Asset Bubbles and Stock Market Crashes: The Signs are Clear

Asset Bubbles and Stock Market Crashes: The Signs are Clear
Written by:
Georgi Milenkov
19th November 2015

Are We In the Midst of A Global Economic Meltdown?

When we speak of stock market crashes, everybody recoils in agony. The concept itself is as terrifying as the reality since nothing good comes from an economic meltdown, at least not in the short-term. That the Fed, the ECB, the IMF and the BOE were part and parcel of an incredible recovery process since the 2008 global economic meltdown is laudable. But much of the monetary easing went into buybacks and the financing of the markets. Whether the global economy actually entered a period of ‘lift off’ is questionable since we are now privy to a series of worrying realities, notably commodity prices.

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That the price of Crude oil has hit multi-year lows may be welcomed by many but the impact of historically low prices on global economic performance is nothing short of crippling. On the plus side, we have seen an increase of approximately 1% in U.S. GDP as a result of cheaper gasoline prices. Not all of this money has made its way into the retail sector as anticipated – much of it has gone into increased U.S. household savings. The Crude oil industry is massive and declines of this magnitude have the capacity to bring about widespread carnage across multiple sectors. As an analyst, it is imperative to be able to spot the imminent signs of a stock market collapse. This article will attempt to do precisely that.

How important is Crude Oil?

For starters, it is the ‘proverbial fuel of economic growth’ in the sense that it powers almost every engine on the planet, with the exception of vehicles using alternative energy sources. It is also used in a host of consumables such as aspirin, chewing gum, food additives, plastics, PVC, clothing and fertilizers. With the price of Crude oil plunging from over $130 per barrel prior to the stock market crash in 2008, we are now staring at prices for WTI and Brent Crude in the region of $40 – $45. And while there are obvious benefits to low Crude oil prices, these do not translate well for the economy at large. Consider for a moment that persistently low oil prices are the drivers of disinflation, deflation and low inflation.

Why does that matter? For starters, Fed and BOE inflation rate targets need to be met in order to grow national economies. With prices being kept low, there is minimal wage growth and the possibility of economic stagnation. Across Europe, England and Japan we are seeing prices year-on-year and month-on-month contracting. In other words real economic growth is shrinking. This means that full employment will not be reached, wages will not rise as expected and fiscal and monetary policy measures will need to be fine-tuned to achieve growth targets.

With China weakness now ominously evident (import figures for September and October were down 20.4% and 18.8% year-on-year) it is clear that global demand is down. This means that Emerging Market economies like South Africa, Brazil, Turkey, Venezuela, Russia and others will be facing sharp contractions. China is the main trading partner of so many EM countries. Add to that a strong USD and additional daylight between dollar strength and that of other currencies and it is clear that we are headed in a dangerous direction. Already currency exchange rates are at dangerously low levels for many developing countries.

One look at the commodities markets is clear: revenues are drying up fast and profits are all but non-existent. Take a look at Glencore PLC, Rio Tinto, Anglo American, and BHP Billiton. That these stocks have declined at such a rate  has not helped the bourses that contain them. The FTSE 100 index is under incredible pressure, so is the S&P 500 index and many others. If companies are not generating profits, then shareholders have nothing to gain from investing in them. A really interesting correlation can be drawn between the negative movements of the S&P 500 index in 2002 and 2009 and the stock market crashes that ensued. We are living through dangerous times indeed. 

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