WORLD MARKETS
The markets have failed to break out of their trading range for the last 5 months or so and it does not seem that there are any catalysts to push them up. The current yield on the S&P is less than that on bonds and the average PE ratio is significantly higher than historic levels. Faced with the prospect of static corporate profits or at best very low rises, there is little potential for this to provide a tail wind for earnings. Fortunately, the FED is almost at the end of the rate raising cycle and oil seems to be stuck in a range of $45 – 55 per barrel, barring a geopolitical disaster, this is unlikely to change in the short term.
However, before those of a bullish disposition contemplate a 10% or more real return from the markets for the current year, there are a number of very dark clouds on the horizon that may well bring the current bull rally to a screeching halt and these have to be considered.
The European Constitution is in the process of being ratified by the 25 members who are at odds as to the type of Europe they want to belong to. The French are certainly going to reject it and the Dutch will probably follow suit, this will more than likely lead to the fall of the Chirac government in France ( Shroeder to follow soon) and lead to uncertainty in Europe. The knock on effect will be a fall in the Euro on the FOREX Markets especially against the Dollar. The reversal of the US depreciation policy will undo all the administrations work of the last year or so; imports will rise; exports fall and deficits soar from the current absurd levels. As a consequence, the FED will have to stop raising rates and probably do the unthinkable – lower the Discount Rate. Germany and France already have unemployment rates in excess of 10% and the falling Euro will lead to fewer jobs and lower profits for their uncompetitive industries, more than likely the direct consequence will be more protectionist policies.
The reflationist policies of the Anglo-Saxons has not had the required effect and are about to be reversed forcefully. Defaults and bankruptcies are on the rise, sales falling, wages falling (in real terms) and even real levels of unemployment are rising. The consumer cannot bail us out anymore as he/she is in need of an elixir to get rid of personal indebtedness that sometimes borders on immoral. How can an individual by food on credit? Why would a sane individual have credit card debts in excess of their outstanding mortgage? If the individuals fail to pay off these debts, who will pick up the tabs? Where will the US and UK governments find the money for extra Social Security payments from? The answer is higher taxes and borrowings in an environment of contraction.
This would leave corporations to pick up the slack through investment and extra spending but where will they find the money? Definitely not from higher margins or sales and certainly not from the debt markets. They will attempt to slash costs in order to raise profits (in some cases, stay afloat), and that does not bode well for the job market or economy at large.
But those with large telescopes are looking east to the Orient and they can see the Chinese coming to our aid with a revaluation of the Reminbi/Yuan (How daft, what is the logic in the currency having two names?) and throwing money at our Western goods. Unfortunately, those in power hid reality from the masses, and thus are about to push us over the cliff and into the abyss; a revaluation in the Yuan is bringing inflation to a high street near you as all the imports will be much more expensive. Needless to say the trade deficits will spiral out of control.
CONCLUSION:
In the next 12 months or so the current lofty levels of the Western stock markets will be akin to the tech bubble of the 90s only this time the pain will be much worse and wide spread. Unless there is a major shift in policy we might well be headed for the abyss.
The markets have failed to break out of their trading range for the last 5 months or so and it does not seem that there are any catalysts to push them up. The current yield on the S&P is less than that on bonds and the average PE ratio is significantly higher than historic levels. Faced with the prospect of static corporate profits or at best very low rises, there is little potential for this to provide a tail wind for earnings. Fortunately, the FED is almost at the end of the rate raising cycle and oil seems to be stuck in a range of $45 – 55 per barrel, barring a geopolitical disaster, this is unlikely to change in the short term.
However, before those of a bullish disposition contemplate a 10% or more real return from the markets for the current year, there are a number of very dark clouds on the horizon that may well bring the current bull rally to a screeching halt and these have to be considered.
The European Constitution is in the process of being ratified by the 25 members who are at odds as to the type of Europe they want to belong to. The French are certainly going to reject it and the Dutch will probably follow suit, this will more than likely lead to the fall of the Chirac government in France ( Shroeder to follow soon) and lead to uncertainty in Europe. The knock on effect will be a fall in the Euro on the FOREX Markets especially against the Dollar. The reversal of the US depreciation policy will undo all the administrations work of the last year or so; imports will rise; exports fall and deficits soar from the current absurd levels. As a consequence, the FED will have to stop raising rates and probably do the unthinkable – lower the Discount Rate. Germany and France already have unemployment rates in excess of 10% and the falling Euro will lead to fewer jobs and lower profits for their uncompetitive industries, more than likely the direct consequence will be more protectionist policies.
The reflationist policies of the Anglo-Saxons has not had the required effect and are about to be reversed forcefully. Defaults and bankruptcies are on the rise, sales falling, wages falling (in real terms) and even real levels of unemployment are rising. The consumer cannot bail us out anymore as he/she is in need of an elixir to get rid of personal indebtedness that sometimes borders on immoral. How can an individual by food on credit? Why would a sane individual have credit card debts in excess of their outstanding mortgage? If the individuals fail to pay off these debts, who will pick up the tabs? Where will the US and UK governments find the money for extra Social Security payments from? The answer is higher taxes and borrowings in an environment of contraction.
This would leave corporations to pick up the slack through investment and extra spending but where will they find the money? Definitely not from higher margins or sales and certainly not from the debt markets. They will attempt to slash costs in order to raise profits (in some cases, stay afloat), and that does not bode well for the job market or economy at large.
But those with large telescopes are looking east to the Orient and they can see the Chinese coming to our aid with a revaluation of the Reminbi/Yuan (How daft, what is the logic in the currency having two names?) and throwing money at our Western goods. Unfortunately, those in power hid reality from the masses, and thus are about to push us over the cliff and into the abyss; a revaluation in the Yuan is bringing inflation to a high street near you as all the imports will be much more expensive. Needless to say the trade deficits will spiral out of control.
CONCLUSION:
In the next 12 months or so the current lofty levels of the Western stock markets will be akin to the tech bubble of the 90s only this time the pain will be much worse and wide spread. Unless there is a major shift in policy we might well be headed for the abyss.
:cheesy:
