Black October

di Finanza Operativa 11 Settembre 2017 | 14:00

A cura di Walter Snyder, Swiss Financial Consulting

Market observers generally agree that US asset prices, namely, stocks, bonds and real estate, are expensive if not over-priced. This Newsletter has foreseen a strong correction if not a crash in the US stock market for the second-longest rally in history, probably in October 2017. Given the excessive indebtedness globally and the low-interest environment created by the Fed, ECB and BoJ plus various bouts of QE, it will be extremely difficult for central banks to do much about a recession when it comes. They are out of ammunition.

The stock rally goes on and on without any correction reaching 3%. What is different about the current situation is that central banks intervene in bond and even stock markets. The PBoC took measures to counteract problems in Shanghai last year, and the SNB (Swiss National Bank) has more than US$ 80 billion of American stocks. The Fed balance is over 4 trillion while divestment has barely begun. The ECB balance is also extremely high. In Japan monetization of the markets has reached the point where price discovery is hard to find.

As the rally continues, investors come to believe that it will go on forever, and margin debt is at record levels. The deal worked out by President Trump with Democrats to postpone the real debate on raising the debt ceiling to December will help to make the continuation of the rally seem more certain for at least another quarter. One may expect a surprise Christmas gift from Congress.

In 2000 it seemed that the rally would go on for a long time, and even experienced managers predicted ever higher stock prices. Investors rushed to buy stocks in order not to be left behind as the market surged, but then the crash came. In 2007 very few saw the signs of the coming disaster.

This time is different because a lot of observers have noted the length of the rally and the concentration of gains in a small number of tech stocks revolving around the Internet, all in a low-interest environment full of liquidity thanks to QE with extremely low volatility. The hurricane season may yet come to Wall Street and summon up a Wagnerian Twilight of the Gods. Gold will still be a good bet to weather the coming storm.

In the event that the rally goes on for a longer period, then we shall have to live with low interest rates, extremely high P/E ratios with unrealistic stock prices while pension funds and insurance companies struggle. The rich will become a lot richer while the poor will have to be content with panem et circenses.

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