Dear PGM Capital Blog readers,
In this weekend blog edition, we want to elaborate on the current correction cycle, that has all the potential of becoming a bear market, which might lead to a global recession or even depression.
DEFINITION OF A CORRECTION:
A correction is a decline or downward movement of a stock, or a bond, or a commodity or market index. The amount of the decline is at least 10 percent and a true correction exceeds that amount.
Corrections generally last two months or less. They usually end when the price of a stock or a bond ‘bottoms out’—for example, some will point to a stock reaching a 52-week low—and investors start buying again.
DEFINITION OF A BEAR MARKET:
A market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment to be self-sustaining. As investors anticipate losses in a bear market and selling continues, pessimism only grows. Although figures can vary, for many, a downturn of 20% or more in multiple broad market indexes, over at least a two-month period, is considered an entry into a bear market.
A bear market should not be confused with a correction, while corrections are often a great place for a value investor to find an entry point, bear markets rarely provide great entry points, as timing the bottom is very difficult to do. Fighting back can be extremely dangerous because it is quite difficult for an investor to make stellar gains during a bear market unless he or she is a short seller.
DEFINITION OF RECESSION:
A recession is a business cycle contraction. It is a general slowdown in economic activity.Macroeconomic indicators such as GDP (gross domestic product), investment spending, capacity utilization, household income, business profits, and inflation fall, while bankruptcies and the unemployment rate rise.
A rule of thumb for defining a recession is, two down consecutive quarters of GDP.
Generally a recession lasts from six to 18 months, and interest rates usually fall in during these months to stimulate the economy by offering cheap rates at which to borrow money.
GLOBAL MARKETS MELTDOWN:
Almost every single stock market in the world is down significantly from a record high that was set either earlier this year or late in 2014. But even though stocks have been sliding in the western world, they haven’t completely collapsed just yet.
In much of the developing world, it is a very different story. Currently there is a stock market meltdown occurring in nations that are known as “emerging markets”. In recent years, developing countries in Asia, South America and Africa loaded up on lots of cheap loans that were denominated in U.S. dollars.
But now that the U.S. dollar has been surging, those borrowers are finding that it takes much more of their own local currencies to service those loans. At the same time, prices are crashing for many of the commodities that those countries export. This is exact the same kind of double whammy that caused the Latin American debt crisis of the 1980s and the Asian financial crisis of the 1990s.
CANADA ENTERS RECESSION:
The Canadian economy has entered recession, official figures have shown.
Gross domestic product (GDP) fell by an annualized rate of 0.5% between April and June.
That follows a contraction of 0.8% in the first quarter, meaning the economy has seen two consecutive quarters of negative growth, the usual definition of recession.
As an oil exporting country, Canada has been hit by a fall in the price of the commodity.
The last time the country was in recession was during the financial crisis of 2008-09
As can be seen from below chart, the Canadian Dollar is currently trading almost 30 percent below its high of July 2011.
BRAZIL ENTERS RECESSION:
Brazil has entered recession after official figures showed the country’s economy contracted by 1.9% between April and June compared with the previous three months.
First quarter output was also revised down to show a 0.7%, rather than a 0.2%, contraction.
The country, the seventh-largest economy in the world, has seen economic growth fall sharply in recent times.
This is due part in low commodity prices and sluggish global growth, which has also caused the Brazilian Real to decrease over 60 percent in value compared with its high of July 2011 as can be seen from below chart.
High interest rates – currently 14.25% – have also affected consumer spending, an important element of Brazil’s economy, while this year, the government has introduced stringent austerity measures designed to tackle high levels of debt.
Government spending, including on unemployment benefits, has fallen sharply, while taxes have risen.
PGM CAPITAL COMMENTS:
With emerging market and commodity based currencies crashing hard, recessions are starting, and equity prices are getting absolutely hammered in these countries.
Of course this is just the beginning. The western world is going to feel this kind of pain as well very soon.
On Monday, August 17, the “Telegraph”, one of the most important news paper in the world, published an article entitled;
“Doomsday clock for global market crash strikes one minute to midnight as central banks lose control”
Here below a summary of this article
When the banking crisis crippled global markets seven years ago, central bankers stepped in as lenders of last resort. Profligate private-sector loans were moved on to the public-sector balance sheet and vast money-printing gave the global economy room to heal.
Time is now rapidly running out. From China to Brazil, 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.
Others are sounding the alarm about an imminent global financial crash as well.
The great props to the world economy are now beginning to fall:
- Central banks world wide are rapidly losing control, with the consequence that credit markets are desperately seeking to reprice risk.
- China, biggest holder of US-Treasuries, sold at least 106 billion US-Dollar of US-Debt in August.
- In the US, 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.
- China’s economic growth is with the consequence that they need less commodities.
- Emerging markets that consumed so many industrial products, produced in the West, are crippled by currency devaluation.
The consequences of this will be extreme volatility in the global capital markets, with chances of a crash this fall.
Remember that most of the major stock market crashes in U.S. history have been in the fall. Just go back and take a look at what happened in 1929, 1987, 2001 and 2008.
The “smart money” has been pulling their money out of stocks for quite a while now, and at this point a lot of others have hopped on the bandwagon.
Beside shorting the S&P-500, the “smart money” is accumulating gold and shares of Oil producing and -servicing companies.
Until next week.
Yours sincerely,
Eric Panneflek