Five reasons to be wary of the markets
By Ian Verrender
Posted Mon 9 Jun 2014, 7:43am AEST
Prepare for the party hangover Photo: The party on stock exchanges probably still has some life in it, but there are some worrying signs. (Romeo Ranoco: Reuters)
There are some worrying features about global stock markets right now and just how mature the boom has become. Here are five reasons why you need to take care, writes Ian Verrender.
There's an old saying that stock market booms are built upon a wall of worry.
When it's running hot, everyone worries the rally has been overdone, as investors agonise over whether they had paid too much. And when the inevitable crash occurs, the worry is that the worst has yet to come.
But for a brief period before the collapse, an eerie calm descends. It happened in 2007, even in the final months of that year, despite overwhelming evidence that the money-go-round had run out of puff.
It was the same in 1987. John Spalvins, one of the aggressive breed of entrepreneurs of the day, abandoned his bearish outlook after 18 months of predicting a crash, threw caution to the wind and embarked upon a major acquisition spree.
Big mistake.
In the past fortnight, three of the world's most powerful central bankers - Dallas Federal Reserve chief Richard Fisher, Bank of England deputy governor Charles Bean and Italy's central bank governor Ignazio Visco - have noticed the same thing happening right now and have sounded warnings.
Before you become too alarmed, it's worth bearing in mind that these three gentlemen bear a large portion of the blame for the current state of global financial markets.
Radical monetary policy has depressed real interest rates to below zero and boosted demand for high-risk investments, including stocks. This is precisely what the global banking puppeteers wanted, so it is a little rich for them to be warning others of the pitfalls.
In any case, rather than ease off the gas, they now are preparing to add fuel to the fire, meaning the party on stock exchanges probably still has some life in it.
On Thursday night, the European Central Bank took the unprecedented step of cutting the rate it offers banks to minus 0.1 per cent.
That's right, minus 0.1 per cent! Any bank that wants to park spare cash with the ECB will have to pay for the privilege. If they feel they are scoring a dud deal, then perhaps they'll finally discover how the rest of us feel.
Despite all those who claim to have forecast the 2008 crash, myself included, no one can ever predict the timing.
Individual human behaviour still has us mystified. Put all those irrational beings together into a group and the psychology takes on a whole new dimension.
But there are some worrying features about global stock markets right now and just how mature this boom has become. Here are five reasons why you need to take care.
1.
When central bankers start issuing cautions, it is worth taking note, even if they are to blame for the problem in the first place.
In December 1996, Alan Greenspan issued his famous warning about "irrational exuberance", pointing out that investors no longer appeared to be worried about risk, and that the stock market didn't appear to be overly concerned about what was happening in the real economy.
It took four years for Greenspan's warnings to bear fruit when the tech bubble finally burst. Greenspan's loose monetary policy in the aftermath of that meltdown is often cited as one of the foundations for the credit crisis of 2008.
America's recovery from the financial crisis has been slow and tepid and in the first quarter of this year, growth reversed.
Despite that, Wall Street pushed further into record territory last week, rising to 16,836. In February 2009, the Dow Jones Industrial Average threatened to plunge through 7000. A disconnect with the real world? Or exuberance extrapolated?
2.
History tends to repeat. And over time, there are certain patterns that emerge that policymakers rely upon.
If you lower interest rates, people tend to borrow more. But if asset prices like stocks begin rising strongly, it is likely interest rates will rise in the future, so bond markets anticipate this.
That fundamental relationship has broken down. Stock markets are rising strongly. But market-based interest rates continue to fall. In essence, stock investors are predicting a recovery while bond investors fear the future.
A year ago, economists were warning this trend could not continue.
It is easy to understand why it has persisted. The relentless manipulation of the financial system by central bankers has completely distorted markets. Despite America's pledge to taper its money printing, there is no sign of a return to normal trading any time soon.
3.
In the final stages of a boom, big corporations bust out the takeovers. Often, these multi-billion-dollar deals are about the individual egos of the executives involved rather than in the interest of shareholders. Logically, they should buy other businesses when markets are down, not when they are booming.
In recent weeks, American and European pharmaceutical companies have unleashed a series of hugely expensive takeover bids with Pfizer, AstraZeneca, Allergan and Valeant featured.
