Serious sharemarket wobbles
Serious sharemarket wobbles
Global Investors got proppper spooked over the weekend, starting with Japan
The VIX
I like to keep an eye on the VIX. The VIX, or the Volatility Index, is a real-time market index that represents the market's expectations for volatility over the coming 30 days. It is often referred to as the "fear gauge" or "fear index" because it tends to rise during periods of market uncertainty or stress.
Over the weekend, the VIX had its third largest jump in history (after COVID and Lehman brothers collapse). So this doesn’t just seem to be a normal sharemarket correction, something big is potentially happening or about to happen.
Things feel to me like we may be on the cusp of a “Black Monday” situation that we had in 1987. Even if you don’t own any shares, a global sharemarket meltdown is going to affect everyone as people run for the exits, so it may pay to prepare.
The Japanese Market
Market trouble started in Japan because the central bank of Japan finally raised interest rates into the positive, setting them at 0.25%, after them having been zero or negative since 2016 (which was their previous strategy for boosting economic growth and staving off potential deflation).
With a positive (although tiny) real interest rate, this means Japanese companies can no longer borrow money for essentially free (0% + retail bank margin), making them less profitable, and less profitable companies have a poorer share price, therefore triggering the selloff in Japanese stocks.
The Japanese sharemarket was down about 12% at time of writing, which was it’s worst day for 37 years - worse than the 2008, 1997 or the 1987 sharemarket crashes.
The new positive interest rate at Bank of Japan is also affecting what is known as the “Japanese yen carry trade”, this is where investors have historically borrowed money in Japan at zero or negative interest rates, and then invested this in US or other stocks, making a positive margin.
With Japanese interest rates rising higher, this is strengthening their dollar against the USD, meaning that people who borrowed in Japan and then bought USD assets will lose their profits in currently exchange rate losses. As people are moving out of the Japanese carry trade this is causing all kinds of instability.
The US Markets
A few days ago the US Federal reserve kept interest rates steady at 5.5%, disappointing investors who were hoping for the fed to start cutting rates. Because the US Fed didn’t announce a rate cut a couple of days ago, fears of a serious US and therefore global recession started building.
If the US sharemarket really starts melting down, the Fed may be forced to have an emergency meeting, do an about face, and start cutting rates immediately - which will be embarrassing for them, as it points out to everyone that they made the wrong decision on rates just a couple of days prior. Still, no-one can predict exactly when a market melt-down will occur, not even the Fed.
As a result of market instability and a poor US jobs result, US Bond yields fell off a cliff, which basically says that people holding bonds expect to get a worse return going forwards.
The trouble with the Fed cutting rates, even reducing rates to zero like in 2008, is that unlike all previous crashes since 1970, this time inflation is already high. Usually when a central bank reduces rates, it can help stave off a recession or a sharemarket crash, however lowering rates increases inflation. As inflation is already high, it is likely to explode higher, putting an existential risk of the US dollar going into hyper inflation.
The US is in the middle of a sovereign debt crisis which no-one seems to want to come clean about, as it’s an impossible problem to solve. The US national debt is now $35 Trillion dollars, which is over $100,000 that they owe for every man, woman and child in the USA. The only solution is for the USA to go bankrupt (not going to happen), or they will just keep printing money until it’s worthless. My personal belief is that the USD is going to become worthless, but the time scale is anyones guess.
The Oracle of Omaha
Warren Buffet has been quietly, and then noisy selling off shares the last year or so, sitting on a larger and larger pile of cash. Buffett now has a $277 Billion dollar cash pile, which is more than the US federal reserve, and If there is one thing that Buffet is better at than anyone else, it’s picking the timing of the market.
It’s pretty obvious that Buffett is picking an almighty sharemarket crash as he cashes out of all stocks, and one the big one finally does come, he’ll be perfectly poised to pick up everything not bolted down for pennies on the dollar.
The financial reality for Americans
As the saying goes, when America sneezes, the rest of the world catches a cold, so I hope the USA turns things around economically, but it’s worth pointing out that these sharemarket wobbles are only the symptom of much larger issues being caused by the gigantic US national debt. The US economy is like a pressure cooker, and the national debt is cranking the pressure up and up. We don’t know when the pressure cooker is going to explode, but we can see that it’s starting to shake.
On the ground in the USA:
Inflation has been at or above 3% for 39 months.
A record number of Americans are juggling multiple jobs.
About 9% of credit card balances are now delinquent.
US Auto Loans are at their highest delinquency rate in history.
Housing market affordability is near record lows.
Mortgage demand is at its lowest in 30 years.
The US Dollar has lost 25% of its purchasing power in just 4 years.
As the US Markets are the worlds largest, when they blow we are all going to feel it, as we already are.
What can I do?
Maybe you have shares, maybe you don’t. If you get really worried about 2008 style global financial melt down, as I always say there is gold. While gold won’t make you any income, it’s an essentially risk proof and inflation proof wealth preservation asset. Probably the biggest threat to the average person is inflation constantly eating away their savings, and that problem is likely to only get worse for the foreseeable future. If you have savings, put them in Gold or property that’s not over leveraged.
Unfortunately, central banks around the world were able to “print their way” into consumer confidence despite covid, but since there is now a lot more money floating around, and the same about of global “stuff”, inflation is going crazy and it’s going to keep eating away the value of currencies around the world for the foreseeable future as far as I’m concerned.
Disclaimer: I am not a financial adviser, I just have an interest in economics. Please do your own research and seek advice before making any investment.