China's hard landing and the commodities bust means recession in dozens of countries around the world.
Wall Street, at last, gives in to Matein Khalid's prediction
A month ago, I published a column predicting history's first "Made in China" global recession. Wall Street finally agreed with me last week after we witnessed the most brutal crash in global equities since October 2008. I have predicated a 20 per cent fall in US equities several times in the last three months and the 1,000-point drop in the Dow last week only reinforces my conviction. The German DAX and Hong Kong's Hang Seng index are down over 20 per cent from their peak. The S&P 500 and Nasdaq could well be next. Why?
One, the commodities markets flashes a deflation SOS from Dr Copper below 5,000 per metric tonne on the London Metal Exchange to West Texas below $40 on the New York Mercantile Exchange. Long-term crude oil futures and US Treasury Tips break-evens have begun to fall. This is deflation.
Two, Janet Yellen fiddles while Wall Street burns. Yet King Dollar's 18 per cent rise since April 2014 has triggered the mother of monetary tightening at a time when world trade is shrinking, as the plunge in Asian exports attest.
Three, the S&P 500's valuation at 17 times earnings made no sense once energy/mining was in free fall, market breadth had begun to decay and second-quarter revenue guidance/EPS growth proved mediocre. Even save haven markets must justify valuation metrics.
Four, as the Chicago Volatility Index rose 100 per cent in a week, every carry trade funded by the euro was in danger and leverage ratios were slashed overnight. Lord Keynes's words ring so true: in the long run, we are all dead; in the short run, we get margin calls. When the world runs amok (Malay word, ringgit at 4.18!), you sell not what you must, you sell what you can.
Five, "our currency, your problem". Nixon's treasury secretary warned the world after Tricky Dick broke the Bretton Woods gold dollar link and devalued the US dollar, the world's reserve currency. China's vice-premier should have said the same thing to the world's chancelleries after he devalued the yuan in a shock currency regime change. The Beijing put was impotent to stabilise Shanghai. The Politburo and People's Bank of China have opted for beggar-thy-neighbour devaluations. This is 1998 all over Asia, only worse.
Six, the $17 trillion US economic colossus still cannot manage three per cent GDP growth with strong capex/productivity and wage growth six years after the end of the last recession - and the Fed needs to raise rates lest the Weimer Republic be resurrected on the Potomac. Surreal!
Seven, the emerging markets currency meltdown has become a nightmare. This will decimate Corporate America's global earnings this winter. The pendulum has swung from greed to fear.
Eight, China's hard landing and the commodities bust means recession in dozens of countries around the world, including oil exporters in the Gulf with pegged currency regimes where King Dollar is a deflationary double-whammy to local shares and property markets. Santayana had it right: those who refuse to learn the lessons of history are doomed to repeat it - with bank leverage.
Nine, equity flows and market technical all screamed sell, even for US money centre banks and Old Tech with minimal earnings risk. Once industrials tanked in the index, all bets were off and the longs were destined to be skinned alive.
Ten, correlations between Wall Street, crude oil, emerging market currencies and Shanghai become all too real. Appetite for speculative IPOs and fantasy concept stocks (Tesla, Amazon, Facebook, small-cap biotechs) began to sag. The VIX rose 46 per cent to 28 on Friday alone. This is not just fear. It is panic.
At 1,970 as I write, the S&P 500 is 7.6 per cent below its May peak while the Nasdaq/Dow are down 10 per cent. Welcome to history's first "Made in China" stock market crash, Adieu to the bull market? Yes, for now, in wide swathes of global equities. The Fed cannot ignore the tightest labour market since the 1970s. $1 trillion in market cap vanished into money haven last week. The world changed for me on Friday, as did investor psychology. This was a liquidation trade and I am not eager to buy "dead cat bounces" as the index rolls over to 1,840 or lower. Time to sell put options on deep value megacap US-centric shares to earn premium. Time to hoard cash and ignore the hoofbeats of the herd and the screams of the doomed perma-bulls in property and structured products!