After years of inactivity, Australian investment bankers suddenly have been inundated with work. Warrnambool Butter got the ball rolling late last year and since then, David Jones, Westfield Retail Trust and a host of minnows such as Crowe Horwath have come under attack. This has delivered sudden gains to shareholders and the prospect of fabulous riches to bonus-starved bankers.
The pace of merger activity appears to be rising to a level not seen since, er, 2006.
4.
Private equity firms have suddenly decided that now is a terrific time to unload some fabulous investment opportunities onto unsuspecting, sorry, lucky punters.
The modus operandi of these buccaneering outfits is to buy a busted company, sell off the best assets like the real estate, sack half the staff, load the company up with debt, pay themselves a whacking great dividend and then wait for a bout of irrational exuberance to float them on the stock exchange. Brilliant!
Most major financial publications have declared 2014 to be the year of the Private Equity IPO. And it's only June.
5.
If any single event in 2014 tells you that global markets have abandoned the notion of risk it is the Great Greek Bond Auction of April.
A little over a year ago, no one in their right mind would have even contemplated buying Greek debt. This was the country that almost tore apart the European Union. And its economy is still a basket case. An unsustainable debt burden, struggling through a recession and massive unemployment.
But this year, after four years of financial pariah status, the Greek government decided to test the waters by issuing some new debt.
The result? A mad scramble from a yield hungry investment world saw the 3 billion euro bond issue six times oversubscribed with ecstatic punters happy to accept an interest rate of just 4.95 per cent. Hey, it's better than nothing. But it is a long way short of the crisis rates of 40 per cent lenders were charging on the secondary market in February 2012.
The Greek government hailed April's events as a triumphant return, a vindication of the austerity measures and a tribute to the hard work of all Greeks.
Others were more sanguine, noting the bond issue would not have been feasible without the backing of the European Union as crisis era headlines resurfaced along the lines of: "Beware Greeks Bearing Bonds".
The global economy may be limping back. But financial markets, as they normally do, appear to be running well ahead of themselves. For now though, the central banks running the system cannot afford another cataclysmic collapse and will continue to do everything they can to avoid one.
Ian Verrender is the ABC's business editor. View his full profile here.
Topics: stockmarket, business-economics-and-finance, markets
By Ian Verrender
Posted Mon 9 Jun 2014, 7:43am AEST
Prepare for the party hangover Photo: The party on stock exchanges probably still has some life in it, but there are some worrying signs. (Romeo Ranoco: Reuters)
There are some worrying features about global stock markets right now and just how mature the boom has become. Here are five reasons why you need to take care, writes Ian Verrender.
There's an old saying that stock market booms are built upon a wall of worry.
When it's running hot, everyone worries the rally has been overdone, as investors agonise over whether they had paid too much. And when the inevitable crash occurs, the worry is that the worst has yet to come.
But for a brief period before the collapse, an eerie calm descends. It happened in 2007, even in the final months of that year, despite overwhelming evidence that the money-go-round had run out of puff.
It was the same in 1987. John Spalvins, one of the aggressive breed of entrepreneurs of the day, abandoned his bearish outlook after 18 months of predicting a crash, threw caution to the wind and embarked upon a major acquisition spree.
Big mistake.
In the past fortnight, three of the world's most powerful central bankers - Dallas Federal Reserve chief Richard Fisher, Bank of England deputy governor Charles Bean and Italy's central bank governor Ignazio Visco - have noticed the same thing happening right now and have sounded warnings.
Before you become too alarmed, it's worth bearing in mind that these three gentlemen bear a large portion of the blame for the current state of global financial markets.
Radical monetary policy has depressed real interest rates to below zero and boosted demand for high-risk investments, including stocks. This is precisely what the global banking puppeteers wanted, so it is a little rich for them to be warning others of the pitfalls.
In any case, rather than ease off the gas, they now are preparing to add fuel to the fire, meaning the party on stock exchanges probably still has some life in it.
On Thursday night, the European Central Bank took the unprecedented step of cutting the rate it offers banks to minus 0.1 per cent.
That's right, minus 0.1 per cent! Any bank that wants to park spare cash with the ECB will have to pay for the privilege. If they feel they are scoring a dud deal, then perhaps they'll finally discover how the rest of us feel.
Despite all those who claim to have forecast the 2008 crash, myself included, no one can ever predict the timing.
