Removing Fuel from a Rally on Fire
Friday, January 26, 2018; the Dow sets a record, adding almost 2,000 points in the first 4 weeks of the year.
Forget rising rates. Ignore what is taking place in Washington. Central Banks? Who are they? Wealth from the “perfect bull” only comes in two speeds, slow and fast.
February 2, 2018; what happened to the “perfect bull”?
Dow Plunges 666 Points – Worst Day Since Brexit, CNN Money, 2/2/18
Could rising borrowing costs on the US government have affected this “surprise” sharp drop?
Can developments in Washington impact the “perfect bull”?
FISA Memo Released: Here’s What It Says, Zero Hedge, 2/2/18
US National Debt Will Jump $617 Billion in 5 Months, Wolf Street, 1/31/18
What happened Friday was a one-off event, right? I mean, why did European stocks plunge?
Global Quantitative Easing since 2009 has misled investors to focus on asset prices and ignore rising debt levels. Even announcing Quantitative Tightening plans by the Federal Reserve and the ECB in 2018, a loss of $1 trillion in asset purchases to global markets, had no impact on soaring stock prices as 2017 ended. January kicked off with the ECB cutting asset purchases by €30 billion a month and the Federal Reserve increasing their unwind to $20 billion a month.
What did the Dow do? Leap almost 2,000 points in 4 weeks and 5,000 points since last September.
The 1,100 drop in the Dow should wake us. We should seek to understand how debt at the global level could change our own lives.
Last summer the International Institute of Finance, a global banking institution, warned of rising risk in emerging markets as the world’s debt levels soared to a record $217 trillion, 327% of global GDP. In January we learned that by the end of Q3 2017 this number had reached $233 trillion.
We need to compare this to 2000 and 2007 to understand where we find ourselves in 2018. At the end of 2000, according to the McKinsey Global Institute, this figure stood at $87 trillion. It had reached $142 trillion by the end of 2007.
Margin debt levels are a number I watch. Margin requirements can change overnight if its collateral drops quickly in value. FINRA, the regulatory authority for the financial industry, stated on their website 2 weeks ago that their latest margin statistics (Nov 2017) showed a record high of $624.7 billion in margin debt. This was an increase of $100 billion since the end of 2016 and double the level seen at the end of 2010.
I have listened to comments by William White, former chief economists at the Bank of International Settlements, since starting The Investor's Mind in 2006. At the World Economic Forum last week he expressed his concerns on debt levels and rising risks. He stated, “Central banks have been pouring more fuel on the fire”, which as we know, is at a time when bond yields have risen from historic lows reached the summer of 2016. This has left central bankers “running out of ammunition” making him “afraid that at some point this is going to be resolved with a lot of debt defaults.”
This next chart came from the February issue of The Investor’s Mind, released on Jan 27th.
When one considers what took place after March 2000 and October 2007, both when global debt levels were much lower, isn’t it time to consider contrarian managers and strategies that have not mirrored the largest herded trades on record?
Was January 26th the Peak?
March 23, 2000 was the peak in the NASDAQ. Bulls switched to bears. October 11, 2007 was the peak in the Credit Bubble. The Great Recession turned bulls to bears. Was January 26th the peak of this 9 year stock bull? Booms have repeatedly been followed by busts in history. This will come. Time to consider mega contrarian trend changes and trades? Join the readers of The Investor’s Mind as history and QT changes the global landscape. Click here to try a 90 day subscription.