Still Waiting For A Crash ? You Will Have It

Burning question on what to invest in on the top of our minds. I am torn between the rosy growth picture painted in the economic numbers that is severely tampered by the chain of event risks that are affecting our investment radars.

Some perspectives.

  • Economic numbers are pointing to green shoots of growth.

“The growth rate of the global manufacturing sector continued to edge higher in August. Although the overall pace of expansion remained only moderate at best, it was nonetheless the fastest signalled since June 2011.

At 51.7 in August, up from 50.8 in July, the JPMorgan Global Manufacturing PMI
™ – a composite index* produced by JPMorgan and Markit in association with ISM
and IFPSM – signalled growth for the eighth month running.
Manufacturing production rose for the tenth successive month, with the rate of growth accelerating to the highest since January. The main drag came from broad-based
weakness in a number of emerging markets, with India, Taiwan, South Korea, Indonesia, Vietnam and Brazil were among the countries to report lower output volume” Source : JPM
  • Global GDP looks secure as the anchors hold above run rate.
Taken from Markit Economics.
Taken from JPM.
  • The outlook is reasonably assured except for Syria and the little EM shake up we have endured for since 22 May and the tapering announcement and other risks, political and policy.
1. Taper
2. Fed Chairperson
3. German Elections
4. Japanese Sales Tax
5. Earnings growth to repeat
The EM Crisis is now hailed as a “normalisation”. According to Ken Rogoff’s Are Emerging Markets Submerging (Project Syndicate), there should be no cause for concern in EM even though growth will have to slow inevitably but we should be worried about a long term spillover if long term investors give up on EM which could tip the global economy off balance leading to another crisis of sorts.

“(Reuters) – Led by firm U.S. growth, the outlook is gradually improving for advanced economies while even crisis-weary Europe is at last joining the recovery, the OECD said on Tuesday.

Nonetheless, a slowdown in many emerging economies meant that global growth would remain sluggish, the Organisation for Economic Cooperation and Development said.”

Morgan Stanley suggests that the “When capital costs are too low, investment overshoots, creating an illusion of a ‘miracle’economy.

Employment and productivity rise simultaneously, attracting more capital inflows and pushing investment up further. With low funding costs and strong growth, investors are willing to accept low yields on assets in the hope of being compensated via capital gains. We have seen this in the most recent cycle in the emerging market real estate boom, which drove the affordability ratio below levels seen in the US pre-crisis, and the rush into low-yielding gold funds.
Excess USD liquidity drove investors into low-yielding investments. Economies, particularly those most closely tied to the USD, developed imbalances. Following the 1996/98
crisis, monetary authorities, particularly in Asia, decided to protect themselves by building large currency reserves. While these reserves made local authorities and investors feel safer, they actually worsened the problem. The recycling of these reserves into Western sovereign bonds pushed Western bond yields even lower. This led to the misallocation of capital in the US, which resulted in the Fed implementing QE and printing USDs, which made their way into EM currency denominated assets.”
It is a vicious cycle !
  • What to worry about ?
1. EM Real Estate
2. Western Sovereign Bonds
3. EM Currency Denominated Assets
will all unravel in the weeks and months ahead.
  • Black Swan ?
India ?
     Sept. 4 (Bloomberg) — The rupee could sink to a record low
past 70 per dollar and the Reserve Bank of India’s struggle to
stem the drop has hurt its credibility, one of its advisers said
as the currency tops incoming Governor Raghuram Rajan’s agenda.
India needs help and needs it now. The trouble is that so does Brazil and gang. And as the saying goes, where is help when you need it ?
So we sit, tortured and waiting for the crash to happen, worrying that the rally will run away from us, beating our chests at market blips and sighing relief at market dips.
  • Some good news.
1. The Hindenburg is not over yet. We are halfway through the 40 days for the crash to happen.
2. WSJ : “Last month’s turbulence in the markets is only expected to get worse.
September is historically the worst month of the year for stocks. The proverbial “wall of worry” looks more concerning now than at any other point this year….Investor anxiety has picked up of late. The CBOE’s Volatility index, or VIX, finished at 17.01 on Friday, its highest level since late June. ”
With Syria and the risks listed above, it looks like the opportunity is coming soon. You will have your crash, its hope we have enough airbags to contain it.