Individual human behaviour still has us mystified. Put all those irrational beings together into a group and the psychology takes on a whole new dimension.
But there are some worrying features about global stock markets right now and just how mature this boom has become. Here are five reasons why you need to take care.
1.
When central bankers start issuing cautions, it is worth taking note, even if they are to blame for the problem in the first place.
In December 1996, Alan Greenspan issued his famous warning about "irrational exuberance", pointing out that investors no longer appeared to be worried about risk, and that the stock market didn't appear to be overly concerned about what was happening in the real economy.
It took four years for Greenspan's warnings to bear fruit when the tech bubble finally burst. Greenspan's loose monetary policy in the aftermath of that meltdown is often cited as one of the foundations for the credit crisis of 2008.
America's recovery from the financial crisis has been slow and tepid and in the first quarter of this year, growth reversed.
Despite that, Wall Street pushed further into record territory last week, rising to 16,836. In February 2009, the Dow Jones Industrial Average threatened to plunge through 7000. A disconnect with the real world? Or exuberance extrapolated?
2.
History tends to repeat. And over time, there are certain patterns that emerge that policymakers rely upon.
If you lower interest rates, people tend to borrow more. But if asset prices like stocks begin rising strongly, it is likely interest rates will rise in the future, so bond markets anticipate this.
That fundamental relationship has broken down. Stock markets are rising strongly. But market-based interest rates continue to fall. In essence, stock investors are predicting a recovery while bond investors fear the future.
A year ago, economists were warning this trend could not continue.
It is easy to understand why it has persisted. The relentless manipulation of the financial system by central bankers has completely distorted markets. Despite America's pledge to taper its money printing, there is no sign of a return to normal trading any time soon.
3.
In the final stages of a boom, big corporations bust out the takeovers. Often, these multi-billion-dollar deals are about the individual egos of the executives involved rather than in the interest of shareholders. Logically, they should buy other businesses when markets are down, not when they are booming.
In recent weeks, American and European pharmaceutical companies have unleashed a series of hugely expensive takeover bids with Pfizer, AstraZeneca, Allergan and Valeant featured.
After years of inactivity, Australian investment bankers suddenly have been inundated with work. Warrnambool Butter got the ball rolling late last year and since then, David Jones, Westfield Retail Trust and a host of minnows such as Crowe Horwath have come under attack. This has delivered sudden gains to shareholders and the prospect of fabulous riches to bonus-starved bankers.
The pace of merger activity appears to be rising to a level not seen since, er, 2006.
4.
Private equity firms have suddenly decided that now is a terrific time to unload some fabulous investment opportunities onto unsuspecting, sorry, lucky punters.
The modus operandi of these buccaneering outfits is to buy a busted company, sell off the best assets like the real estate, sack half the staff, load the company up with debt, pay themselves a whacking great dividend and then wait for a bout of irrational exuberance to float them on the stock exchange. Brilliant!
Most major financial publications have declared 2014 to be the year of the Private Equity IPO. And it's only June.
5.
If any single event in 2014 tells you that global markets have abandoned the notion of risk it is the Great Greek Bond Auction of April.
A little over a year ago, no one in their right mind would have even contemplated buying Greek debt. This was the country that almost tore apart the European Union. And its economy is still a basket case. An unsustainable debt burden, struggling through a recession and massive unemployment.
But this year, after four years of financial pariah status, the Greek government decided to test the waters by issuing some new debt.
The result? A mad scramble from a yield hungry investment world saw the 3 billion euro bond issue six times oversubscribed with ecstatic punters happy to accept an interest rate of just 4.95 per cent. Hey, it's better than nothing. But it is a long way short of the crisis rates of 40 per cent lenders were charging on the secondary market in February 2012.
The Greek government hailed April's events as a triumphant return, a vindication of the austerity measures and a tribute to the hard work of all Greeks.
Others were more sanguine, noting the bond issue would not have been feasible without the backing of the European Union as crisis era headlines resurfaced along the lines of: "Beware Greeks Bearing Bonds".
The global economy may be limping back. But financial markets, as they normally do, appear to be running well ahead of themselves. For now though, the central banks running the system cannot afford another cataclysmic collapse and will continue to do everything they can to avoid one.
Ian Verrender is the ABC's business editor. View his full profile here.
Topics: stockmarket, business-economics-and-finance, markets
