Have you heard the news? The stock market has started to collapse and all the various news outlets are speculating about what’s going on and why this is happening all of a sudden.
Many of the major news sites are talking about a company called Glencore and how it could be the next Lehman Brothers, in that it’s the first mining company to go bust, which then causes the other mining companies to struggle to refinance their debt, which in turn leads to some of the more unhealthy companies going bust, which then further unsettles banks and retirement funds and we have another GFC style event.
I’m not going to speculate on whether this assessment is right or wrong, because ultimately it doesn’t matter. The true reason why everything is looking, well, wobbly – is because of debt and a lack of any “real” growth. You’ll see i’ve highlighted the word real, and that’s because the majority of the growth we’ve experienced is due to central banks around the world doing things like quantitative easing, which is just a fancy way of saying – handing out money – normally to banks.
Why do central banks need to do this?
Because there is so much debt on the books of public and private companies, households, students and governments that there isn’t enough money to go around to create any “real” growth. Most of the money that is available is being used to pay back debt and the interest it is accruing everyday.
The government wants you to start a business, create new jobs and sell things to other countries so that they can run an account surplus. This surplus is then used to pay off debt and reinvest into new assets. In the past a great way to do this was to borrow in the short term, invest in productive assets and then the gains would pay off the debt in the long term.
Unfortunately we’ve got to a point where there is now just too much debt everywhere, that the only thing central banks can do is lower interest rates in an attempt to ease the debt burden. It may even get to a point where they implement negative interest rates, where you will pay the bank to hold your money, rather than them pay you interest.
Because interest rates are so low already, something else really interesting is happening at the moment. Central banks are having currency wars with each other. The goal of these wars is to create as much new money as possible so that their own currency is worth less than other currencies. Sounds strange right? The reason they want to do this is that once your currency is inflated, it becomes really cheap for you to export goods to other countries and for companies to want to do business in your country, because hiring workers is really cheap compared to elsewhere.
The obvious downside to this is that you have less buying power on a global scale, but the government is happy because their revenue goes up, which they can then use to pay down debt etc.
Normally this plays out and most people don’t notice, the fun at the moment is that virtually all central banks are devaluing their currencies at the same time, because everyone wants new growth, but it just doesn’t work when everyone is attempting to do the same thing at the same time. The problem they have is that everyone is so burdened by debt that there is very few other options – and so the race to the bottom just gets bigger and faster until the bubble goes pop.
Back to the point of this post… What’s going on with the stock market?
Well, people are starting to realise that things a pretty much rooted, and that most companies are way over valued. The net result is that things are starting to go into a bit of a melt down. Glencore isn’t the cause, they are just one of the more leveraged players in the game, who are going to be one of the first to be exposed.
If you want to get into pure charting, which let’s face it – I love charting, then check this out:
The Dow has broken through the uptrend and is now looking a lot more bearish that it has done at any time over the last 5 years.
Will it follow that red arrow on the chart? I have no idea, but if it does keep going down, those purple support lines are where it should hover for a little while before either going down to the next purple line, or bouncing back up. My money would be on it going further down, both on a fundamental analysis and a technical, however, that doesn’t mean it will.
To be on the safe side, i’ve already moved most of my money into safer assets, as I have very little to gain at this point, and a lot to lose.