Best of the Week
Most Popular
1.Canada Real Estate Bubble - Harry_Dent
2.UK House Prices ‘On Brink’ Of Massive 40% Collapse - GoldCore
3.Best Cash ISA for Soaring Inflation, Kent Reliance Illustrates the Great ISA Rip Off - Nadeem_Walayat
4.Understanding true money, Pound Sterling must make another historic low, Euro and Gold outlook! - Marc_Horn
5.5 Maps That Explain The Modern Middle East - GEORGE FRIEDMAN
6.Gold Back With A Vengeance As Bitcoin Bubble Bursts - OilPrice_Com
7.Gold Summer Doldrums - Zeal_LLC
8.Crude Oil Trade & Nasdaq QQQ Update - Plunger
9.Gold And Silver – Why No Rally? Lies, Lies, And More Lies - Michael_Noonan
10.UK Election 2017 Disaster, Fake BrExit Chaos, Forecasting Lessons for Next Time - Nadeem_Walayat
Last 7 days
Students, It’s Time to Prepare Your Finances for the Years Ahead - 25th Jul 17
Stock Market and Gold Stocks Trend Forecast Update - 25th Jul 17
Saving Illinois: Getting More Bang for Its Bucks - 24th Jul 17
3 Stocks Sectors That Will Win in The Fed’s Great Balance-Sheet Unwind - 24th Jul 17
Activist Investors Are Taking Over Wall Street, Procter and Gamble Might Never Remain the Same - 24th Jul 17
Stock Market Still on Track - 24th Jul 17
Last Chance For US Dollar To Rally - 24th Jul 17
UK House Prices Momentum Crash Warns of 2017 Bear Market - Video - 22nd Jul 17
Crude Oil, Gold, ETFs & more: Pro-grade Market Forecasts - 22nd Jul 17
Warning: The Fed Is Preparing to Crash the Financial System Again - 21st Jul 17
Gold / Silver Shorts Extreme - 21st Jul 17
GBP/USD Bearish Factors - 21st Jul 17
Gold Hedges Against Currency Devaluation and Cost Of Fuel, Food, Beer and Housing - 21st Jul 17
Is It Worth Investing in Palladium? - 21st Jul 17
UK House Prices Momentum Crash Threatens Mini Bear Market 2017 - 21st Jul 17
The Fed May Show Trump No Love - 20th Jul 17
The 3 Best Asset Classes To Brace Your Portfolio For The Next Financial Crisis - 20th Jul 17
Gold Stocks and Bonds - Preparing for THE Bottom - 20th Jul 17
Millennials Can Punt On Bitcoin, Own Safe Haven Gold For Long Term - 20th Jul 17
Trump Has Found A Loophole To Rewrite Trade Agreements Without Anyone’s Permission - 20th Jul 17
Basic Materials and Commodities Analysis and Trend Forecasts - 20th Jul 17
Bitcoin PullBack Is Over (For Now): Cryptocurrencies Gain Nearly A 50% In Last 48 Hours - 19th Jul 17
AAPL's 6% June slide - When Prices Are Falling, TWO Numbers Matter Most - 19th Jul 17
Discover Why A Major American Revolution Is Brewing - 19th Jul 17
iGaming – Stock Prices - 19th Jul 17
The Socionomic Theory of Finance By Robert Prechter - Book Review - 18th Jul 17
Ethereum Versus Bitcoin – Which Cryptocurrency Will Win The War? - 18th Jul 17
Accepting a Society of Government Tyranny - 18th Jul 17
Gold Cheaper Than Buying Greek Villas in 2012 - 18th Jul 17
Why & How to Hedge the Growing Risks of Holding Stocks - 18th Jul 17
Relocation: Everything You Need to do for a Smooth Transition Abroad - 17th Jul 17
A Former Lehman Brothers Trader: It’s Time To Buy Brick And Mortar Retailers - 17th Jul 17
Bank Of England Warns “Bigger Systemic Risk” Now Than 2008 - 17th Jul 17
Bitcoin Price “Deja Vu” Corrective Sequence - 17th Jul 17
Charting New Low in Speculation in Gold and Silver Markets - 17th Jul 17
Bitcoin Crash - Is This The End of Cryptocurrencies? - 17th Jul 17
The Fed's Inflation Nightmare Scenario - 17th Jul 17
Billionaire Investors Backing A Marijuana Boom In 2017 - 17th Jul 17
Perfect Storm - This Fourth Turning has Over a Decade of Continuous Storms to Come - 17th Jul 17
Gold and Silver Biggest Opportunity Since Late 2015, Last Chance at These Prices - 17th Jul 17
Stock Market More to Go - 17th Jul 17
Emerging Markets & Basic Materials Stocks Breaking Out Together - 16th Jul 17
Stock Market SPX Uptrending Again After Microscopic Correction - 15th Jul 17

Market Oracle FREE Newsletter

Crude Oil, Gold, ETFs & more: Pro-grade Market Forecasts

Stock and Bond Bull Markets - The Beginning of the End?

