The optimist says, “things can’t get any better!”
The pessimist responds, “I think you’re right!”
The present state of the market
As we move into the festive season the above comments best express the current state of the financial markets globally. With the DOW at all time highs and European interest rates deep into negative territory, we can’t help but wonder whether the globe is experiencing a boom or a recession? The truth is that at present, the global economy really hangs on a very delicate thread. Asia is slowing, Japan is struggling after 10 years of monetary stimulus and Europe is in the verge of a recession. With the US capital markets being the only economic game in town at the moment, global capital flows keep pushing the US equity markets and USD higher and higher against historic norms despite the rest of the world’s problems. The vast global initiative of quantitative easing, low to negative interest rates and money printing has created an impossible environment for an investor to decide where to allocate their capital safely.
Several weeks ago, famous market forecaster Martin Armstrong during his annual conference in Florida, claims that the recent massive FED capital injection into the banks REPO market spells the beginning of the end for global growth. Armstrong believes over the next few months the global markets will experience a spike in volatility which will pave the way for a major capital market event that frightens investors even more, which will in turn cause a collapse in public confidence confirming that global governments and central banks no longer have control over the economic situation.
Armstrong believes that this collapse in confidence will bring an end to the continual never-ending borrowing by governments and will potentially result in a complete reset of the global monetary system. Remember at this point central banks and heavily indebted nations KNOW that they will NEVER be able to repay their borrowings. The asset classes potentially most exposed are not surprisingly the ones that have benefited the most from the huge sums of liquidity that have been pumped into the financial system by central banks. The primary sectors that could suffer would be: global real estate, corporate and sovereign debt, emerging markets and higher yield and riskier investments.
According to Armstrong the recent REPO crisis signals that International Financial Institutions no longer have the confidence to lend to each other. Because of these concerns about 6 weeks ago the FED had to inject more than 120 billion USD of liquidity into that market to keep the global financial system afloat. Remember that is was cracks in the REPO market that also signaled the beginning of the last financial crisis. Be aware that this is a signal that banks are no longer prepared to lend to other banks.
So much is happening economically now around the world;
- The Australian dollar is heading downward against the USD at a rate of knots,
- Asian data is incredibly weak in China Manufacturing PMI, Taiwan, even Singapore data are all extremely weak,
- The tensions in HK are turning a once vibrant trading hub into a ghost town,
- The trade war between China and the US has gone much longer than anyone initially expected,
- Global Central Banks are either at negative interest rates or in a race to negative interest rates that has proved an absolute disaster economically, and penalizes savers and self-funded retirees
- De-facto QE4 has begun to shore up short term liquidity deficits in the REPO market,
- USD is in a huge rally that also seems to coincide with a large gold rally (which is uncommon),
- European banks and Japanese banks remain hugely exposed and represent a big chance of a massive default.
- As interest rates go negative Governments will start restricting savers moving their money into cash. The government battle against cash will accelerate to try to force savers to move from cash to bank savings. Please note recent European and Japanese initiatives to abolish cash.
- 13 trillion USD in debt is now in negative yielding debt which has hitherto never economically been seen, brutally punishing savers and the baby boomers all looking to retire within the next 10 years.
The bottom line is that there is a reasonable probability of some type of recession, if not more, in the next 6- month period. Whether you look at this as an opportunity to invest in precious metals or other options our clients need to be aware that there are real and disturbing economic signs globally and that Australia will not be immune to the global repercussions of a global recession.
In Japan and Europe negative interest rates coupled with Quantitative Easing has been an absolute failure. What central banks have managed to do is to destroy their own bond markets with the only bid at these negative rates being themselves. They are trapped and unable to stop as there is no other buyer in the market for their bonds. As Australia moves quickly to adopt the same failed policies of Europe and Japan, we will replicate the same results. Unfortunately, savers and self-funded retirees will be wiped out, so will their pensions (which cannot sustain themselves in low or negative interest rate environments).
So as we head into the festive season please make sure that you, as our valued clients are all protected as much as possible from the economic effect of a potential recession in the near future as this risk is real and the extent of the potential recession could be significant.