What the Three Market Bears Mean for Resources

When I started working with Port Phillip Publishing in December 2013, our Publisher, Kris Sayce, was the biggest market bull I had ever met.

Yet, as you read in his article here, he’s now turned shockingly bearish! And for good reason.

Kris’ view now aligns with our colleagues Jim Rickards of Strategic Intelligenceand Vern GowdieofGowdie Family Wealth. They’re all anticipating a major near-term stock market crash; possibly worse than that of the Global Financial Crisis.

Will they be right?

Only time will tell.

I’ll explain…

The US interest rate rise is coming

Kris recently wrote in Tactical Wealth, ‘the more I look at the evidence and review what I’ve written, the more convinced I am that a major stock market collapse is only weeks away’.

When someone who’s been right for seven years straight changes tack, it’s worrisome. Kris’ view is that the stock market will crash because of two reasons — interest rates and earnings.

So let’s talk interest rates

I’ve long said to expect a US interest rate hike this year.

US Federal Reserve Chairperson, Janet Yellen’s continues to confirm our forecast with her comments this week. In her own words,

Most judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point. Participants observed that the labor market had improved notably since early this year, but many saw scope for some further improvement

Indeed, it’s now not ‘if’ but ‘when’ the US Fed will raise rates. That said, the US Fed plans to raise rates sooner rather than later.

On the topic of timing, it’s long been my view that the first rate hike will come in September or October. This target aligns with Yellen’s comments last month:

We also want to be careful not to tighten too latebecause, if we do that, arguably we could overshoot both of our goals and be faced with this situation where we would then need to tighten monetary policy in a very sharp way that could be disruptive.

If there is a negative shock to the economy with interest rates pinned at zero, we don’t have great scope to respond by loosening policy further, whereas with a positive shock of course we can tighten monetary policy.

What I find interesting is the Fed’s intention to have some ammunition up its sleeve, to fight the next financial crisis.

This is a shocking reason to raise rates.

But I guess the worst forecasting institution of the world — a tough call when you throw in the International Monetary Fund — has to at least seem useful.

As Kris recently wrote to Tactical Wealth readers,

The Fed appears to believe that raising interest rates is a no-lose situation for them. If the Fed raises interest rates and the markets keep booming, they can say they were right to raise rates.

But if the Fed raises interest rates and markets plunge, it gives them an excuse to intervene in the market…perhaps by launching a new money-printing program.

An increase at the September meeting seems most likely. That’s because it’s just two to three weeks before the next US earnings season’.

Kris Sayce says ‘watch out for the October stock market crash’

And this brings me to my Publisher’s second point — earnings. No doubt, and in line with Kris’ October stock market crash warning, he expects them to be terrible.

In fact, looking back at when we were approaching the Global Financial Crisis, earnings started to slow down immensely. Yet, while earnings slowed down, mergers and acquisitions activity was booming — a sure sign that the crash was coming…

In today’s respect, this quote from Dealogic explains it all:

Global Healthcare M&A volume stands at a YTD record high of $422.8bn in 2015, up 42% from 2014 YTD and has almost exceeded the full year record high volume of $429.3bn set in 2014.’ A big increase in M&A activity is a danger sign. You usually see a peak in activity as the economy and markets near a peak’.

So with earnings slowing down and acquisitions at an all-time high, is a crash coming?

Worse than subprime

According to finance veteran Vern Gowdie, it’s inevitable. And when it comes, the crash‘will be far worse than either 9/11 or the GFC. Banks going broke. Governments reneging on bond obligations. Massive pension funds scrambling to protect what’s left of their portfolios.

This aligns with Jim Rickards: ‘when the next crisis hits, the predictable and illogical response will be for panicked investors to storm the doors of the US Treasury and demand to buy as much of that worthless paper as they can’.

The argument for owning US Treasuries is that, like it or not, the US is the still the reserve currency of the world. It’s also got the largest economy. And the deepest and most liquid financial markets. So, when panic comes, people turn to the US financial markets for safety.

No doubt this is precisely why Rickards believes that the bond bubble can continue to run for, potentially, years to come…

So, if the three bears don’t see the crash stemming from the bond market, where will the crash come from?

Eyes wide open

Jim Rickards elaborates here:

The next financial collapse, already on our radar screen, will not come from hedge funds or home mortgages. It will come from junk bonds, especially energy-related and emerging-market corporate debt.

The Financial Times recently estimated that the total amount of energy-related corporate debt issued from 2009–2014 for exploration and development is over US$5 trillion. Meanwhile, the Bank for International Settlements recently estimated that the total amount of emerging-market dollar-denominated corporate debt is over US$9 trillion’.

So Jim Rickards is calling for a dual financial crash next year! Part one will be in US dollar-denominated emerging market corporate credit sector. And part two will arise in the energy corporate credit space.

And this is why Tim Dohrmann and Jim wrote in Strategic Intelligence this week:

If Yellen does raise US interest rates, fasten your seat belt and look out below. Markets will have no bottom and we’ll be in for a 1998-style crash beginning in emerging markets.

‘For that reason, the most important date of the year will be the September 17 Fed meeting.

If the Fed raises rates, you’re going to see a huge amount of capital rush into the US dollar. This could trigger the emerging market crisis in the years ahead. Lower oil prices could easily trigger a junk bond collapse.

And there you have it: the right ingredients for the next financial crash.

But if you ask me…

The next global financial crisis will stem from government bonds.

The majority are far too bullish on bonds — at a time when economic growth has come to a halt and the financial system is severely overleveraged. Historically, these conditions typically spell the end of bond bubbles. Yet most people dismiss that there could ever be a crisis in bonds which could wipe out wealth worldwide.

Governments defaulting on their bonds is the crisis you should be worried about…

And when the US fed raises rates, it will spell the end to this 30-year bond bull market.

The hedge?


To learn more, go here.


Jason Stevenson,

Resources Analyst, Resource Speculator

From the Port Phillip Publishing Library

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