This week was the anniversary of the Lehman bankruptcy and financial collapse of last autumn and it was curious to hear the financial pundits talking as though this problem is fully behind us.
There were also some widely trumpeted figures about the success of the Chinese mega-stimulus (equivalent to 50 per cent of GDP in the first half) in sustaining GDP growth around eight per cent.
Chinese exports slump
Almost uncommented was the 20 per cent slump in Chinese exports over the first eight months of the year, and that in the world’s most export dependent economy.
Talk about a shift of growth from economic fundamentals to an unsustainable credit bubble! And just how long can a country keep that kind of stimulus going when its exports are crashing? Perhaps for a while and then?
That would be an issue even if financial markets had stayed down on the floor since the depths of March. But they have not. The stimulus money has gone into a new bubble. Markets have surged upwards, discounting a recovery that shows absolutely no sign of appearing in the real economy.
Therefore markets have now to correct back from an over-bought condition to an over-sold position. After a historically unprecedented 50 per cent recovery from lows, there is no other place for the market to go, and no liquidity or buyers to take it anywhere else as the economic stimulus packages unwind.
It was interesting to read the reflections of fund managers in Gulf News today who looked back on the collapse last autumn. None of them seemed to have seen it coming or made the obvious move into cash and bonds, gold or short positions before it happened.
Crash warning
This ought to be a warning written in letters 10-feet high to anybody thinking about diving into financial markets this autumn. This is a selling opportunity, not a buying opportunity. You can buy to sell short but that is it.
How long will this reversal take to happen? If only such exact market timing was possible we would all retire on our market profits.
But anybody who read the commentary on this website a year ago will know that it was saying exactly the same thing again a year ago, and those who chose instead to trust their professional advisers are still counting the cost.
Down will come equities, commodities including oil and gold, and real estate. Bonds should have a last hurrah and the dollar rally. So why still hold some gold? This is a hedge with a limited downside and the asset class of the future.
