Saturday , 13 July 2024

Stock Markets Crash As Central Banks Lose Control

The great props to the world economy are now beginning to fall:

  • China is going into reverse,
  • the emerging markets that consumed so many of our products are crippled by currency devaluation,
  • the central banks have lost control and at the same time
  • the global economy is grinding to a halt.

It is only a matter of time before stock markets collapse under the weight of their lofty expectations and record valuations.

The above comments, and those below, have been edited by (Your Key to Making Money!) for the sake of clarity [] and brevity (…) to provide a fast and easy read and have been excerpted from an article* by John Ficenec ( originally entitled Doomsday clock for global market crash strikes one minute to midnight as central banks lose control and which can be read in its unabridged format HERE.

Here are 8 signs things could get a whole lot worse:

1. China slowdown 

The Chinese economy has now hit a brick wall.

  • Economic growth has dipped below 7pc for the first time in a quarter of a century, according to official data. That probably means the real economy is far weaker.
  • Data for exports showed an 8.9pc slump in July from the same period a year before. Analysts expected exports to fall only 0.3pc, so this was a huge miss.
  • The Chinese housing market is also in a perilous state. House prices have fallen sharply after decades of steady growth. For the millions who stored their wealth in property, it makes for unsettling times.
  • The rate of borrowing has been slashed during the past 12 months from 6pc to 4.85pc by the People’s Bank of China in an attempt to boost the flagging economy.
  • Opting to devalue the currency was a last resort and signalled the great era of Chinese growth is rapidly approaching its endgame.

2. Commodity collapse

The China slowdown has sent shock waves through commodity markets.

  • The Bloomberg Global Commodity index, which tracks the prices of 22 commodity prices, fell to levels last seen at the beginning of this century.
  • Brent crude, the global benchmark for oil, has begun falling once again after a brief rally earlier in the year. It is now hovering above multi-year lows at about $50 per barrel.
  • Iron ore is an essential raw material needed to feed China’s steel mills, and as such is a good gauge of the construction boom. The benchmark iron ore price has fallen to $56 per tonne, less than half its $140 per tonne level in January 2014.

3. Resource sector credit crisis

Billions of dollars in loans were raised on global capital markets to fund new mines and oil exploration that was only ever profitable at previous elevated prices.

  • With oil and metals prices having collapsed, many of these projects are now loss-making. The loans raised to back the projects are now under water and investors may never see any returns.
  • Nowhere has this been felt more acutely than shale oil and gas drilling in the U.S.. Tumbling oil prices have squeezed the finances of U.S. drillers. Two of the biggest issuers of junk bonds in the past five years, Chesapeake and California Resources, have seen the value of their bonds tumble as panic grips capital markets.

As more debt needs refinancing in future years, there is a risk the contagion will spread rapidly.

4. Dominoes begin to fall

The great props to the world economy are now beginning to fall.

  • China is going into reverse and the emerging markets that consumed so many of our products are crippled by currency devaluation.
  • The famed Brics of Brazil, Russia, India, China and South Africa, to whom the West was supposed to pass on the torch of economic growth, are in varying states of disarray.

5. Credit markets roll over

As central banks run out of silver bullets then, credit markets are desperately seeking to re-price risk.

  • The London Interbank Offered Rate (Libor), a guide to how worried UK banks are about lending to each other, has been steadily rising during the past 12 months. Part of this process is a healthy return to normal pricing of risk after six years of extraordinary monetary stimulus. However, as the essential transmission systems of lending between banks begin to take the strain, it is quite possible that six years of reliance on central banks for funds has left the credit system unable to cope.
  • Credit investors are often far better at pricing risk than optimistic equity investors and in the U.S., while the S&P 500 continues to soar, the high yield debt market has already begun to fall sharply.

6. Interest rate shock

Interest rates have been held at emergency lows in the U.K. and U.S. for around six years.

  • The U.S. is expected to move first, with rates starting to rise from today’s 0pc-0.25pc around the end of the year.
  • Investors have already starting buying dollars in anticipation of a strengthening U.S. currency.
  • U.K. rate rises are expected to follow shortly after.

7. Bull market third longest on record

The U.K. stock market is in its 77th month of a bull market, which began in March 2009.

  • On only two other occasions in history has the market risen for longer. One is in the lead-up to the Great Crash in 1929 and the other before the bursting of the dotcom bubble in the early 2000s.
  • U.K. markets have been a beneficiary of the huge balance-sheet expansion in the U.S.. US monetary base, a measure of notes and coins in circulation plus reserves held at the central bank, has more than quadrupled from around $800m to more than $4 trillion since 2008. The stock market has been a direct beneficiary of this money and will struggle now that QE3 has ended.

8.  Overvalued U.S. market

In the U.S., Professor Robert Shiller’s cyclically adjusted price earnings ratio – or Shiller CAPE – for the S&P 500 stands at 27.2, some 64pc above its historic average of 16.6. On only three occasions since 1882 has it been higher – in 1929, 2000 and 2007.


Also read Central Banks Are Beginning to Lose Control