Double dip recession, anyone?

This blatant rigging of western equity markets has gone on for several years, with stocks soaring despite weak economic fundamentals. While everyone in financial circles knows this, to say as much out loud is to guarantee pariah status — and I should know. But eyebrows are now being publicly raised by genuine insiders, with the Swiss-based Bank for International Settlements, an umbrella organisation for the world’s leading central banks, warning of ‘euphoric’ equity valuations. ‘It is hard to avoid the sense of a puzzling disconnect between the markets’ buoyancy and underlying economic developments globally,’ it argued in its annual report published earlier this month.

Systemic global risks today may be greater than before the Lehman crisis, the BIS warns, as debts have risen. Across the developed world, the average combined public and private debt ratio is at 275 per cent of GDP, compared with 250 per cent in 2007. And no less than two fifths of new syndicated loans are now sold to dodgy ‘sub-prime’ borrowers, the BIS adds — above the pre–Lehman high.

trans. In popping one small balloon, we’ve blown up lots of big ones.

… It’s undeniable, for those willing to look, that numerous technical stock-market indicators are now flashing red. For one thing, the S&P500 sports an average cyclically adjusted price-earnings ratio of 25.6, according to Professor Robert Shiller of Yale University. That’s way above the historic average of 16.5, suggesting prices are unsustainably high.

…Trading volumes, meanwhile, are wafer thin, with just 1.8 billion shares trading daily within the S&P500 over recent months — that’s a six-year low. High valuations and low volumes amount to classic crash conditions. Yet still the rally continues — because investors can’t quite bring themselves to believe that the Fed will fully implement the planned end of QE in October as planned, or raise interest rates from ultra-low levels any time soon.

Western share prices generally have ballooned amid slow profit growth and still deep-rooted concerns about where the world economy is actually going. As such, global equities valuations are detached from reality and propped up by printed money.

…‘I would be extremely wary of stock markets right now,’ says Professor Michael Dempster, co-founder of the Centre for Financial Research at Cambridge University. ‘The last crisis was caused by cheap money and it’s happening again via QE, which is very, very worrying. QE started as a way of priming the pump, but no one knows how to turn it off without causing financial havoc.’

Admati points also to the failure of policy-makers [DS: change you can believe in!] to reform the ‘too big to fail’ western banks at the heart of the worst economic collapse in almost 80 years. ‘Our financial system remains bloated, inefficient and reckless,’ she says. ‘It endangers innocent citizens unnecessarily and distorts the economy to benefit the few. This recklessness isn’t only tolerated but, perversely, encouraged and rewarded by flawed policies and ineffective regulation.’

Admati pillories the official attempts to fix our banking system. ‘Supposed tough reforms are just tweaks to the previous rules that failed spectacularly, maintaining key flaws,’ she says.

‘Chinese walls don’t work,’ [DS: have you seen their debts over GDP? says Dempster. ‘Glass-Steagall should never have been taken down,’ he argues, referring to US legislation that, between 1933 and 1997, kept such activities in separate companies, insulating taxpayer-backed deposits from risky investments. ‘It was the reason we had a reasonably stable banking system for almost 70 years.’

…In March, the International Monetary Fund admitted such banks still receive annual implicit subsidies of $590 billion, with creditors judging that state bailouts will indeed be forthcomingwhen reckless, highly leveraged investments go wrong. This flies in the face of political rhetoric that the problem is solved and taxpayers will never again have to bail out bonus-fuelled traders.

This autumn, as the end of Fed ‘tapering’ and rising interest rates loom larger, overvalued western stock markets will come under intense pressure. Our largely unreformed, debt-soaked, loss-hiding banks mean a sharp asset price correction could spark a systemic crisis, involving not only the ‘advanced’ world but the large emerging markets, too. I don’t want it to happen, but there’s a good chance it might.

Regime uncertainty of elections need to be accounted, inc. the September Scotland referendum.


1. Be civil. 2. Be logical or fair. 3. Do not bore me.

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