Stock-Markets / Global Stock Markets Jun 27, 2007 - 12:20 PM GMT

By: William_R_Thomson

Stock-Markets The bull market appears to have peaked and a major correction in global bonds and equities is looking more likely, say panelists

PARTICIPANTS

Moderator: Anthony Rowley, Tokyo correspondent for the Business Times


Panelists:

Marc Faber, investment adviser and publisher of the 'Gloom, Boom and Doom Report'

Mark Mobius, president of Templeton Emerging Markets Fund Inc, and director and executive vice-president of Templeton Worldwide Inc

William Thomson, chairman of Private Capital Ltd in Hong Kong

Christopher Wood, managing director and equity strategist at CLSA Asia-Pacific Markets in Hong Kong

OVERVIEW

LIKE the often-prophesied end of the world, a major correction in global bond and equity markets is a long time in coming - so much so that many investors are tempted to think that it may never happen. But, as two of our eminent investment experts comment in the panel discussion below, the most dangerous words in the English language are: 'This time it is different.'

The 20-year bull market in bonds is already looking very shaky, following recent sharp rises in government bond yields. While the market unwinding is unlikely to happen overnight, the implications for ultra-narrow credit spreads in general are clear to see. As central banks tighten monetary policy, in belated recognition of
rising commodity and asset prices, the liquidity bubble that has propelled markets - emerging markets especially - to record highs is expected to burst. The correction could be savage, as our panelists point out.

Anthony Rowley: We're privileged to have some of the best in global investment talent taking part in this Investment Roundtable, at what could be a critical turning or tipping point for bond and equity markets.

Our panelists are veterans on the world investment stage, and also in these discussions. A very warm welcome back to all of you. Marc, let's throw the ball into your court first. Does the recent sharp rise in bond yields signal the beginning of the end of the sustained global bull market in bonds, and possibly a bear market in equities too?

Marc Faber: We had a more than 20-year bull market in bonds - Sept 21, 1981, to June 2003 when the 10-year (US) Treasury bond yield fell to 3.3 per cent and the JGB (Japanese government bond) yield fell to less than 0.5 per cent. We are now at the onset of a major bear market in bonds worldwide that should bring interest rates above the level in 1981 when US Treasuries were yielding over 15 per cent. But this process will take at least 10 years. In this environment stocks will not do well in real terms but will rise in nominal terms. How high will depend on (US Federal Reserve chairman Ben) Bernanke's money printing presses.

William Thomson: I believe the bull market in US Treasuries that began in 1980 peaked in 2003 and that we have been in a long-term topping action since. The recent rise in interest rates indicates that bond prices are probably moving into a lower trading range with higher yields than we have become accustomed to. Central banks have been behind the curve in raising rates and until recently they were beguiled by phony, low-inflation numbers. As a result, real interest rates, after adjusting for inflation, have been too low. Commodity price inflation (in terms of food, energy and minerals) is now seeping through the global economy and boosting even government-manipulated inflation readings. Thus, interest rates are rising as central banks take belated notice. Equities are overbought short-term and due for some consolidation.

The exact timing of a bear market will depend on many factors in individual markets including, but not limited to, interest rates. A bear market next year would not surprise me since the global expansion will be very long in the tooth by then, and markets will be trying to assess possible changes in US fiscal, monetary and possibly
protectionist policies in 2009 with a new US administration.

Christopher Wood:
The 10-year US Treasury bond yield has broken above the long-term trend line, in place since the beginning of the great bond bull market back in 1981. The recent equity rally has occurred in the context of rising government bond yields, just as the sell-off in February/March occurred in the context of falling bond yields.

All this suggests that the Fed model, where hundreds of billions of dollars of portfolio capital is allocated globally on the relationship between bond yields and earnings yields, has broken down.

Anthony: Even so, it is often argued that a 'new paradigm' is at work in the equity and bond markets - one that has invalidated past investment cycles and boom and bust theories.

Mark Mobius: Someone once said, 'The most expensive words in the world are: This time it is different.' There is no new paradigm at work in equity and bond markets which would invalidate past investment cycles and boom and bust theories. The nature of markets is such that there will always be excesses in bullish moods and
bearish moods. In 1999 and 2000, the majority of investors felt that we had entered a new paradigm and earnings did not matter but the 'burn rate' (the speed at which companies could spend and expand) was more important. Of course that mania resulted in disaster for many investors.

William: I agree. That long bull market seems over and we may enter a bear market or a longer trading range at higher yields than in recent years, reflecting higher underlying inflation.

Marc: There is no new paradigm but there are central banks that expand money and credit at a fast pace and create 'excess liquidity'. This is particularly true of the US Fed, which through its expansionary monetary policies led the US to have a close to US$800 billion current account deficit, which then leads to a 'savings glut' and excess liquidity around the world. This liquidity then drives all asset markets, including stocks, commodities, real estate, art, collectibles, and even until recently bond prices, higher.

Anthony: If the music has to stop, or the tempo to slow sharply, when is that most likely to occur?

Mark: No one knows when the music will stop and the party end. Normally, however, when everyone is unanimous about the viability of the market and the impossibility of it going down is when the market will probably crash. It's just like when you have a party with lots of alcohol. Everyone is happy and gets drunk. They feel wonderful and the world is bright. Then the alcohol wears off and you wake up with a hangover. It's all over.

