If you believe as I do that the governments of the world have shot their load, and for whatever reason (politically, economically, or culturally) can’t keep expanding their debt loads, means one thing.
EXETER Pyramid is activated.
First an explanation. Exeter surmised that when the animal spirits are roaming free, investment activity drifts up the pyramid, and the reverse is true in a panic. Why this is, is when people are feeling great they take on more risk, and more debt, and when conditions change they sell an asset that may no longer produce returns they desire, or in fact start losing money. They may voluntarily or forcibly liquidate the debt. Then it gets interesting, as most people pledge assets as collateral, but the value of the collateral also may fall, thus forcing them to sell other assets, and if this affects enough people you cause a cascade, and a panic into the most trusted assets.
China has started that cascade. Many on our shores have not seen seen the approaching Hurricane yet, but is rumbling through the BRICS (less India, but add Australia, the Middle East and Canada) through the utter collapse of commodity prices. That is DEFCON TWO in the Pyramid. At the same time emerging market debt and stock markets are getting pummelled, and in the last quarter, our junk related, and commodity related debt markets are breaking down. We also are seeing stress in the Muni market and a stealth bear market in many stocks DEFCON THREE.
Last weeks complete wipe out of the of the entire market gains for 2015, and the Corporate Bond Market being saturated, and companies debt to income ratios at extremes, and gold waking up, I claim DEFCON FOUR has begun.
There will be a panic into U.S. dollars and investments, and into gold. At first, the bond markets will see the best returns (forget the FED’s blathering about raising interest rates), but usually will lend some support to our stock market, in the short term, as well. But our markets are so overvalued, and revenue growth going negative, this safe haven may have already run it’s course. Gold will see continued interest.
If someone asked me what shall I do with my money now, Treasuries, gold, and cash. Oh, and hang on.
If Trading, short Biotech and Apple is my theme. Both are way overvalued and form the bulk of the gains in our markets in recent years. Biotech will get unpleasent attention this election cycle now that everyone must pay the first $4-8000 of their healthcare (on top of the 10-20 grand health insurance tax) and will start questioning these outsized profits at their families expense. I know I am. Apple is out of must have ideas, global markets are retrenching, and current products will be commoditized. I am sure there are more.
I don’t think DEFCON FIVE hits on this next flush.
Life is getting interesting, again.
