there was an interesting piece flagged up by the FT Alphaville blog last night. Charles Robertson from Renaissance Capital has compared the oil price to global GDP, to try to get a measure of how cheap or expensive the stuff is.
1979 saw the high, with the world spending 7.5% of global GDP on oil. “More than education and defence spending globally, combined.”
The low was in 1998, at 1.1% of GDP. That coincided with an emerging-markets crisis (sounds familiar).
This year, says Robertson, if oil averages $23 a barrel, then spending would amount to 1% of GDP (using International Monetary Fund estimates, for whatever they’re worth). “That price would be a 50-year low.”
That’s not to say that we’ve seen the low for the oil price. But it’s pretty clear that we’ve gone from unprecedented highs to unprecedented lows in a very short space of time.
My colleague Alex Williams has taken a closer look at what’s going on in the oil market in the next issue of MoneyWeek magazine, out on Friday.
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