The S&P/ASX futures were down 124 points this morning before the market even opened. You already had a pretty good idea that what happened in New York (the Dow fell 360 points and 2.6%) was going to happen in Sydney. More or less.
So will it be more or less? There’s nowhere to hide on the ASX this morning, as every single sector is in the red. All twelve GICS sectors (Global Industry Classification Standard) are down by at least one full percentage point. Financials are down by almost two and a half.
Yet there are obvious differences between Australia and America. The Australian market is heavy on resource stocks, correlated to China. The American market is heavy on financial stocks correlated to the subprime disaster.
Australian banks seem relatively unscathed from the global credit crisis, as evidenced by robust earnings, while Morgan Stanley reported a US$3.7 billion loss on its subprime assets and Andrew Cuomo, the attorney general for the state of New York, has launched an investigation into mortgage lender Washington Mutual (NYSE:WM) and the two government sponsored enterprises, Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE).
These seem like economies headed in opposite directions. The yield spread between benchmark interest rates in the two countries is widening, driving the Aussie dollar to parity with the US dollar, the gold price beyond US$830, and oil within spitting distance of US$100.
When things get so stretched, you expect them to break. Or in this case, decouple. But will they? Or will the bear market in credit be indiscriminate in its mauling of global equities? Judging by the sector data this morning, the bear looks like he’s blinded by blood lust.
Beyond the equity bear is the economic bull. “Australia’s economy will continue to bump up against growth speed limits, with odds now increasing that the Reserve Bank’s meeting in February will bring another interest rate rise,” writes Vanessa Burrow in the Age. And that is a whole other kettle of fish. Can the Aussie economy keep on careening down the road of globalisation at 150km/h without flying apart at the seams?
Here we advance a new theory. Looking for an asset class that provides refuge and a store of value during a bear market in credit is going to be tough. The entire world has been over-stimulated…for nearly 50 years.
Cheap money and cheap credit have made possible a feverish level of economic activity that is due for a massive correction, at the very least. The great stomach of the global economy will contract and all the contents of those bad loans will be vomited down the toilet.
As the price of energy and money goes up, some things will do well, like oil and gold. But we begin to wonder if the great over-stimulation of the last fifty years is going to lead a great fever too. Inflation is the symptom of an over-stimulated body economic. The binge is characterised by soaring asset values, or, as we know now, asset inflation.
The purge is deflationary, especially for financial assets. And we are beginning to think that in China and America and all around the world, high energy prices and the bear market in credit are just the thing to trigger the purge.
Markets and Money