Are the Worlds Stock Markets and Commodity Bubbles Peaking?
Stock-Markets / Liquidity Bubble Jun 06, 2007 - 01:19 PM
Get this:
- China is serious about slowing their stock bubbles. They just increased a stamp tax to .3% on stock sales, formerly a .1% rate. This is not a miniscule amount because it is assessed on every trade - they add up. China has raised interest rates repeatedly, and their senior economic leaders have stated that their stock bubbles are rising too fast. China intends to cool their bubbles. More on that, but they may be the ones to break the entire world financial bubbles - first - judging on the reaction to their February 9% stock declines that led to two weeks of serious Asian market crashes - and one 500 point drop in the US DOW - that led to so much volatility that Dow fell behind in the quotes for several hours that day.
- China's manufacturing purchasing index declined from 58.6 to 55.7. I posited last week or so that China manufacturing boom will be telegraphed by dropping base metal demand in things like copper, and that commodities would likely telegraph any slowing in China before economic data does.
- ECBs Trichet, and Bernanke, have just stated - again - that the world financial markets are not taking into account the risk out there - ie they are in a semi euphoria. The last time we heard comments such as these from the ECB - within a month or two, we saw the February stock crashes in Asia led by the Chinese.
- The BOJ Fukui just stated that hedge funds add welcome liquidity to markets, but also add unwelcome volatility in stress presently.
- The Hong Kong monetary authority recently stated that they are concerned that derivatives are an increasing danger and that it is of unknown extent. (Fed has also stated this, as has the ECB and the BOJ.)
- A month or so ago, I wrote an article that stated that world stock collapses will likely lead to the next world recession. Reason: stock gains worldwide have buffered the real estate declines here in the US and also abroad. When the stocks let go, the last remaining buttress of US consumer confidence will flag. Certainly, US GDP performance of about .3% annualized is not behind any consumer confidence at this time.
- The Chinese stock market has had repeated days of 7% or more drops for a week. It dropped 7% Tuesday, and rapidly made all that up and gained about 3% on the day. That market could be telegraphing that it is about to take a real hit, and, if so, we will likely see another repeat of the Asian stock crashes, and who knows if it will follow into the Dow this time? The last episode of that in late February led to two tense weeks of stock crashes, but were forestalled by a lack of follow through on the US side. Shanghai might recover – or might not.
- The US stock market is looking at inflationary pressures here, and it seems possible the Fed may either keep rates where they are, or even raise, as the rest of the world finds itself in a rising interest rate environment - the EU, China, rising interest rate pressures in Britain, Australia, Canada, and even possibly Japan. Gold is reacting to expectations that the US may not lower interest rates. Higher interest rates are gold suppressive generally.
- IF world interest rates rise further, all the accumulated leverage - stock margins, derivatives, the massive Yen carry trade, and record consumer debt could easily lead to a peak in world financial markets - followed by stock crashes and economic contraction related to consumer spending. The world financial/stock bubbles are based on leverage. When the leverage money peaks, markets will have to unwind.
- We have differing figures on consumer confidence - the Housing market is in serious decline here in the US, but wage growth in the US appears to be positive - and non housing related economic activity appears ok, but of course the auto industry is severely in recession.
- The EU and China are showing strong growth, Japan is ok. But China and Japan are vulnerable to stock sell offs - their markets are highly leveraged. If the Asia cannot overcome a drop in US demand for their exports, there is little rationale for their financial markets to stay elevated. IF their own consumers are supposed to take over a drop in demand from the US consumer, a big stock drop will prevent that from happening. China has 100 million brokerage accounts now, rising at up to 500,000 new accounts a day. A collapse of their stock mania will severely hurt the middle class.
- There is record brokerage margin money out. There is record insider selling in the US since 2000. There is record corporate buyout activity and mergers. Half of all corporate buyouts are for companies that are not profitable! Did you know that?
- There is huge stock buy back activity - backed by new corporate debt.
- Debt is at record levels in most major western economies - The US, Britain, Australia are prime examples. Consumers are going into bankruptcy in increasing numbers in these nations.
- Record corporate stock repurchases, M&A, and buy outs are classic stock bubble phenomena, as is record insider selling.
- It is stated that much of the stock increases in the last year or so are due to corporate buy backs, mergers and buyouts that are taking stock out of circulation in public markets. When this phase peaks there will be perhaps little further impetus to world stock bubbles -
- Increasing interest rates world wide are putting pressure on all the leverage and margin in world stock markets. Rising interest rates will continue to be a problem till the markets all start to tank. The logic is that, if that happens, central banks will lower interest rates- but if investor sentiment is hit badly, will it be fast enough? With all the leverage, every one and his dog has out - public, corporate, government, and the pan leverage of the Yen carry in all financial markets - I rather doubt the world central banks would be able to effectively rekindle world financial markets if there are crashes that spread further, like the late February crashes in Asia and briefly here in the US - and started with the way over inflated China stock markets.
Commodities are in a bubble
Commodities are in a bubble, partly driven by demand from nations like China, but I believe people underestimate the extent of speculative froth that has built up in them - copper as a prime example. If there are any significant drops in demand from China and the US, for example, not only will inventories start to rise, but all of that speculative froth in commodities will flee out - leading to rapid and enduring falls in prices and indexes.
The warning signs are there
I could list another 3 or 4 times the examples - as above - of why I am sure that we are at the peak of the world financial/stock bubbles. In particular, any weakening of the US/China industrial / trade economy will lead to rapid unwinding of stock and commodity markets, because speculative froth will flee, among other things.
My subscribers have been following these trends for months. They are major reasons why I have stated that commodities are going to be at risk of big falls, and that gold will be associated. Stocks in general will be hit badly if a crash happens and is not contained. There are always risks of some major geopolitical event that can spike gold, in particular, but overall, the macro environment is clearly looking to peak in commodity and financial markets - probably this year.
It is my belief that the world is going to see major stock sell offs this year. The latest drops in February, and China's stock weakness, are only the first stages. As I said, there are many reasons - not just looks at the stock indexes.
By Christopher Laird
PrudentSquirrel.com
Chris Laird has been an Oracle systems engineer, database administrator, and math teacher. He has a BS in mathematics from UCLA and is a certified Oracle database administrator. He has been an avid follower of financial news since childhood. His father is Jere Laird, former business editor of KNX news AM 1070, Los Angeles (ret). He has grown up immersed in financial news. His Grandmother was Alice Widener, publisher of USA magazine in the 60's to 80's, a newsletter that covered many of the topics you find today at the preeminent gold sites. Chris is the publisher of the Prudent Squirrel newsletter, an economic and gold commentary.
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