The Amnesia Market

Markets have short memories.

10 trading days into 2016, China shocked the markets with a currency devaluation, wiping off US$4 trillion (AU$5 trillion) in a couple of days.

Shortly after that, the Brent crude price dropped to a 12-year low of US$27.10 (AU$34.51) per barrel.

Many speculated this price fall would trigger the collapse of the US shale industry.

Few market commentators believed the US shale industry was profitable with oil trading at this price. 18 months on, colleague Greg Canavan, editor of Crisis & Opportunity, pointed out in a special report that the US shale oil industry is nothing more than a mirage.

Then, before January was over, the Bank of Japan sent interest rates into negative territory, causing investors to dump Japanese bonds as yields crashed to nothing.

Come the middle of last year, markets were pelted after the Brexit referendum — causing the FTSE to fall 7% on vote night. Shortly after the Brexit vote, Italian banks were found to be loaded with one third of the Eurozone’s non-performing loans.

And to finish the year, China’s debt levels suddenly mattered to market-watchers, raising alarm. With the yuan pegged to the US dollar, concerns were mounting that any interest rate increases from the Federal Reserve would have major implications on the Chinese market.

More than a year later, none of this seems to matter.

None of this matters because the market has a short memory.

And this month is evidence of how quickly the market forgets and moves on.

September 2017 marks the 10-year anniversary since the start of the financial crisis.

Yet no one seems to be talking about it. In fact, the crisis that almost broke the global financial system a decade later doesn’t appear to be on anyone’s mind.

Take this from The Times of London in July this year: ‘Property prices in Britain have risen sharply in the past 20 years.’

Except UK property prices dropped almost 30% in some areas of the UK from 2008–09.

As UK property prices crumbled, papers were littered with headlines like this one from The Guardian: ‘House price plunge fuels recession fear’. Or this one from The Economist: ‘The Bubble Bursts’.

In 2008, the UK property market was rapidly decreasing in value. Almost a decade later, The Times seems to have forgotten about that.

At the centre of the storm back then was the UK’s Bank of England chief Mervyn King.

The past few years has allowed King some thinking time and, in his book, The End of Alchemy, he explained that what caused the property crash at that time is no longer a problem today, writing:

Whether it was Northern Rock or Bear Stearns, it was inevitable that a crisis was going to occur. The banking system as a whole was very highly leveraged. It had on its balance sheet a large volume of assets that were very difficult to value and no one could work out what the exposure of one individual bank was.


Banking Industry in Better Shape Now?

A decade on, there now seems to be a widespread faith that the structural banking issues which created the crisis have been fixed.

Those in charge at the time — and even now — want us to believe the banking industry is in better shape than it was 10 years ago.

Even Federal Reserve chairman Janet Yellen says another financial crisis ‘in our lifetime’ was unlikely.

The thing is, if central banks were too big to fail a decade ago, you can bet your fiat dollars some of those banks are even ‘bigger to fail’ now.

Bank of America’s balance sheet is 50% larger than it was in 2007.

Funds management groups are also far bigger now than in 2007. Take fund management firm Blackrock for example. Today, it has four times more funds under management than before.

Oh, and all that Chinese debt that spooked markets at the end of 2016? Well, Chinese banks are now the biggest banks in the world.

Here’s what really sticks the boot in. Global debt is now US$70 trillion (AU$89 trillion) higher than it was 10 years ago.

But hey, markets have short-term memories.

New Property Bubbles

Already, new property bubbles are popping up all over the world. Again.

Which is something my colleague Phil Anderson, editor of Cycles, Trends and Forecasts,  said would happen. To date, he’s the only person I know who has predicted not only the market downturn in 2008…but the rosy market upturn since the financial crisis.

Where are all the bubbles building up now? Bitcoin could be one, but Sam Volkering, editor of Secret Crypto Network, says you should hold onto your hats, as today’s bitcoin price of US$4,210 (AU$5,363) will look like chump change in the future.

The Aussie property market has been labelled as being in a bubble for the better part of two years now. It was only a few years ago that I was rooting for a US-style Aussie property crash myself.

But it never came.

In spite of Aussie house prices being at all-time highs — and Aussie households sitting on a record indebtedness of 190% to their income — the proverbial house of cards has yet to blow over.

Phil tells me that it has nothing to do with the banking system. It’s a matter of ‘land value’. Falling land values caused the last crash. After trudging through centuries of economic data, he says land values have been deliberately ignored.

While Phil says another property downturn is definitely going to happen, it’s much, much further away than we think. The way he sees it, we are seven years into a new cycle. Even though each cycle isn’t the same, they are remarkably similar.

You just need to understand how the cycle works to locate when the next downturn will begin, as Phil explains here.

Markets may have short memories when it comes to a crisis. But the underlying factors that cause them don’t change.


Shae Russell,
Editor, Money Morning

Shae Russell started out in financial markets more than a decade ago. Working with a derivative brokering firm, she helped clients understand derivative markets, as well as teaching them the basics of technical analysis. Since joining Port Phillip Publishing eight years ago, Shae has worked across a number of publications. She holds the record for the highest-returning stock recommendation, in which a microcap stock returned over 1,200% in six months. Ask her about it, and she won’t stop yapping on. For the past two years, Shae has worked alongside Jim Rickards as his Australian analyst, translating global macro trends for Aussie investors, and how they can take advantage of these trends. Drawing on her extensive experience, Shae is the lead editor of Markets & Money. Each day, Shae looks at broad macro trends developing around the world, combining them with her distaste for central banks and irrational love of all things bullion.

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