Pop the champagne! And I mean the real stuff from France’s Champagne region. Not some generic sparkling wine imposter.
The French election results are in and…we can all breathe easy. The world and global stock markets have never been safer. Or at least not in almost a quarter century.
That’s right. Apparently 39-year-old Emmanuel Macron’s trouncing of Marine Le Pen at the voting booths has laid France’s — and the world’s — other problems to rest. At least according to the CBOE Volatility Index, which this week fell to its lowest level since 1993.
In case you’re unfamiliar with it, the Volatility Index, or VIX, is used to measure market risk. You may have heard it referred to as the ‘investor fear gauge’.
The VIX is now trading at a 24-year low.
According to Business Day:
‘For investors already looking at record-low price turbulence, the defeat of far-right candidate Marine Le Pen means even more risk removed from the table…
‘“Complacency has returned in such quick fashion that it’s starting to feel like 2005–06, when nothing seemed to faze the broader markets,” George Goncalves, a fixed income strategist at Nomura, wrote in a note to clients.
‘Volatility in the US equity market has dissipated as stock investors whistled past geopolitical unknowns from populist politics to heightened threats from North Korea.’
Wow. Talk about whistling past the graveyard.
George Goncalves makes a good point. 2005 and 2006 were undoubtedly heady days in global markets. Here in Australia the ASX 200 gained 40% during that two-year run. And it wasn’t done yet. The index continued to soar until October 2007, when it hit 6754 points — up 64% since January 2005.
Investors were making millions…at least on paper. Of course, those who stayed in the market, blissfully whistling, soon puckered up.
I’m sure you remember what happened next. It was down, down, down for the ASX 200 until the index bottomed in January 2009 at 3344 points. Roughly a 50% loss in only 16 months.
Not to worry though. With the VIX at its lowest level since 1993 — yep, lower than it was in 2007 — surely the markets can only go up, up, up from here. When the herd is complacent, you may as well join the party, right?
Well, after you finish off your champagne, you may want to consider the following. Don’t share this with the herd though. Wouldn’t want to start a stampede.
World’s growth engines slowing
First, this headline from The Telegraph: ‘Global recession risk rises as the US and China tighten into the storm’. The article goes on to warn that investors, happily awaiting solid global growth fuelled by expansionist policies in China and the US, may be bitterly disappointed:
‘Analysts at UBS say the international credit impulse has already “collapsed”. The two economic superpowers are both tightening policy into an approaching storm.
‘The US bond market has been signalling for two months that the American economy is still uncomfortably close to a deflationary relapse, an implicit judgment that the US Federal Reserve is about to commit a policy error…
‘The slump in US economic growth to 0.7 per cent (annualised) in the first quarter suggests bond holders are right. There are now enough indicators flashing recession warning to take serious heed.’
If that’s not enough to ruffle your complacency, the same article notes that, in China:
‘It now takes 13 yuan of new debt to generate one yuan of growth. Beijing began stealth tightening six months ago. This is turning into a full-fledged effort to rein in the $US8 trillion shadow banking nexus.’
But who cares, right? After all, the French just elected a pro-EU moderate. And as we all know, France is an economic powerhouse…sure to drive the global economy and stock markets to new heights.
Well, much as the French may wish this were the case — and they do — the numbers tell a different story. According to Statistic-Times, in 2016 the US represented 24.7% of global GDP. China made up 15.1%. That means the two biggest economic powers together comprised 39.8% of the world’s gross domestic output.
And France? 3.31%.
We’ll let the numbers speak for themselves and turn our attention back Down Under.
Here at home, runaway housing prices — particularly in Sydney and Melbourne — continue to constrict consumer spending. As reported by The Age:
‘Mortgage repayments have become a huge struggle for a significant chunk of Australians…an ANU survey shows that one-fifth of people are struggling to meet mortgage or rent payments, with 2 per cent having fallen behind. Almost a quarter said they would be in quite a bit or a lot of difficulty if interest rates jumped by two percentage points…’
It’s no surprise then that retailers are feeling the squeeze across Australia. Citi economist Josh Williamson, as quoted by Business Day, had this to say about the struggling sector, ‘The retail sector is verging on recession. Retail trade growth has now been negative in three out of the last four months…the sector’s worst performance since July to November 2012.’
In a consumer-driven economy like Australia’s, that’s not good news.
But the purpose of today’s Markets & Money isn’t to spread a message of doom and gloom. It’s to point out that you need to be alert…especially when the majority of investors are complacent.
You need to be alert to the slump in US growth; and to the fact it takes 13 yuan of new debt to generate 1 yuan of growth in China; and that more and more Aussies are struggling to meet mortgage payments; and that the Australian retail sector is seeing its worst performance in almost five years.
Does this mean the Australian economy is set for a deep recession? Or that the stock market is going to plunge by 50% or more this year? Not necessarily. But it could. And that’s something every investor needs to keep in mind.
No one keeps closer tabs on these kinds of ‘crash indicators’ than my fellow Markets & Money editor Vern Gowdie. He’s gone so far as to write a detailed book about how you can spot the warning signs…and what you can do today to prepare for the inevitable market crash ahead.
And a market crash is inevitable. Only the timing remains to be seen.
You can find out how you can obtain a hard copy of Vern’s book here. If an ounce of prevention is worth a pound of cure, this book is worth its weight in gold.
For Markets & Money