The stock market rally? That is only something that will make it harder for investors to discover the truth. Apocalypse in the financial markets is around the corner in 2010. And the worst thing is that it is inevitable. Who says this?
Well, last year during the crisis, I mean during the tough bear market that brought the S&P below 700, you could read a lot about the financial armaggedon to come. But not nowadays.....
In this article, Global bear rally will deflate as Japan leads world in sovereign bond crisis, there is a lot of pessimism and the scenario is quite concerning.
In summary:
- The contraction of M3 money in the US and Europe will puncture economic recovery
- The surplus regions have not increased demand enough to compensate deficit countries. The vast East-West imbalances that caused the credit crisis are no better a year later.
- The fiscal blitz has merely shifted the debt burden onto sovereign shoulders
- There is a global excess capacity; bonds will slither back down in a deflation scare.
- Weak sovereigns will buckle. Debt service costs will tear the budget to pieces.
- Japan will flip from deflation to hyperinflation.
- China too will be in a quandary. It will make as big a hash of this as Western central banks did in 2007-2008.
- Ugly loan books will set off wave two of Europe's banking woes. The North-South split has gone beyond the point of no return for a currency union.
- The dollar rally will gather pace.
While there are some elements of this "scenario" that may be interesting, the kind of collapse envisioned looks for the moment a little bit too much.
In Slope of Hope, Tim Knight, a chronic bear, highlights that:
- bank balance sheets remain loaded with toxic assets
- Stock markets rebounded ‘too far, too fast’ in 2009
- Global trade continues to reel from the worst crash since the 1930s.
- US consumer and commercial lending is sharply down
- Property values continue to deteriorate
- The 2009 downturn was too short following a major financial crisis
- Emerging markets like India and China are faking their growth
- Oil prices are too high
- We have not seen a bond market crash with much higher interest rates, and a boom in gold price.
I find the big issue is that American consumers cannot be replaced at the moment. The Chinese economy cannot continue to grow at the same pace because it is creating excessive capacity that cannot be filled by government debts and deficits. Higher commodities prices will also not help.
Sooner or later these tensions in the global system will emerge again. The effects can be quite significant: a stock market crash, a strong dollar and the boom of gold are ahead? This would be a replica of 2008, except that some also think interest rates will go higher.
Where will the next crisis be generated? Many look at China...
See my previous post: Upcoming Chinese Financial Crisis.
In the meantime, markets print new highs.....
Disclosure: no positions
