When The Stock Market Hits A Wall, Prices Will Crash

The news has been full of the callous, senseless killings of five police officers by a sniper in Dallas, Texas.

It happened last Friday evening, US time.

The news has focused on two points. The first is the disproportionately high number of African-American men killed by police officers.

The second point has again been on the need for gun control in the US.

But as you know, at Port Phillip Publishing, we don’t look at the news on the surface; we dig much deeper. We look and analyse areas most folks dare not touch.

We look at the news (financial and other) with a cynical and sceptical eye. We spot hypocrisy, highlight it, criticise it, ridicule it, and, occasionally, laugh at it.

In this case, laughter isn’t in order. I would like you to read the following extract from a Financial Times article on the Dallas shootings:

The police chief said officers cornered the suspect on the second floor of a building in central Dallas. But when negotiations broke down and gun shots were again exchanged, [police chief] Mr Brown said that police “saw no other option but to use our bomb robot and place a device on its extension for it to detonate where the suspect was.”

I’d like you to stop and read that quote again.

In short, the Dallas police chose to blow the suspect to smithereens. They chose to blow him apart.

For the past several years, Western politicians and media have railed against the violence of ISIS in the Middle East, or the insanity of North Korean leader, Kim Jong-Il.

They’ve retold in gory detail how ISIS stones men and women to death.

They’ve retold how ISIS has taken criminals or infidels to the top of tall buildings, throwing them to their deaths.

They’ve recounted stories of how they’ve put people in cages, before setting them on fire.

They’ve retold unconfirmed stories of the North Korean leader executing enemies by ‘feeding’ them to dogs.

But, when the Dallas police chief decides to ‘blow up’ a suspect with a bomb…it garners little more than a passing and casual remark in the media.

As I’ve said all along: Don’t worry about civilians owning guns, worry about the state and its unflinching ability to sink to new lows when it comes to applying justice.

The dreadful return of the pernicious wench

The markets are roaring again. And by markets, we mean the stock markets.

The Aussie market is up nearly 2%. US markets closed on Friday up well over 1%. Why all the market smiles?

Well, based on what we heard on CNBC last Friday evening, the US market is in ‘Goldilocks’ territory. A curse upon her.

We’ve had trouble with that woman before. It’s the idea that everything is just right in order for the economy to grow and, therefore, for stocks to go higher.

And the reason for the CNBC believing the economy is doing a Goldilocks?

Bloomberg reveals all:

Japanese shares surged the most since April, with industrial and mining stocks driving a rebound in the Asian equity benchmark after the S&P 500 Index flirted with a record close on Friday following stronger-than-expected data on the American jobs market.

But wait a minute.

Let me get a pencil.

And some paper.

And a pair of half-rimmed glasses.

And a green table lamp.

A leather chair. And an old teak writing desk.

I need to do some thinking…

If the US jobs data was better than expected, doesn’t that mean the Fed could increase interest rates?

And isn’t that why the market had gotten all snippety this year?

The market is worried about interest rate rises, right?

Oh, do keep up.

The original prospects of the US Federal Reserve raising interest rates several times this year have now virtually disappeared.

According to the futures market, there is less than a 10% chance of the Fed increasing rates even once between now and the November meeting.

The probability of hiking rates rises to 20.6% at the December meeting.

In other words, if you think the Fed will raise rates this year, as they might say, 191 miles north east, along the I-95 freeway, ‘Fuhgedaboutit’.

Bloomberg has more on the state of the global economy:

Call it the drift economy. The world somehow manages to stay afloat yet doesn’t go much of anywhere very fast.

Supported by a surfeit of central bank liquidity, the world has skirted numerous hazards and grown at a steady, albeit unspectacular, pace since 2010. And it looks set to do it again in the coming year, slowed, though not swamped, by the U.K. vote to leave the European Union.

Didn’t you know a limp economy, with the Fed Funds Rate at 0.5%, is the new definition of a Goldilocks economy?

Call your broker, it’s time to buy, buy, buy.

And it’s not just the global economy going nowhere. Things aren’t looking good at home in Australia either.

Again, from Bloomberg:

The silence was deafening.

When S&P Global Ratings fired a warning shot on Australia’s AAA sovereign grade — cutting the outlook to negative from stable — the announcement was met with a metaphorical yawn on the currency, equity and bond markets. While local lawmakers scurried to microphones to reassure the electorate, traders instead focused on a global bond rally that’s left little role for ratings among developed nations.

Australia’s two-year and 10-year bond yields are still near record lows.

The fact that markets are soaring based on the prospects for continued low interest rates, despite rubbish economic growth prospects, hardly seems reason to pay near-record highs in some asset classes.

The word that springs to mind for all this is ‘hubris’.

We see and read the excitement among stock market commentators. They tell us the S&P 500 closed less than one point below its highest ever closing price.

If Friday’s excitement follows through to today, it will be bunting and confetti all over the New York Stock Exchange.

But, we won’t buy it. That doesn’t mean we don’t own stocks. It doesn’t completely rule us out of buying any more stocks either.

We just don’t buy the hubris. We don’t buy the idea that the risks are in favour of investors right now.

Refer to that last quote from Bloomberg. The market doesn’t care about bond ratings. The growth outlook can worsen; nobody cares. Interest rates are staying low, and stocks are going up.

If you do want to take the risk, that’s up to you. You know we don’t get everything right. We’ve called the tops of markets before, only to see the market rally for months and years longer.

But we suggest sticking to the plan. That means limiting your risk exposure to stocks. It means having a healthy cash savings balance. And naturally, (naturally to us, anyway) it means owning gold (and silver, if you like).

This Goldilocks economy has about as much chance of being sustainable over the long term as the last Goldilocks economy.

When that one ended in 2007 and 2008, stock prices halved. Of course, Aussie stocks are already a fair way from the record high. But US stocks aren’t.

And that’s where the big risk resides. When the US market hits a proverbial wall, prices will crash. And don’t think for a moment the Aussie market won’t fall too.


Kris Sayce,
Publisher, Markets and Money

Editor’s Note: This article was originally published in Port Phillip Insider.

Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms. A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Markets and Money e-newsletter in 2005. He is the Publisher, Investment Director and Editor in Chief of Australia's most outspoken financial news service, Markets & Money.

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