–Sometimes you have to wonder if the giant rally in stocks since 2009 has all been engineered by insiders in the financial world to boost stock prices so they can sell into a rally…and then head for the hills with their diesel generations, tinned food, and stash of gold. Financial historians might describe the last few years as a world-wide asset pump and dump scheme led by the Fed (the pumper) and designed to benefit the financial industry (the dumpers).
–It’s a thought.
–The big news yesterday was what didn’t happen: China did not raise interest rates (although bank reserve requirements were raised late last week). Inflation in food prices has scared the Chinese monetary authorities/price fixers. In response, they’ve announced possible wage and price controls, which have worked so well everywhere else money supply and credit creation has run amok, from Latin America to Africa.
–China’s inflation problems stems from its dollar-peg and the creation of massive amounts of domestic credit (another $1 this year on top of $1 trillion last year). Since the developing world-and China in particular-are generating most of the global growth (while Europe and America struggle) investors were worried last week that China’s efforts to cool domestic inflation would slow everyone down.
–When China sneezes, everyone else shivers. Maybe that’s the new 21st century normal. So come on China! Do your part for the planet and keep those factories belching out gewgaws and knick knacks! It’s your solemn duty to the global system of debt-based consumption. Don’t shirk it.
–With no rate rise coming this week, Shanghai stocks zoomed up nearly 3% yesterday. Gold, palladium, silver, and oil were all up. Even U.S. bonds reversed themselves. Ten-year yields fell yesterday and prices recovered a bit. Good times are here again, for a few days.
–The chart below-with special seasonal colours-shows that the All Ords beat Shanghai’s rally to the punch by rallying first. December has been good to the Aussie market so far. And since July the All Ords (green line) and The Shanghai Composite (red line) have tracked each other fairly closely. Shanghai is fixing to cross its 50-day moving average. That would be technically bullish.
–Yesterday’s big Aussie winners were the Big Four banks. That tells you pretty much everything you need to know about what the big banking reforms will do: they’ll lower funding costs for the big four and produce big profit margins. It’s an even bigger bonus that ultimate liability for paying off depositors in a calamity can be fobbed off on the government via the Financial Claims Scheme.
–The financialisation of Australian life continues.
–You’d think investors would be a bit more worried, given how unsettled affairs are in every other part of the planet. And even here. The mining tax isn’t done and dusted yet. A China credit bubble crash would be bearish for the big miners (which make up a large part of the ASX/200 in a market-cap weighted index). And the banks have had to offer up their depositors as collateral to secure funding in preparation/anticipation of another global liquidity crunch. Yet the chart below tells you no one is losing any sleep over any of this.
–The ASX began publishing the VIX locally in the last few months, although it back-filled the data to 2008. In complicated terms, the VIX is a weighted average of implied volatility on widely traded options contracts. When premiums are large on options contracts, it tells you that investors are willing to pay more for insurance against an unexpected outcome (a big rise or fall in stock prices).
–It’s kind of an interesting question whether VIX is a leading or lagging indicator. When it rises, fear rises with it. Investors are uncertain of what investment outcomes to expect in the near future. Uncertainty and the possibility of losing money produces fear.
–But is fear a reliable indicator that stocks are over-priced? Is it a self-fulfilling emotion? Or are investors fearful when they should be brave and bored when they should be fearful? A low reading on the VIX usually tells you that people are not particularly worried about anything in the future interrupting a very pleasant present.
–This is when you should be most worried; when no one is especially worried. That’s a one sided trade in favour of the lazy people.
–Lazy, comfortable, complacent investors never see it coming. They don’t see it coming because they aren’t looking. They are too busy eating hot dogs and guzzling beer. To be fair, sometimes the blood-curdling, portfolio destroying event hits you from straight out of the blue like a cricket bat. With the VIX approaching a 52-week low, we’d be looking into the deep blue and watching for cricket bats to the head. We’d also be reluctant to be long over long weekends or the Christmas break.
–By the way, a very good Chanticleer article in the weekend Australian Financial Review made the mistake of calling a China credit bubble a Black Swan. Why is that a mistake? As Nassim Taleb points out in The Black Swan, banking accidents are not a mystery at all and therefore not Black Swans, which by definition, are not events you can model for.
–By contrast, you can be pretty certain that when a bank levers up and relies on an expanding balance sheet for growth, it’s going to blow up eventually. For a bank to make more money, it has to take more risks. Profitable banks are risk-taking banks. And extremely profitable banks are usually the by-product of enormous leverage and even bigger risk-taking/speculation/bad lending/greed/theft/deception.
–Maybe instead of finding ways for Australia’s banks to secure more funding so they can put more Australians deep into housing debt which they’ll never repay, the regulators could have a discussion about how to return banking to a boring, low-risk, business that serves the interest of depositors. And then the centre of gravity could be refocused on productive enterprise, rather than money shuffling.
–This might prevent the banking sector from creating massive bubbles in the economy, hi-jacking public policy so the interest of financiers are put ahead of savers, and the general despondent financialisation of modern life that means perpetual debt for all of us as we chase house prices that are growing many times faster than incomes…until they crash.