So finally the market has corrected.
Is it over?
I don’t think so.
If this is 2011 all over again, it will bounce, but I ask this question.
Can you see value in the market?
Generally there is always value in the market, even when there is a bubble going on in a sector.
I can’t see any, at least none without looking at for example resources stocks which have a good reason to be on life-support. To make it worse, the market is full of ludicrous valuations.
So the market has corrected but there still isn’t value to be had.
That is highly suggestive to me that we are only in to the first wave of a bear market.
Until there is value in some sectors of the market, the downside is real and significant.
So what would be the catalyst of the next wave down?
There could be nothing acute to hit the market and we could suffer an extended period of lower highs and lower lows, that what makes a bear market, not the idiot hindsight statement that a market has fallen 20% already defines a bear market. There is no point reporting a bear market that already happened, you need to predict it.
That kind of bear market that grinds down over years is not one I’ve ever seen. You will be hard pushed to find one in the charts. I expect a market to float upwards and occasionally crash horribly, so that’s the cycle I believe we are in.
We have had a nasty bump, but not a crash: yet.
So, Is it over or just begun? That is the ‘money’ call.
To my mind to make the next level down needs a catalyst.
China’s market has already mainly crashed, so another move down to where their bubble started seems unlikely to shave another 15% of the Dow, it could but it feels there needs something more.
Oil is already on its face and another fall to say $30 doesn’t seem quite enough to pitch the markets down another 1000 Dow points in a morning.
So what could give us a 2008 moment, this year?
Well try this on for size?
Forbes has this lovely table.
This gives us the biggest global companies by assets.
What do you know they are all banks?
Most of them have gone broke recently and or had to be bailed out from going broke.
Except the Chinese ones.
Can you tell where this is going?
In the top 8 of those companies are 4 Chinese banks with $11 trillion dollars of assets.
$11 trillion, that’s more than twice what China has in US treasuries.
What kind of haircut would you put on those assets?
Liabilities meanwhile never evaporate in a recession or stock market crash.
Banks go bust, right? They go broke surprisingly often. Care to argue against that?
Could it happen in China with a stock market crashing, with an economy in trouble, in a land where opaque accounting is a pestilence, corruption rife?
You must agree that if Chinese banks followed the path of western banking in 2008, or even started to look like they might get on the pathway to that, then the outcome to world markets would be mind boggling.
Now with the arrest of Chinese journalist Wang Xiaolu for writing that the Chinese stock market bubble was toast, I may well have torn up my ability or for that matter desire to visit China, but this potential rupture, that of course ‘could never happen,’ is what I’ll be looking out for as matters unfolds in this China-centric correction.
Maybe it doesn’t need the meltdown of Chinese banking to turn this correction into a crash, maybe we should all ‘buy the dip,” but I’ll take a lot of convincing that this isn’t the start of something big. Market crashes are like avalanches, it isn’t the guy who yodeled that caused the snow to rush down the mountain, it was weeks of snow building up to a level that it absolutely had to happen one way or another.
Meanwhile we should bear a thought for those arrested for the non-crime of exposing a bubble created by those in power, they are in effect political prisoners scapegoat-ed by those responsible for the folly of creating a bubble in the first place.
No one ever went to jail for creating a bubble.