2016 is off to a very bad start for the stock markets worldwide: they have lost approximately 10% of their value since January 1st, one of the worst starts of a year in stock market history. Since their peak of last June, stock markets worldwide have declined by 20%, according to Bloomberg, which corresponds to 15 billion dollars in stock market value vanishing in smoke.
The magnitude and duration of this decline in stock prices seem to point toward a severe plunge lasting several years, as we’ve seen after the 2000 and 2007 peaks. However, despite the signals, the majority of market pundits want to believe this is just a mere glitch or a cleansing process which will help return to a progressive phase. It is true that at that time, the causes of the crises were clear for all to see (Internet stocks crash in 2000, subprime in 2008), whereas this time, we can’t find the powder keg.
The reason is quite simple: things are bad everywhere! Or, if we wish to identify a culprit: we are in the midst of a debt crisis, and debt is everywhere. There is too much debt with nations (very few countries have balanced budgets), in certain corporations (high-yield bonds, often toxic), in certain households (U.S. student debt, real estate bubble in the U.K. and certain American states) and, above all, with banks (bad loans, lack of proper funds versus liabilities, at 1/30 in Europe). The plunge in the price of oil, of course, is the cause for the crisis in oil exporting countries, but it also reveals that the mountain of debt invested in shale oil in the United States has grown too quickly and too easily. Near-zero rates played the same facilitating role as they did for the subprime bubble, and we know the result too well.
All this debt is becoming more and more difficult to bear as the real economy’s situation deteriorates: no growth to speak of in Japan and Europe, real growth of 2% only in China, impossibility for countries to apply more fiscal pressure (and to diminish their spending, mostly social and clientele-orientated), and an increase in bad loans from banks (in Italy, notably). Consequently, cracks are appearing everywhere.
Bloomberg agency reports this anecdotal data revealing the actual state of the economy: it now costs less to lease a 1,100-foot long merchant ship for a day than a Ferrari F40. The crisis is hitting the real economy but it hasn’t hit the trader who is renting his luxury car... yet.
Here’s more proof that markets do not understand what is going on: after several days of decline, they rebounded solidly last Thursday and Friday following Mario Draghi’s statement that “there is no limit” to the use of monetary policy instruments and that he would probably act as soon as next March. And, perhaps, Janet Yellen could decide on some more quantitative easing, QE4... another punchbowl, courtesy of the Fed and the ECB? This faith in central banks’ almighty power – today’s economy’s modern totems – is suicidal. But the markets still don’t know it.
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Philippe Herlin Finance Researcher / Member of the Goldbroker.com Editorial Team
Philippe Herlin is a researcher in finance and a doctor in economics of the Conservatoire National des Arts et Métiers in Paris. A proponent of extreme-risk thinkers like Benoît Mandelbrot and Nassim Taleb, and of the Austrian School of Economics, he will be bringing his own views on the actual crisis, the Eurozone, the public debts and the banking system. Having written a book on gold that has become a reference (L’or, un placement d’avenir, Eyrolles 2012), he wishes to see gold play a growing role in our economies, all the way to its full re-monetization.