About time I re-posted this as a reminder.
Every time I see a finance guy, I think of this
The FTSE 100 slid on the first day of trading in 2015. Here are 10 warning signs that the markets may drop further.
Vix fear gauge
For five years, investor fear of risk has been drugged into somnolence by repeated injections of quantitative easing. The lack of fear has led to a world where price and risk have become estranged. As credit conditions are tightened in the US and China, the law of unintended consequences will hold sway in 2015 as investors wake up. The Vix, the so-called “fear index” that measures volatility, spiked to 18.4 on Friday, above the average of 14.5 recorded last year.
Rising US Treasury yields
With the Federal Reserve poised to raise interest rates for the first time in almost a decade, and the latest QE3 bond-buying programme ending in October last year, credit markets are expecting a poor year for US Treasuries. The yield on two-year US Treasuries has more than doubled from 0.31pc to 0.74pc since October.
Along with the increased US Treasury yields, the cost of insuring against corporate credits going bad is also going up. The cost of insuring investment grade US corporate credit against default has become 20pc more expensive, rising from lows of 55 to 66 since July, according to Markit.
Rising US credit risk
The wider credit market is also flashing warning signs. The TED spread, as reported by Bloomberg, is the difference between the rate US banks are willing to lend to each other and the Federal Reserve rate, which is seen as risk free. The TED spread is taken as the perceived credit risk in the general economy, and increased 9pc in December to its highest level since the end of 2013.
Rising UK bank risk
In the UK, a key measure of risk in the London banking sector is the difference between the London interbank offered rate (Libor) and the overnight indexed swap (OIS) rate, also called the Libor-OIS spread. This shows the difference between the rate at which London banks are willing to lend to each other and the Federal Reserve rate which is seen as risk free. On Friday, the Libor-OIS spread reached its highest level since October 2012.
Interest rate shock
Interest rates have been held at emergency lows in the UK and US for around five years. The US is expected to move first, with rates starting to rise from the current 0-0.25pc around the middle of the year. Investors have already starting buying dollars in anticipation of a strengthening US currency, with the pound falling 10pc against the dollar since July to hit 1.538 on Friday. UK interest rate rises are expected by the end of the year.
Bull market third longest on record
The UK stock market is in its 70th month of a bull market, which began in March 2009. There are only two other occasions in history when the market has risen for longer. One is the period leading up to the great crash in 1929 and the other before the bursting of the dotcom bubble in the early 2000s.
UK markets have been a beneficiary of the huge balance sheet expansion in the US. US monetary base, a measure of notes and coins in circulation plus reserves held at the central bank, has more than quadrupled from around $800m to more than $4 trillion since 2008. The stock market has been a direct beneficiary of this money and will struggle now that QE3 has ended.
Overvalued US market
In the US, Professor Robert Shiller’s cyclically adjusted price earnings ratio – or Shiller CAPE – for the S&P 500 is currently at 27.2, some 64pc above the historic average of 16.6. On only three occasions since 1882 has it been higher – in 1929, 2000 and 2007.
Commodity markets have been the lead indicators for a global slowdown, as the prices for oil and iron ore more than halved in value last year. The Bloomberg Global Commodity index, which tracks the prices of 22 commodity prices around the world, fell to fresh five-year lows on Friday at 104.17.
Professional investors exit
Professional investors are already making for the exit. The Bloomberg smart money flow index tracks the market movements at the end of the trading day on the Dow Jones, when professional investors tend to make their move. The index showed heavy buying activity from 2009 onwards as professional investors followed central banks’ money into the markets, achieving record gains during the past five years. That trend was reversed from the beginning of 2014 and the smart money is now making for the exit, as the S&P 500 carries on rising to new record highs.
The structure of global capital markets is such that the $68 trillion equity market is riskier and sits on top of a credit market worth more than $100 trillion. As yields have fallen in the credit markets, the excess profits have flowed up to equity, in turn lifting stock markets to record highs.
The reversal of that trend, one of increased risk and rising credit yields will reduce returns to equity and send shockwaves through stock markets. The warning signs are not all flashing red just yet but investors would do well to head these indicators that suggest caution and prepare their portfolio before the crowd flocks to the exit.
Nothing like this has been seen in European history since the 14th century, after the depletion of silver mines set off a slow monetary contraction, followed by Edward III’s default on debts to Italian banks and the Black Death soon after, compounding a deflationary collapse.
“What we are seeing is the ‘Japanification’ trade,” said Andrew Roberts, credit chief at RBS. “The eurozone is sinking into corrosive deflation and it is too late to stop. We think the inflation rate in December may already have been negative. The ECB are in trouble, and they know it.”…
MGTOW have the right idea.
The Global stock market selloff accelerated on Friday with the FTSE 100 index falling 91.56 points, or 1.4pc, to 6,340.2, it’s lowest level in a year and 7.81pc below highs of 6,878 on May 14.
Pictures often communicate these things better;
Gold, a shelter for investors in times of uncertainty, has surged during the past week by as much as 2.64pc, to $1,222.95 per ounce, as the Federal Reserve minutes hinted at delaying interest rate rises till later next year.
Meanwhile, the CBOE Volatility Index, a measure of investor anxiety known as the Vix or “fear index”, leapt more than 24pc.
“The FTSE 100 has broken through the support on its recent trading range and US traders have moved from the ‘buy the dip’ and ‘risk on’ commentary we heard earlier in the year, this is becoming more than just a dip,” said Alastair McCaig, market analyst from IG.
“Going into the weekend with so much uncertainty in the air will only further fuel traders compulsion to get out of risky assets and it would take a miracle for the bulls to salvage anything today,” added Jonathan Sudaria, from Capital Spreads.
The Dow Jones Industrial Average slumped by 334.97 points, or 1.97pc, to close at 16,659.25 last night as Wall Street feared the US economy would be dragged down by weakness in Europe and the rest of the world.. The price of Brent crude also collapsed to its lowest level in five years at $89.42 per barrel.
“European markets looks like they are staring over the edge and into the abyss, or may have even stepped off the cliff,” added Mr McCaig as Ebola screening at UK airports and the discovery of new cases raised fears the deadly virus may have spread to the continent.
“European equities have plunged on the open as storm clouds gather over the global economy. Bad economic data is now being viewed as bad and the dovish signals from central banks are now being taken as a sign of weakness rather than a reason to ramp up equities,” said Mr Sudaria.
In Germany [DS: the people propping up the EU] the benchmark DAX index collapsed by 196 points, or 2.16pc, to 8809.83, bringing the falls for the week to more than 4pc.
Investors were concerned about the slowdown in the German economy as exports in August reported their biggest fall since January 2009 when the global economy was rocked following the collapse of Lehman Brothers. The CAC 40 index of leading shares in France was also 63.9 points, or 1.5pc lower, at 4,076.27 by midday.
In London it was travel stocks which led the market lower on ebola fears, with TUI Travel down 7.34pc to 330.7p and Carnival the cruise ship operator falling 3.3pc to £21.93. Oil related stocks were also feeling the pain as African oil explorer Tullow Oil fell 5.6pc to 539p, and Weir the Scottish based manufacturer of industrial pumps used in the oil industry, was down 3.2pc to £22.26.
Hold on tight, it’s gonna be a bumpy ride.
Your money is worth less, because of debt. Government, corporate and personal.
Prices are going up (RRP) but the intrinsic value (production) is the same or lesser (growth stagnation).
“The risk in all this is that when everything is entrepreneurial perhaps nothing is. Is it time to speak with a new term? Maybe those who undertake the risks of starting a new for-profit company are really in the business of “firm formation.”