For the latter part of 2014 and all of 2015 I had a fairly dim view of committing new capital to U.S. stocks. This view was largely predicated on the idea that U.S. central bank policy was nearing a divergent path to that of most of the rest of the world. The necessary deleveraging in Europe, Asia and South America had the potential to suppress global growth for some time. And that deleveraging could produce the sort of crisis in those areas as what happened here in the 2008/09 and in Europe in 2010.
Much smarter peeps then myself say central banks have little choice but to continue on their path of easy monetary policy in their efforts to stimulate growth, but what’s really needed is the sort of fiscal stimulus instituted by the Chinese to the tune of a half a trillion dollars that got the global economy off of the mat in 2009. In hindsight that very fiscal policy caused a massive super cycle in commodities that ultimately led to massive excess overcapacity that has resulted in a massive implosion in industrial commodities and related industries which will be ground zero for the next credit crisis. Kind of a chicken or an egg sort of thing. Investors in risk assets have reason to be cautious about increased fiscal spending in China, as we know how this will end, at a time where they desperately need to take out industrial capacity as the company attempts to transform their economy to consumer led as opposed to industrial. There was a great read in the FT from Monday on the challenges of this transition (China’s state-owned zombie economy).
Our country could obviously use the tailwind of massive public works to rebuild our infrastrcture, but that would have to be a late 2017 early 2018 thing given the fact we are in an election year. And fat chance in Europe as they grapple with an increasingly worsening refugee crisis that has the potential to bring the political process to its knees given the differing views on the situation among EU members. And Brazil and Russia? Unless oil prices can at the very least stabilize (rise, then maintain gains above $40) these two are likely bankrupt with the potential for massive political upheaval. Fiscal stimulus is fairly unlikely on a massive scale, and could only be undertaken with massive credit expansion, which has the potential to increase the crisis of a credit contagion. As Bloomberg Gladly highlighted last week as it relates to China, credit has expanded of late a massive pace, as growth is at its lowest levels in 25 years, and stagnating, while non-performing loans are increasing:
My main point is simple (but unpopular) Like the U.S. in 2008/09, the rest of the world will eventually have to take their medicine and have a massive debt deleveraging event which will likely result in a similar financial crisis. Investors in global financial stocks seem to acknowledge this possibility. Investors in sovereign debt get it. Until very recently this was embedded in high yield corporate debt. Investors in gold have recently become keenly aware of the growing risk. As well as those who continue to keep the US Dollar well bid, 25% above its 2014 lows and 35% above its 2011 lows. The only set of investors who don’t seem to care are those who think that large cap U.S. stocks will make new highs some time soon.
At the risk of sounding stubborn, my view of the growing risk of a global credit contagion has not changed. And the SPX’s nearly 10% rally off of its recent lows doesn’t change that view. At the very least the market remains in in a downtrend until proven otherwise. And quite possibly we’re in the middle of a fairly epic top:
So why is this rounding top different that 2010, 2011 and 2014? Plain and simple, trillions more in global debt, lessening positive impact of monetary policies the world over, stagnant global growth and plain and simple the lack of overly accomadative monetary policy in the U.S. (and for now a very strong dollar).
U.S. stocks have staged a massive 2 week rally. Commodities have stabilized and fears seem to be easing in credit markets. But nothing has changed fundamentally. Which means it’s still realistic to say the worst is yet to come.
“Man, Money ain’t got no owners, only spenders” – Omar, The Wire