Multiple Risks Are Converging on Markets
I’ll never forget as a kid, watching footage of the Gulf War on the news. I’ve was around 10 or 11.
The concept of war terrified me. All I could think was, could that happen here?
My parents reassured me that I was safe in Melbourne. We were thousands and thousands of kilometres from the conflict. It’s something that just doesn’t happen in Australia. Why? I wanted to know.
‘We’re too far away’ was the answer.
That was all my kid brain needed. Reassurance of distance that it couldn’t come here.
Obviously as an adult – and now a macro analyst – I understand things differently. The world has changed. Global politics and markets are intertwined and technology has made massive distances shorter.
Australia’s distance from conflict no longer implies its safety.
Today’s analysis from Jim is timely.
It comes at a time when the Dow Jones is down 2,500 points since October. Dragging the Aussie market back down to a level not seen since September 2017.
Putting the S&P/ASX 200 index back into a trading range that may be hard to break out from. Meaning Aussie stock investors may find their stocks are ‘range bound’ like they were for most of last year.
More importantly, as Jim reveals below, the falls in the Dow Jones can be attributed to the ongoing geopolitical tensions between the US and China.
Leaving Australia stuck in the middle. The US is Australia’s biggest ally. China is Australia’s biggest trading partner.
What Jim is trying to demonstrate is that trade wars are often correlated with shooting wars.
If a shooting war develops between the US and China, the conflict will be brought right to our shores.
Distance won’t keep us safe this time.
I’ll hand you over to Jim, and he’ll break it down for you.
Multiple Risks Are Converging on Markets
Jim Rickards, Strategist
One of the questions I am asked most frequently in my global travels is what will be the cause of the next financial crisis.
This question is asked by those who understand that this crisis is coming but want to pin down the date or a specific turn of events that will help them know when to react.
My answer is always the same: We can be certain the crisis is coming and can estimate its magnitude, but no one knows exactly when it will happen or what the specific catalyst will be.
The second part of my answer is to prepare for the crisis now.
Are the market falls a sign of things to come?
When it happens, it could unfold very quickly. If you’ve been paying attention to the stock market lately, you know how quickly selling fever can spread once it starts.
Just look at these past two days in the US alone.
We’ve had multiple days since October when the Dow lost several hundred points, with the other major indexes posting similar losses on a percentage basis.
There may not be time or opportunity in the middle of the crisis to take defensive measures.
That’s why I keep reminding my readers that now is the time to prepare and suggesting suitable allocations to gold. In fact, I explain how you can go about this in my book, The New Case for Gold.
With that being said, it is useful to consider the most likely flashpoints for the next crisis and to monitor events as a way to improve one’s chances of seeing a crisis at the early stages.
A crisis builds slowly, then rapidly reveals itself
You recall that the financial panic of 2008 actually started in 2007 with massive loan losses in subprime mortgages.
Those losses caused certain hedge funds and money market funds to close their doors. Investors scrambled for liquidity to cover their mortgage loan losses.
This led them to sell equities, bonds and gold to raise cash to meet margin calls.
The panic was subdued in late 2007 but came back to life in 2008 with the collapse of Bear Stearns, Lehman Bros., AIG and others.
The Fed and US Treasury intervened to provide guarantees and liquidity, but not before everyday investors saw half their net worth wiped out. The crisis was not confined to the US but spread worldwide to Europe, China and Japan.
Now, a new loan loss crisis is unfolding. The new crisis is not in mortgages but in student loans.
Total student loans today at US$1.6 trillion are larger than the amount of junk mortgages in late 2007 of about US$1.0 trillion.
Default rates on student loans are already higher than mortgage default rates in 2007. This time, the loan losses are falling not on the banks and hedge funds, but on the US Treasury itself because of government guarantees.
Not only are student loan defaults soaring, but household debt has hit another all-time high.
Student loans and household debt are just the tip of the debt iceberg that also includes junk bonds, corporate debt and even sovereign debt, all at or near record-highs around the world.
Trade war threatens markets
Meanwhile, the trade war remains a great risk to markets.
When the trade wars erupted in early 2018, I said that the trade wars would be long-lasting and difficult to resolve and would have significant negative economic impacts.
Wall Street took the opposite view and estimated that the trade war threats were mostly for show, the impact would be minimal, and that Trump and China’s President Xi Jinping would resolve their differences quickly.
As usual, Wall Street was wrong.
Trump’s top trade adviser Peter Navarro recently delivered a speech making it clear the trade wars will not be resolved soon. He also tells Wall Street to ‘get out’ of the policy process.
He said, ‘If there is a deal, if and when there is a deal, it will be on President Donald J. Trump’s terms, not Wall Street terms’.
Navarro warns that prominent Americans such as Hank Paulson, former secretary of the US Treasury, and Blackstone chief Stephen Schwarzman may be acting as ‘unregistered foreign agents’ as a result of their lobbying activities on behalf of China.
This could subject these principals to criminal prosecution.
Investors should expect lower earnings per share from Apple, Sony and entertainment companies dependent on the Chinese market or Chinese manufacturing to make their profits.
Companies such as Caterpillar are also caught in the crossfire.
Get ready for a long and costly trade war. It has already started and won’t be over soon.
The trade war is dragging the US markets down.
And Australia is, once again, caught in the crosshairs.
Tomorrow, I’ll show you how this trade war could bring a shooting war straight to Australia’s doorstep.
All the best,