Markets Feel a Pain in the Neck

Global equity markets have spent months ‘shrugging off’ problems. But overnight, the weight become too much to bear. The shoulders cramped up…and markets got a pain in the neck. The Dow and S&P 500 both fell around 2%. Pick your reason why…Ukraine, Argentina, Portugal, company earnings…they are all valid reason not to keep chasing stocks to record highs.

But the primary reason for the pain in the neck was an obscure little data piece that showed employment costs rising much faster than expected. ‘Slack’ in the labour market has been one of the primary reasons behind the Fed’s lower for longer stance on interest rates. Now, Wall Street is coming around to the view that the Federal Reserve might raise rates sooner than they thought.

We’ll see about that…

But for now, the speculators are in a bit of a panic. Just as worrying is what is going on in Russia/Ukraine. The West has hastily placed sanctions on Russia, and there will be repercussions. You can see those repercussions starting to manifest on the German stock exchange, the DAX.

As you can see in the chart below, the DAX is under pressure, and last night broke below its 200-day moving average (red line). This is what happens when you impose economic sanctions on one of your biggest energy suppliers. Investors worry…and sell stocks.

The DAX — Dacked!


Of course, all this could just be another minor sell-off in an ongoing bull market. But given that US markets haven’t had a decent sell-off in years, the chances are this correction might be more than just a run-of-the-mill ‘buying opportunity’.

I know what my mate Dan Denning thinks. Recently, Dan has focussed on Australia’s defense vulnerability and economic weakness.  But his July issue, sent out to The Denning Report subscribers yesterday afternoon, took a different tack…and he pulled no punches.

In deference to his paid up clients, I can’t reveal the contents. But I can tell you they are explosive. If you’re long stocks, this report is worth the price of admission alone.

The Aussie market is off more than 1% in early trading. Will it continue to buck the trend of weaker Northern Hemisphere markets, or succumb and fall harder as the day progresses? I don’t know. Lately, Aussie stocks have rallied on renewed optimism on China and more money surging into rent-seeking banks.

I pointed out yesterday that the banks are huge beneficiaries of the land bubble. By the way, that’s what I’m going to start calling it from now on…a land bubble. It’s not a housing bubble. Housing, the structure on top of the land, depreciates. It’s the land value that rises. As Phil Anderson  repeatedly says, it’s the land that captures the value created by a nation’s economic progress. And banks own the land.

Check out this chart of the Commonwealth Bank [ASX:CBA], the largest land owner in Australia. On Wednesday, it broke out to new highs, with more follow through buying yesterday. The Aussie market duly followed. In our asset/debt dependent economy, what’s good for the CBA is good for the market.

CBA — no worries

Good for the country though? Not so much. It’s one thing for land to capture the economic wealth of a country, but when we leverage that wealth with truckloads of debt, it turns into a land boom/bubble.

When we leverage it with foreign money created by a central banker’s keyboard, well, it’s hardly stable finance underpinning the boom. Australia’s day of reckoning may not be here yet, but it’s coming. And there’s nothing Glenn Stevens, Tony Abbot or Joe Hockey can do about it.

Why? Because the whole global financial system operates on confidence. Central bankers create great wads of liquidity that then flow through the financial system and come out into the real economy as ‘capital’. But in reality, liquidity and capital are two separate things.

Real capital (mostly, not always) invests prudently and productively. It is not liquid, meaning it can’t readily turn into cash. Liquidity transformed into capital takes on a whole new demeanour. It ‘searches for yield’, ignores risk, jumps on trends, gets excited and scared in equal measure depending on which way the wind is blowing.

In short, it’s a fickle little thing. It knows it’s at risk of having to turn back into ‘liquid’ securities if a change in confidence demands it. Against this backdrop, the CBA and other banks are now offering 30 year mortgages as standard in order to make land more ‘affordable’.

A 30 year asset versus a short term liability? Better hope those foreign lenders keep their confidence up. If they cease to roll over their liabilities, or decide to start asking for a little more compensation for their risk, then the land bubble is over. It happened on a massive scale in Australia in the 1890s, and it can happen again.

It’s true that banking has always been about borrowing short term and lending long term…but the world is now in a period of the greatest asset/liability duration mismatch ever seen. Modern finance (shadow banking) has monetised every long term asset in the world and turned it into ‘cash’, or something resembling it in the mind of the investor.

This means confidence is the lynchpin of the system. It’s confidence that makes the extreme duration mismatch manageable. It’s confidence that keeps everyone thinking that central banks will keep levitating markets. Once that confidence goes, it’s lights out as the dash for cash starts.

I’m not saying we’re there yet. It could still be a couple of years away. Or not. I’m just warning you that you’re living in an age of deranged and crony capitalism where governments and the elites have firmly taken over. What keeps the system going (to their benefit) is your belief and participation.

How you deal with this system when it comes to your investments is something all of us here at Port Phillip Publishing work on in our paid publications. Some of us will be right, and some wrong. But we’re walking into this storm with our eyes open. If you keep yours open, you’ll come out the other side…maybe a little worse for wear, but you’ll be OK.

Those stumbling around blind, on the other hand…

On this front, I’m pleased to let you know that our latest project, the Albert Park Investors Guild, launches tomorrow. It’s different to anything we’ve done before. It will give you the opportunity to take advantage of the ideas and strategies from Agora’s (Port Phillip’s parent company) best analysts around the world, including Agora’s founder, Bill Bonner.

It’s a project our Managing Editor, Bernd Struben, the Chairman of the Guild, has been developing for the last five months alongside Investment Director Meagan Evans. What they’ve developed is no less than three strategic portfolios that Australians can use to grow their wealth, substantially, without the big inherent risks associated with many of the strategies investors employ today. It’s a fascinating insight into Port Phillip Publishing and our wider network…and for the first time it’s being opened up to you.

Watch out for Bernd’s exclusive invitation tomorrow, shortly after your weekend edition.


Greg Canavan
For Markets and Money

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Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:


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