This isn’t a panic. It’s an epiphany.

Stocks are crashing. Do you wish you’d sold out weeks ago?

But how could you have known that it was time to do so? And when exactly? Which stocks?

These questions sound like hindsight reminiscing. “Should’a, would’a, could’a,” you might call it…

But they’re not wishful thinking at all. By following a rules-based strategy that decides when to sell out, you could’ve avoided holding on to stocks during the crash. Without making the mistake of selling early during a brief dip along the bull market’s journey.

To find out what these rules look like, and how they work, click here.

What if the stockmarket crash you’re seeing isn’t a temporary shock? What if it’s the realisation that printing money doesn’t help the economy? That we can’t escape reality after all. That stocks reflect the economy, not central bankers’ fantasies.

Sure, coronavirus is going to blow over, eventually. The first question is how much damage it does in the meantime. And will it expose fragilities that were there all along, hiding in plain sight on corporate and sovereign balance sheets? That’s what we looked into yesterday.

But, for today, consider a different hypothesis. What if Covid-19 leads to the realisation that the stockmarket rally of the last ten years was a mirage? A house of cards printed banknotes that can collapse if you cough hard enough.

Ten years into the quantitative easing (QE) and negative interest rate experiment, with impressively poor economic recoveries in most places, we’re facing a recession. The patient who’s been kept on life support since 2008 is not going to make a full recovery after all. Instead, despite being on life support, their condition is worsening.

Sure, the vital signs are there. Unemployment is extraordinarily low, for example. But even people in a coma have a pulse…

The Italian stockmarket index doubled since 2009. Before the recent plunge, that is. But the economy hasn’t improved since the country joined the euro. And the government was heading for an eventual financial crisis regardless of what it did.

Demographic change in Europe suggests there won’t be enough young people to buy the stocks, bonds and properties that future retirees plan to sell to fund their retirement. In parts of Spain and Italy, properties are given away or even incentivised.

In China, the workforce is shrinking each year too.

It’s not just coronavirus that’s causing immediate problems in markets, remember. OPEC and Russia may have pulled the rug out from under US shale oil and the Iranian regime, but how much longer were oil stocks going to hold up given the improvements in renewables?

Italian and UK banks are implementing mortgage moratoriums. You don’t have to repay as usual. What’ll this do to bank profitability? And at 0% interest, what does suspending repayments even mean? And, with the European Central Bank lending to banks at negative rates, why don’t we all just get interest-free mortgages anyway?

Why go to work when money is free? My mortgage offer a few months ago was 1.35%. What is it after the recent rate cut? How does it compare to rental yields?

There’s a reason that European bank share prices haven’t been lower in my lifetime. The banking business model simply doesn’t function at 0% rates and no growth.

Do you see where I’m going with this? What if markets don’t recover? What if falling markets are the new normal? And that’s what investors have realised.

It sounds absurd. But it’s accepted in Japan, the country that went through a multi-decade bear market which it never recovered from. The country that experienced the demographic shift coming for Europe. And China.

Sure, the Japanese economy is sort of fine. But the stockmarket speculation of the 80s is gone. It’s still very much alive in the West though… for now. We live in an extraordinarily financialised economy. Japan is very different.

Our resident value investor Tim Price likes to recount a story about Japan. A British fund manager visited a stock exchange-listed firm that he was considering investing in. The whole company came out to welcome him, with a huge banner and lots of fanfare. He was the first investment analyst to visit in years…

And, to the Western world, the concept of steady deflation looks bizarre. But in Japan, it’s normal and not a substantial problem.

Last but not least, Japan has tried QE and fiscal policy for decades now. The result is a failure by most measures. Despite Japan being by far the best place in the world to live, if you ask me. For foreigners, at least…

It’s not just Japan, either. There are other, similar examples. Italy’s stockmarket index is down by two thirds since 2000. In Italy, stocks don’t go up in the long run either. And the financialisation of the economy has been in decline for decades there too.

My point is that there isn’t just an asset price bubble in the West. There’s a financialisation bubble too. And, while the real economy was in trouble for decades, the financial economy kept on booming with free and cheap money.

Coronavirus could be what exposes the truth. That, without growth, financialisation is dangerous.

For now, it’s just a hypothesis. The near-term explanation for the plunge is a little simpler.

Coronavirus’ impact on economic and financial data is finally being priced in. Given we didn’t know much about Covid-19, it was hard to figure out where prices should be. Each day we learn more about the virus, we find the right price. And, because the news on Covid-19 had been bad, so have stock reactions.

Or perhaps it’s the disappointing response of central bankers and politicians that’s caused the rout. With a reference point of 2008, the market will demand truly extraordinary action to recover this time.

But what is there that qualifies as “more than 2008”? That’s the subject of an internal email chain of our editorial team. Which means more on that for Monday.

Until next time,

Nick Hubble
Editor, Southbank Investment Research

Category: Commodities

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