THE PARTY’S OVER
I told you so. But it wasn’t what you wanted to hear. You wanted to hear, that the markets and the economy were sound and improving. That the only way for inflation and interest rates would be up. That the financial system, after 5 years, finally emerged from a period of stress. That current market leverage was nothing to worry about. That this current prolonged credit and speculative cycle did not have the characteristics of any dangerous bubble. That Central Banks were not misguided, as they repeatedly intervened in keeping the markets going. That any perceptions of price distortions were way off the mark. But what really happened, was, that the peasants became utterly complacent and unaware of the actual fragility of the system.
So the Boom in risky asset speculation turned into a Bust after all? ‘Modern’ monetary policies would supposedly keep everything under control! There would be ample liquidity at all times. This time, no systematically important institution or country would be allowed to go under in order to avoid a crisis. Lessons were learned from the depression in the 1930’s. So where did it all go so wrong anyway?
The decline started slowly enough, but gained momentum later. As usual, in any mature Bull market, the Small- and Midcap stocks peaked first, followed by the Large Cap Blue Chip stocks. This divergence within the market, was a red light. But then, we were told, the party would simply continue in the top 50 stocks, with their ‘safe’ dividend record, while a higher Price/Earnings ratio would take care of one more dance on the Titanic. We didn’t want to miss that one, did we? A repeat of the Nifty Fifty in the early 1970’s! In the meantime, the yields in the gigantic quality bond market, however, broke down sharply, ‘unexpectedly’, as if economic growth was all a mirage. Wow. This wasn’t supposed to happen. Must have been ‘technical’. The message of that sophisticated market surely was incorrect. Right? Except that those markets were way ahead in discounting the Bust, which was frankly not in the cards. The mathematical models said so!
When you read this, the Bust probably hasn’t happened yet. The markets are experiencing ‘just’ another boring correction, which undoubtedly is seen as another buying opportunity. Buy on the dips has been a winning investment strategy for so long. Mother Central Bank will always act as a backup for you, the speculator, who absolutely needs to continue playing the game in this peculiar Zero Interest Rate world. You cannot imagine anything different! You failed to question, why interest rates and inflation were ‘irrationally’ low. No, forget ‘manipulation’. The reason is, because financial disaster lurks around the corner! The last time such a scenario unfolded, was during the 1930’s. Your portfolio with risky assets is now hanging by a thread and you don’t even know it. The party’s over. Another generation of investors is about to bite the dust.
RICK SCHMULL
August 3rd, 2014WESTCLIFF-On-SEA, Essex, U.K.
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