No hiding place
Three weeks ago, this column’s headline was “nowhere to go but down”. It highlighted the consensus among independent technical analysts (ie those not in the employ of big banks or brokers) that the equity markets were heading for major falls. It cited David Rosenberg, who is now perhaps THE leading independent fundamental analyst, and his list of cogent and compelling reasons why there was indeed nowhere for share prices to go but down — and noted that even Jim O’Neill of Goldman Sachs was reluctantly forced to concede the validity of most of these reasons.
Since then, the flow of economic data, in particular that relating to the US and China, has been overwhelmingly negative. To make matters worse, a growing number of governments have been forced to swing in the direction of fiscal austerity and the recent G-20 meeting illustrated that there is very little political will to undertake additional stimulus programs. That means that as the massive government programs applied in the US, China, Japan and elsewhere in late 2008 and early 2009 wind down and their impact fades, and as it becomes ever more apparent that the private sector is neither willing nor able to take on the role of driving economic expansion – there is indeed nowhere to go but down.
So it can be no surprise to anyone but the most determined ostrich that the markets have begun to slide rapidly downhill, that the second quarter ended with a sharp lurch downwards and that July seems to shaping up in the same vein – if not worse. No grounds for surprise, because the bond market showed the way well in advance of the equity market, as the spread between yields on corporate bonds and yields on government bonds (or, at least, of those governments still considered solvent) widened sharply, in a manner and to a degree eerily reminiscent of 2007 and 2008.
But one of the features of a severe bear market is that even if it well advertised in advance, its sheer violence and intensity still has the power to shock. People think that they can get out of its way by taking protective measures, but most of these prove to be useless. ‘Good-quality’ corporate bonds are certainly not the answer, as noted – and that’s even without disasters of the scale of BP, which can gut a major multi-national and weaken the entire sector that the company is part of.
It is also painfully clear that commodities are not the answer. This lesson should have been absorbed in 2008, but the myth quickly re-emerged that strong demand from China and other rapidly-growing economies would ensure that commodities, especially industrial commodities, would maintain their value – but they have not. China is now a source of weakness: its stock markets have led the way lower, since late last year and most recently over the past few days. As the Chinese economy inevitably slows, the speculative buying that has driven the prices of copper etc. fades and eventually disappears, leaving commodities, too, with nowhere to go but down.
It now seems that the last bastion of the bulls, precious metals, is also crumbling. The price of gold had managed to move higher, but it was certainly not fulfilling the predictions and expectations of its numerous believers by making a massive upward leap. Yesterday, it would seem, the trend turned decisively lower as gold and silver fell sharply.
At the end of the day, the only financial asset that keeps its value in a deflationary depression, which is what the world is facing now, is cash and near-cash assets such as short-term Treasury bills and similar paper from governments judged capable of remaining solvent. That’s why the yield on 90-day US Treasury bills is down to a mere 0.16% per annum, whilst even longer-dated obligations such as 2-year Treasury notes saw their yields fall to a new all-time low this week, of less than 0.6% per annum. More and more people are being forced to the realization that the only thing that matters anymore is safety and the return OF their money, leading them to give up the effort – futile in current circumstances – to achieve a ‘decent’ return ON their money.