Global Economy in Danger Zone? Quick, Everybody Panic!

global economy in danger zone?

To paraphrase the great trader WD Gann, be bullish in a bull market, and bearish in a bear market. In other words, go with the flow. Don’t try and swim upstream…don’t fight the trend.

It took me a while to realise the wisdom of this saying. I believed the value of my opinion held more weight than that of the market. What hubris!

I now know that what I think is irrelevant. It’s what the market thinks that is important.

And while I’ve been warning about a coming correction lately (purely because probability suggests we’re due for one) I’m not overly bearish. The market isn’t going to collapse from here.

But if you’re swayed by the bearish argument, there is plenty of fodder out there for you. Unfortunately, believing the bearish spin will lead you into making the wrong decisions when a correction does hit.

The latest (at least that I’ve seen) is from the London Telegraph journo Ambrose Evans-Pritchard. He’s dramatically bearish most of the time. And his latest offering is no different:

The world financial system is as dangerously stretched today as it was at the peak of the last bubble but this time the authorities are caught in a “policy trap” with few defences left, a veteran central banker has warned.

Nine years of emergency money has had a string of perverse effects and lured emerging markets into debt dependency, without addressing the structural causes of the global disorder.

“All the market indicators right now look very similar to what we saw before the Lehman crisis, but the lesson has somehow been forgotten,” said William White, the Swiss-based head of the OECD’s review board and ex-chief economist for the Bank for International Settlements.

Jeez…time to sell, huh?

But hang on…‘all the market indicators right now look very similar to what we saw before the Lehman crisis’. Really? 

The global economy is doing just fine

There is no global real estate bubble now, as was the case back in 2007. There is no mass securitisation of property assets, which were sold to investors as low risk, high yielding bond-like investments.

Property, in one form or another, makes up the majority of a banks’ balance sheet. When a property bubble bursts, it dangerously impairs the banking system. Credit and liquidity freeze. That’s when you get a ‘Lehman moment’, and a credit crisis.

As there is no global property bubble, it is highly unlikely that we’re heading towards another Lehman Moment.

I’m not saying there aren’t problems in the global economy. Years of artificial global bank stimulus have caused, and will cause, all sorts of distortions.

But to think that it will cause another deflationary global meltdown is playing the low probability game.

Look, no one knows what will happen in the future. You have to operate on probabilities. Thinking we will experience another global meltdown, simply because your experience of the previous one was so vivid, is a low probability play.

The article continues to give ‘evidence’ of 2007-like similarities:

Professor White said disturbing evidence of credit degradation is emerging almost daily. The latest is the disclosure that distressed UK construction group Carillion quietly raised £112m through German Schuldschein bonds. South African retailer Steinhoff also tapped this obscure market, borrowing €730m.’

That’s the evidence of credit degradation?

Companies go bust all the time. And when they’re in trouble, they will try to access the easiest money they can find.

But it’s hardly a reason to believe the whole credit system is freezing up.

The other thing to keep in mind is that the 2003–2008 boom was a boom in just about everything. It was a global credit boom. Commodities also had a massive run, which was great for Australia.

Where are commodities now, though?

Still trying to get up off the floor…

Take a look at the following chart. It shows the ishares GSCI Commodity Index Trust fund ETF [AMEX:GSG] since mid-2006. According to this index, commodity prices are still BELOW their 2009 nadir.

iShares GSCI Commodity Indexed Trust Fund ETF - 24-01-2018


Source: Optuma
[Click to enlarge]

That doesn’t look anything like 2008.

But as we potentially move into an inflationary environment in the years ahead, this index could head much higher.

As I said, it’s all about probabilities. The way I see it, it’s more probable that we move into an inflationary environment in the next decade…not a deflationary one.

The early stages of inflation are good for stock markets and economies. It’s only when inflation gets out of hand that it starts to damage asset prices, as it did in the 1970s.

We’re a long way from that point.

US stocks are certainly due for a correction. And when that correction starts, there will be no shortage of bears telling you the bubble is popping.

But at that point, ask yourself if there really are major similarities to 2007/08. If you look at the situation without bias, you’ll find that there are not.

Greg Canavan,
Editor, Crisis & Opportunity

Greg Canavan

Greg Canavan

Greg Canavan is a Feature Editor at Money Morning and Head of Research at Port Phillip Publishing.

He likes to promote a seemingly weird investment philosophy based on the old adage that ‘ignorance is bliss’.

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