Stocks

Google Ad

France’s market watchdog Autorite des Marches Financie (AMF) sees as the number risk for 2018 a brutal correction of stock prices. Goldman Sachs Bull/Bear Index is at the highest in almost 50 years. Analysts preach this time its different, is it?

GS Bull and Bear

“The world has never been so indebted — even more than before the 2007 crisis — and this debt has never been so risky,” said the Autorite des Marches Financiers in its annual report. “The number one risk for 2018 is a brutal correction of stock prices. The current valuation levels look high both by historical standards, and in fundamental terms across a whole range of indicators, starting with American equities. “

Last year the market capitalisation of world bourses rose 18 per cent to $US82.5 trillion. The US stock market has resisted corrections despite crashes in emerging markets, China, the trade war and with margin debt at record levels the eternal hope of all those all in is "this time it's different"

That mantra is the same every overshoot, bubble or decimation. The argument is the massive QE and low rates is different, the AMF says inflated asset markets had so far held off the first phase of monetary tightening by the US Federal Reserve but pressure is building.

The U.S. market has so far ignored the geopolitical triggers that could tip it all over. This pattern is the same in the prelude to any bubble pop or major adjustment. We have the fragile five emerging markets imploding, Argentina, Italian political disfunction, Brexit uncertainty. A dangerous partisan split in America. Of course the trade war unleashed by the US.

MW SP W 9 15 18

It is not enough we have the Russia sanctions fallout, the Iranian nuclear treaty withdrawal and sanctions. Through to the Korean peninsula, a wounded China, the total capitulation of Venezuela. All this with a massive bet on financial markets at or near record highs fueled by record debt.

In basic terms we have already had a series of massive bubble bursts that wiped out wealth such as the crypto currency collapse, the fall of previous safe heaven assets such as gold. The collapse of emerging nations meaning debt will NEVER by paid back. There are many more already that have been covered for now by more debt.

China Stocks Low

The French body worries about the existing frailties but also possibilites, such as higher oil prices and uncontrolled inflation. The financial guardians warn that the sheer level of “speculative debt” would amplify the effects of a cyclical downturn fueld by a Federal Reserve desperate to make its member banks whole with easy money since the Lehman crisis has consequences.

“Expansionary monetary policies have encouraged investors to hunt for yield. By buying higher-yielding securities from lower-rated issuers whose solvency could be called into question quickly if rates rise or the macroeconomic environment worsens,” the AMF said

The Goldman Sachs  indicator, the Bull/Bear Index pictured above was designed to provide a “reasonable signal for future bear-market risk” is now at the highest in almost 50 years. The index is based on measures of equity valuation, growth momentum, unemployment, inflation and the yield curve, is now at levels last seen in 1969.

MW AMZN W 9 15 18

Its Different This Time We Have Amazon 

Even at the firm with the indicator their analysts are saying this time its different. Goldman strategists including Peter Oppenheimer wrote in a note last week that a long period of relatively low returns from stocks is a more likely alternative than a market crash.

“The accord is conditional on a vote in the British Parliament and the European Parliament. The outcome of the talks risks remaining in doubt until the last moment, so actors must prepare for a no-deal scenario, a hard Brexit on March 29, 2019, and develop appropriate contingency plans,” the AMF warned.

Last year the market capitalisation of world bourses rose 18 per cent to $US82.5 trillion. The US stock market has resisted corrections despite crashes in emerging markets, China, the trade war and with margin debt at record levels the eternal hope of all those all in is "this time it's different"

For those familar with the herd mentality rife in extended periods of greed and fear warning signs are flashing, the difficulty is timing the turn. Of course there is always a chance this time is different, perhaps a different degree or ratio. The point is be prepared, shut out the noise and avoid the ego driven rants of gurus and analysts that have only experienced the massive QE fueled bull run. 

Know your levels, expect the unexpected and trade smart.

Source: Bloomberg, AMF

KnovaWave @knovawave

Log in to comment
Discuss this article in the forums (2 replies).