If trouble comes in threes, we’re in for one more surprise.
Last week the market had to deal with the Swiss and the end of the currency peg.
Then yesterday, China’s CSI 300 index fell a whopping 7.7%.
What next? Is there more trouble on the horizon?
Of course, but if you try to pick the exact crisis and when, well, you’ve got better odds of winning the lotto jackpot…
The two events that have happened over the past week are what you can call ‘Black Swan’ events.
We won’t get into the theory behind it, but in simple terms, it’s a way of describing events that are almost entirely unpredictable.
Therefore, because something is unpredictable, it’s a fool’s errand to try and predict them.
Now, some may argue that these two events don’t quite fit the mould as ‘Black Swan’ events. You could argue that there was an element of predictability.
We’ll concede that. But we will make one other key point — no one did predict them.
And yet, for the past six years, market watchers have fallen over themselves trying to identify and predict big market-changing events, all to no avail. That’s because most market watchers are lazy.
They use the scattergun approach of predicting everything will cause a crash…but then still missing out on the events that do cause a crash.
Besides, when it comes down to it, stocks have had a pretty good run over the past six years.
Stocks boomed from 2009 through to mid-2010.
They boomed again from mid-2012 through to mid-2014.
That’s right, there are plenty of investors who have already forgotten about that boom.
Sure, it wasn’t as big as the US stock market boom. Aussie stocks only went up 32%, compared to the 58% gain for the US S&P 500 index.
But heck, we’re not complaining. Because if recent history is anything to go by, once the dust settles, stocks could be about to lift off again.
Quiz time: name the crisis
Look at this chart of the Aussie stock market for the past 10 years:
Source: Google Finance
Click to enlarge
To be quite honest, it’s hard to pinpoint a time when someone hasn’t predicted an impending crisis.
In fact, as time passes, one event seems to blur into another — when was the Dubai crisis? Or the Cyprus crisis? What about the European debt crisis? Can you accurately pinpoint them on that chart, without looking up the dates?
And let’s not forget the one that was really supposed to tip the world over the edge into war and depression, the stoush between Russia and Ukraine over Crimea. It may feel like a distant memory, but it was actually just about this time last year that all that kicked off.
Each time a so-called crisis has reared its head, the market has had a little tantrum, but then roared back as though nothing had happened.
So, does that mean there’s nothing to fear?
Not quite. There’s always something to fear. If folks didn’t worry about anything, then you’d always pay full price for a stock. That means, in a weird way, it should actually please you when the market has a hiccup like this.
Look, this isn’t the first time that the markets have gotten nervous about something, and it won’t be the last time.
Stating the obvious
So, what’s the big cause of this current ‘crisis’? There’s only one place to pin the blame: central banks.
The reality is that as long as central banks are involved in the markets, there will always be instability.
In an article for the Financial Times that somewhat states the obvious, fund manager Axel Merk notes:
‘Few pity the speculators who lost money when the Swiss franc surged last Thursday after the Swiss National Bank removed the ceiling it had imposed versus the euro since 2011. However, the ensuing rout in currency markets suggests central banks may have become a potentially destabilising force.’
‘May have become’? Mr Merk is clearly a bit slow on the uptake when it comes to the involvement of central banks in an economy.
Central banks have been a destabilising force for centuries. Their main purpose is to destabilise, because it’s up to them to manipulate the markets on behalf of their paymaster — the government.
The problem with central banks is that they tend to lengthen periods of boom and bust activity. Take the 2000s as an example. When the US Federal Reserve kept interest rates low, it stoked the fires of a boom.
Low interest rates encouraged excess borrowing and risk taking. And because the Fed was worried about raising rates too quickly, in order to avoid stalling the boom, it meant the boom would turn into a bubble, which would eventually collapse.
The same scenario is playing out again now. Interest rates have been at a record low for more than six years. Commodity prices boomed, fuelled by low interest rates and money printing.
Both of those policies are, by their nature, destabilising. It’s only because central banks exist that you get those destabilising forces on such a grand scale — negative interest rates, and trillions of dollars of freshly printed money.
Profit first, trouble later
That’s destined to lead to trouble.
There’s no doubt that these reckless policies must lead to a sticky end.
However, as bad as things may look, it doesn’t mean the worst will happen right now.
In fact, the odds are that the market will keep on booming in the short term, because the central banks have barely gotten into their stride.
If you want proof, here’s another story from the Financial Times:
‘The European Central Bank will this week set out plans for an ambitious programme of sovereign bond buying, as the bank steps up its efforts to stave off deflation and boost the eurozone’s flagging economy.’
Money printing won’t 100% guarantee a booming market, but it’s about as close to a dead certainty as you can get.
We know that because we’ve seen it happen before…and we’ve helped investors profit from it before. So has my colleague, Tim Dohrmann. This time, reports suggest the European Central Bank (ECB) is ready to print US$635 billion to supposedly revive the European economy.
Will it work? In the short term it will. But take note of what happened in Switzerland. When the central bank can no longer support a market, the market will crash. That happened to the euro, and it will happen to European stocks when the stimulus ends.
But that’s potentially in the future. For now, as long as the ECB prints, you can expect the markets to respond with higher prices. It’s a high risk investing strategy if you bet on more stimulus, but it’s also a strategy few can afford to miss.