What happens next?

Wednesday, 19th December 2018

What happens next?

Interest rates have been heading up – with promises of more hikes to come….

So, it shouldn’t come as any surprise that stocks have been travelling in the opposite direction – down….

Stock values are falling like stones wherever you look….

Here in the UK, the FTSE 100 is down 10% since the beginning of October. The FTSE 250 has lost 14% of its value over the same period….

In the US, the Dow Jones Industrial Average is down 11.2%; the S&P 500 is down 12,9%; and the Nasdaq Composite has fallen 15.6%….

The German DAX is down 12.7%. The French CAC 40 is down 13.4%. The Japanese Nikkei 225 index is down 13.4%….

  • A frenzy of borrowing….

Ten-years of the lowest interest rates and the loosest monetary policy ever known in the history of mankind succeeded in creating a particular and specific hothouse environment….

One where credit was freely available – and cheap. Cheaper than it has ever been before….

Governments, institutions, businesses and consumers were being encouraged to borrow. And borrow they did….

They borrowed as much as was good for them. And more. And then more still. They borrowed all they could get their hands on. They borrowed like there was no tomorrow and very little left of today….

Typically, much of this borrowing found its way into the markets and other asset classes….

This flood of fresh money succeeded in raising the value of those assets. And those rising values saw money borrowed for next to nothing earn handsome rewards….

Who wouldn’t want to borrow money at close to zero, pump that money into the markets and watch it rise in value – way above what you were paying for the privilege of the initial credit?

  • The longest party in history….

For the last 10-years it has been party time for stock market investors….

Even fools have found it easy to make money. Many fools have gotten handsomely rich over the last decade. It has been easy – especially so with the benefit of hindsight….

Just stick your cheap cash into the stock market and watch it fly!

And don’t worry about dips. This thing always comes back. Use those opportunities to buy more – and then sit back and enjoy the bounce….

At times it seemed like this party would never end. It seemed to go on forever….

In America they call it the longest bull market since World War II. It lasted an incredible 3,453 days. The S&P 500 index more than quadrupled in value from the lows of 2009….

Then along came 2018. And along came a new Fed chief, Jerome Powell. He joined the party in February. And he came armed with a new playlist….

  • The music changes….

Powell is the man who called time on the excesses of the previous decade. He saw that the party had gone on long enough. He switched off the rock-and-roll and put on a funeral march – for the markets….

Since being in office he has been raising the interest rate steadily but remorselessly….

At 2.25%, we are still a long way short of historical norms. But the direction of travel is up. That’s the big change….

And the markets have felt the stiffer breeze. They have responded to the cooling climate….

In an environment where interest rates are rising, new debt is more expensive to take on and existing debt becomes more expensive to service….

The flood of fresh money that served to keep the market flying high has dissipated a little. The spigots have been turned off and market values have adjusted accordingly….

We are seeing the same thing all over. Central banks cutting back on quantitative easing and raising rates – and stock market values falling as a consequence….

That is where we are at as we head into Christmas 2018….

  • What happens next will depend on melodrama….

So, what next?

Even with the recent pullback, markets remain extravagantly priced and still close to all-time highs….

Close enough that some folk believe the recent period to be a bit of a wobble that the bull market can remerge from once weak-kneed investors regain their nerve….

I take the view that if current trends continue – the continued tightening of monetary policy – that stocks have a long way to fall yet….

If interest rates continue to rise, anybody with money tied up in stocks might see the wealth he thought he had accumulated over the last decade disappear into a puff of smoke some time in 2019….

Or the central bankers could lose their nerve. And Fed Chief Jerome Powell – the guy who got this ball rolling – might just be the first guy to blink….

Donald ‘I’m a low interest rate guy’ Trump is already on record. He doesn’t like interest rate rises and what they are doing – and might do in the future – to his economy and his stock market. He’s piling the pressure on Powell….

Later today, we get to see if Powell has gotten Trump’s message or whether he will defy the big white chief and raise interest rates again anyway….

What happens next to the stock markets – worldwide – hangs on this melodrama….

  • The government’s festive terror campaign….

On another note, the British government is ramping up its plans for a ‘No deal’ Brexit….

Citizens are being pre-warned that the government will be coming at them – across radio, TV, Internet and social media channels – during the Christmas break to ‘prepare’ them for what might happen….

I expect that this will turn into a festive campaign of terror – warning the public to expect food and medicine shortages, fuel shortages, power blackouts, delays to essential services, chaos in the hospitals and on the transport system, businesses failing left, right and center, job losses, crime, poverty, hunger, the military on stand-by – and all the rest of it….

Yes, that’s right. The powers-that-be are going to use the Christmas period to terrify the British people and soften them up to a point where the majority are prepared to consent to a second referendum on Europe so that we can avoid all this catastrophe and a return to the stone age….

Then we can have another vote in the summer. This time we will vote to Remain in Europe and our masters in high places will have succeeded in getting the ‘right’ result at the second time of asking – the result they wanted in the first place….

That’s how ‘democracy’ works in action. Watch out for this terror-project developing over Christmas. You heard it here first….

Have a good Christmas anyway. I’ll be back in the New Year.

That’s how it looks from here….

All the best,

Dave Gibson

Money Truths