William: My crystal ball is cloudy right now. This upswing has been very strong globally. The imbalances we have talked about remain but have not as yet caused real upsets. But they will have to correct sometime, either violently or gradually. My best guess is that the new US president - if there are tax and other policy changes in 2009, the markets will begin to anticipate them ahead of time, probably in 2008, maybe later this year, adding uncertainty. On top of that, the Chinese may want to cool their economy after the Beijing Olympics. Higher interest rates, in the interim, globally should have some dampening impact.

Christopher: The continuing US housing slowdown could still be the source of a renewed growth scare that will hit markets in coming months. Rising bond yields would surely pose a blow for the US housing sector, which continues to deteriorate, if the breakout on the 10-year Treasury bond yield is sustained.

Marc: It will stop when the excess liquidity gradually dries up. This can happen for a variety of reasons. Consumer price inflation could accelerate and economies overheat, thus draining money from the financial sector into the real economy. Or it could happen because of illiquidity in the US household sector, which would curtail imports and lead to the current account deficit of the US no longer expanding. There are already some clear cracks in the global asset bubbles: US housing prices, the sub-prime lenders, investment banks, and most recently, the bond market. The second half of this year could become painful.

Anthony: What, in your view, is most likely to be the factor that will precipitate a correction or crash in markets?

William: We can only hazard guesses. More than likely it would be some event that markets cannot discount - say, an attack on Iran , unrest in China , or protectionist measures in the US by a new US president as the result of a recession. If the correcting event is unexpected, and of a major kind, it could cause problems with
derivatives - leading to financial instability.

Christopher: Rising credit spreads remain the key risk for equities and all other financial asset classes since they have the potential to bring an abrupt end to the global credit bubble of which leveraged buyouts have been the latest most extreme manifestation. Credit is much more mispriced than equities.

Marc: Excess liquidity has been driven by the US current account deficit growing from 2 per cent of GDP in 1998 to close to 8 per cent now. Growth of the current account deficit has slowed down as the US consumer is struggling. If US inflation were properly measured, we would already be in a phase of stagflation in the US . (The rate of new money flowing into the global system) has slowed down considerably and so not every asset bubble can continue to expand. The global bond market was the first casualty.

The reason that other asset markets have continued to soar is, however, increased leverage and a flight from cash into assets as people rightly begin to realise that paper money's purchasing power is collapsing. Therefore, any catalyst, no matter how small, could one day reverse investors' expectations and lead to a process of
de-leveraging and a collapse in asset prices.

Mark: The underlying viability of markets is earnings power. If market participants think they can make profits either short-term or long-term, they will continue to hold investments and even invest more. Therefore, we must look for that event or series of events which lead to people thinking that the ability of their stocks to make money for them has ended. The perception of earnings power viability can last a long time but the trigger that tips the scales and causes people to act can be a relatively meaningless event which is really unrelated to the market itself.

Anthony: Is it equity or bond markets that are most at risk of a severe and lasting correction?

Marc: Emerging stock markets are now vulnerable because they are the most extended. They were the prime beneficiaries of the excess liquidity.

William: They say in America , when the paddy wagon comes round, it takes the good girls with the bad.

Christopher: Neither is at risk of a severe and lasting correction until credit spreads blow. Then only government bonds will go up.

Mark: Equity markets tend to be more volatile but even bond markets can take a severe beating in a strong downtrend.

Anthony: Is a correction likely to impact developed and emerging markets equally and which ones would suffer most severely?

Christopher: All Wall Street-correlated stock markets are likely to be impacted.

Mark: Those markets that have risen the most will probably suffer the greatest percentage falls, so emerging markets, since they have risen more than developed markets, should have greater declines.

William: History would indicate that emerging markets would be slightly more growth potential and should be bought on significant weakness.

Marc: Emerging markets would suffer the most in a global tightening environment coming from the US current account deficit no longer expanding.

Anthony: What would be the likely magnitude of a correction in terms of percentage fall?

Mark: A severe market correction could range between 20 per cent and 70 per cent.

William: That is impossible to say. It depends on the reason for the reaction and will vary from market to market. Ten per cent is hardly a correction; 25 per cent does not seem unreasonable; 50 per cent seems far too great unless we have a true crash, especially as we had one like that in 2001-3.

Christopher: If credit spreads blow, a bear market would ensue which would mean 50 per cent-plus corrections. Otherwise, corrections are likely to be limited to 10-15 per cent.

Marc: Once the shares of Goldman Sachs are down by 20 per cent from their peak the phones at the Fed and at (US Treasury Secretary) Hank Paulson's office will ring asking them to cut interest rates to support the asset markets. So, who knows? But in real terms (in gold terms) US financial assets will be 'toast' for a long time.

Anthony: Thank you all, as ever, for a very stimulating discussion and we look forward to welcoming you back - before or after the 'crash'.

By William R. Thomson
Chairman
Private Capital Ltd.
Hong Kong 
wrthomson@private-capital.com.hk

William R. Thomson Archive

© 2005-2017 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife