Correction, or the start of a crash? That was the debate in the Money Morning office this week.
At time of writing, the ASX 200 is down just over 1.7% from the level it opened at on Monday morning. Despite good news from the US economy, the Aussie market continued to fall in fits and starts through Tuesday and Wednesday, before scraping along sideways on Thursday and Friday.
Is it in the process of forming a bottom? Or just gathering its breath before plunging farther?
There are plenty of arguments for why it should drop from here. You’ve likely heard many of them before.
Australia’s over-dependence on debt, especially foreign funded debt. The slowing of the housing bubble, which could finally be ready to burst. The massive weight given to the big banks and resource companies in the economy, until a threat to either becomes a threat to everyone.
But if that’s the case, and this isn’t simply a correction but the beginning of a crash, why now? What changed?
All of those threats have been hanging over our heads like the sword over Damocles for months, if not years. And, largely, Australians have noted the risks, shrugged, and continued on with their lives. As Greg noted on Monday, the ASX fell 3.4% in the month of May. Significant, but not heart stopping.
So how is it that in just the first few days of this week we’ve lost almost exactly half as much again?
Maybe it’s nothing. Maybe there’s no one thing to point to. If this week is the first week of the next great crash, maybe there’s no single event to pin the blame on. Sometimes that’s how these things happen. The market is doing fine, until it isn’t. Everyone’s aware of the growing risks, but not really afraid — until they are. And then once the panic starts, it can be impossible to stop.
Australia flirted with that panic this week. We may not be beyond it yet…
This week in Money Morning
We started Monday morning in a reasonably optimistic place. Greg believed that good results from the US over the weekend, combined with momentary strength in the iron ore price, should have seen a good start to the week.
Judging by the panicky voices in the mainstream, you might think we’re in the heart of a bear market. Greg argued that the correction in May is not unexpected, or particularly large.
There are always individuals trying to capture fame and fortune by correctly calling the beginning to the next ‘big one’. And whether through luck or skill, someday some of them will get it right. But Greg argues that it’s impossible for individuals to understand the entire market or make accurate big-picture forecasts.
If you gathered up all the occasions when someone declared that a drop in the market was the beginning of the next big one, you’d find vastly more false warnings that real ones. But when it turns out the sky isn’t falling, no one gets a book deal. No one earns instant fame and admiration for a false alarm. Or eventually gets to be portrayed by Ryan Gosling in a slick Hollywood dramatisation a decade later. So we don’t tend to remember the false alarms as often.
But as Greg pointed out, people making dramatic, sweeping declarations about the future of the market are far more likely to quietly fade into obscurity, than turn out to be right.
Greg makes one exception to that assessment. To read what that is, you can find Monday’s Money Morning here.
Despite the strong performance of the US market, the Aussie market didn’t perform as well as expected Monday. The big four banks led the market down, falling an average 1.6%. In Tuesday’s article, Greg discussed the reasons why — and, more importantly, what it might mean.
Greg argues that too many people are using their biases to create narratives for what is happening. But they run the risk of ignoring possibilities that don’t fit their biases — even if those possibilities are more likely to happen. To read why Greg doesn’t believe we’re about to see a housing crash drag the big four banks to destruction, and what you should be expecting in the market, you can find Tuesday’s Money Morning here.
The tough week for the market continued through Tuesday. On Wednesday morning Greg looked at the depth of the correction so far. The levels of panic we saw in the mainstream media this week just didn’t match up with what had actually happened. Greg continued to argue that you shouldn’t mistake a correction for a crash. But why does such a large portion of the crowd disagree? Greg looked at the psychology of market reactions, and how you can rise above it, to your profit. You can read the details here.
On Thursday, the falls stopped. The market didn’t exactly leap upwards, but at least it wasn’t falling, either. Sam turned his attention to the UK election, and discussed why a surprise result could be in the cards.
Sam’s predictions have turned out to be very prescient. But what could it mean for Australia’s troubled market? Could yet another unexpected election outcome be the bit of uncertainty that tips us further into decline? Or will the global economy keep on ignoring politics and recovering its strength, in spite of who the world votes for and what idiocy they tweet? Read more here.
And on Friday Sam stepped away from short-term market moves to look at what he says will be ‘the biggest transformational change to finance…ever.’ And Sam isn’t the only one. After years of not quite ‘getting’ this technological revolution, it finally clicked for another of your Money Morning editors this week. To read the conversation that did it, you can find Friday’s article here.
That was all from your Money Morning team this week. Tune in again on Monday to watch as Australia’s economy battles on, and our editors carry on the debate about where it’s headed next.
Editor, Money Weekend