Brace Yourself, The Market Is Going for a Bumpy Ride

There is turbulence ahead. Markets are bracing themselves for a bumpy ride.

In Europe, Britain is moving ahead with their separation from the EU. And the UK’s new prime minister has coined a catchy slogan to get the population on board: ‘Brexit means Brexit’.

It is not surprising they want to leave the EU.

After cutting interest rates to zero, the Euro area inflation came up to just 0.2%. Unemployment is still at a 10.1% high, with GDP growth falling to 0.3% in July.

In Spain, we keep watching election reruns. Congress has just rejected a bid from caretaker Mariano Rajoy to take office. After nine months with no government, it looks like they are heading for a third round of elections. And the political indecision is taking a toll on the already weak economy.

In Italy, the economy is also showing signs of weakness. There is high unemployment, and growth is close to zero. The government keeps amassing huge amounts of debt; the debt to GDP ratio is at 132%.

And don’t get me started on Italian banks. They are riddled with bad loans and low profitability.

Italy’s October referendum is already scaring investors. Polls say 34% of Italians will be voting against Prime Minister Matteo Renzi’s plan, with only 28% are in favour.

Much like David Cameron, Renzi has vowed to quit if the referendum goes against his wishes. And this could pave the way for a Five Star government, which has already promised to hold a referendum on the ‘Italexit’.

In Latin America, Brazil’s Olympics have ended, yet the country is still capturing the world’s headlines. On Wednesday the Senate impeached President Dilma Rousseff. Michel Temer, her vice president, who is accused of corruption, is now the one in charge of fixing the tattered economy.

Chile’s 1990 economic miracle has also ended. The drop in copper prices has led to weak economic growth, leaving the country at the precipice of a recession.

Pensioners are holding massive protests to scrap the already failing pension plan that keeps many retirees below the poverty line.

Meanwhile, Argentina has returned to the debt market after 15 years. And they are trying to make up for lost time. According to newspaper Clarin, in only six months, they have issued US$28 billion in short term high interest debt, or around 5% of GDP.

In the US, the presidency is up for grabs. The world is watching to see if unemployment figures will be enough for the Fed to hike interest rates.

And in Asia, China’s consumer sentiment indicator has fallen due to negative feelings on the job market and household finances.

In South Korea, the world’s seventh largest container shipping company, Hanjin [KRX:117930], has filed for bankruptcy. Ports in China, Spain, the US and Canada have denied entry to its ships after they lost the support of the banks.

And this is all happening in peak shipping season when retailers across the world are stocking up for Christmas.


Meanwhile, in Australia, we feel we are in the movie ‘On the Beach’. Waiting to see when and how this toxic cloud will hit us to end our 25-year recession-free streak.

The fact is, trouble is brewing in all corners of the world. And the next economic shock could come from anywhere.

We are living in a low inflation world with little or no growth. Yet the share markets have been soaring for quite some time. Take a look at the S&P 500 chart below:

S&P 500

Source: Yahoo Finance

According to the Wall Street Journal, for the last 12 months, payouts across S&P 500 companies amounted to 38% of their net income. Companies are spending large sums on paying dividends to boost their share prices.

And with lower interest rates around the world, investors are asking for more dividends, putting pressure on company earnings in turn. Take a look at the chart below on world earnings growth. Shares are trading high, yet earnings are low…or negative.

World Earnings Growth

Source: AFR

Now even the mainstream is announcing a major crash in the market. UBS analysts calculate that markets are too high from reality, and that they could fall by as much as 20%.

Worryingly, any shock could trigger this looming correction.


Selva Freigedo,
For Markets and Money

Markets and Money’s Vern Gowdie believes we’re already at the beginning of the next major crisis.

Vern is the Founder of The Gowdie Letter and Gowdie Family Wealth advisory services. As one of Australia’s top financial planners, Vern says the coming crisis is already in motion.

Australia has gone through two credit bubbles in its history. The third, and latest, has built up over the past 65 years. When it pops, the impact will leave a lasting mark. One that makes the 2008 financial crisis look like child’s play.

The fallout of this crash could damage your wealth. But you can safeguard your wealth from the worst effects of the coming crisis, provided you act now.

Vern will show you how to do this, and more, in his latest report, ‘Global Financial Crisis 2016: 3 Crisis Scenarios, and How They’ll Impact Australia’. To get your free copy today, click here.

Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the ravaging effects of hyperinflation, high unemployment, deposit freezes and debt default. Selva now writes from her vantage point here in Australia. She is lead Editor at the daily e-letter Markets & Money. And every week, she goes through each report and research note produced by our global network of trusted advisors to find the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.

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