Global: What will cause the crash?

Sunday, September 03, 2017 // Written by Enzio von Pfeil

Un-originally, we have forecast a market crash between 4Q17 and 2H18.  Iconoclastically, however, we don't think that the usual causes are relevant.  But one will be the trigger.

  1. What won't cause a crash.  I have difficulty identifying the following as the REASON for a crash:
--ETFs.  How can a passive instrument cause a crash?  Surely this passivity is merely the reflection of an underlying index, no? So how can mirrors cause crashes?  You can smash a mirror - but a mirror cannot smash you!
--Valuations.  This is always the rabbit pulled out of the hat particularly once a crash has occurred: we are not rational but we do rationalise!    Here is how this one is a non-starter: before the crash, you'll get six people pointing to over-valuation, six to under-valuation, and 12 stating that they just don't know where markets stand in terms of their "true" valuations.Afterwards, all 24 bleat the mantra of "over-valuation". 
--China.  China is to Asia what Germany is to Europe: whatever the former two do is plain wrong for 'bleacher (onlooker)  economists". The Chinese or Germans consume too much: that's wrong. The Chinese or Germans consume too little: that's wrong, too.  'The Chinese or Germans save too little: that's wrong. They save too much: that's wrong, too!  These "catch-22 economists" currently are all agog because China's  debt to GDP ratio exceeds 300 per cent.  We are not trying to make light of these data; however, consider the following: in our nary 30 years' coverage of the Chinese economy we (nearly) never have encountered accurate statistics, so who is to say that 300 per cent are accurate? Besides, this is domestic debt, akin to Japan's. Japan has been a giant, sinking submarine - but certainly not a cause of that 2007/8 crash!

2. Deja vu?.  This Saturday's Weekend Financial Times (FT) had two  wordy articles about the 10th anniversary of that 2007 crash. Here is what they write: "But what's worrying some economists is a feeling that we're on a slippery slope: that the same forces which fed the crisis last time round - rampant demand for yield among investors, skewed incentives on Wall Street and a government determined to relax regulatory constraints - could feed another." This sets the stage aptly for our next observation. 

3. Likely cause of a crash.  My "crash-trigger" will be something dumb happening with over-leveraged American CLOs or CDOs containing student-, home- or car-debt.  After all, according to the Institute of International Finance, global debt has reached USD 217 TRILLION. This means that just a half a per cent-age point rise in US rates will cost borrowers USD 109 billion dollars in extra interest payments...(I don't think that a skirmish with North Korea, nor Russia's war games staring on 14th September, will cause crashes: these events will be shrugged-off by markets after an initial dip.)

4. Investment implications. Either be clever and time the markets (not so clever, as you cannot be correct consistently). Or you batten down the hatches and invest only in high dividend stalwarts such as consumer staples or utilities. Or you do what I do, which is humbly to dollar-cost-average, knowing that in the long term, i.e. over the course of our Economic Clock's ® four Economic Time®  zones, markets will keep rising. All of which means that a crash is a buying opportunity for us steady-eddies.  Meanwhile, China /Hong Kong, Japan and Europe might be good crash hedges, given that their Economic Time® shows improvement, whilst America's Economic Clock® is ticking on "toppy". 
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