I thought I’d shoot out an update given the dramatic drop in the stock markets today.
The warning is that this is just the beginning. Whether Greece leaves the Euro and the EU is almost moot. The drama there will no doubt continue. Greece has threatened court action if the EU tries to kick them out. So this drama will drag on and on…. And remember that most of the money being sent to Greece was not really getting to the Greek people it was just circled back to bail out the banks most of them German banks. Greece could well default on upwards of €300 billion. That’s a lot of holes being left in EU central banks, EU banks and the IMF.
The fear of course is contagion as the focus might shift to Spain and Italy with their €1.8 trillion plus debts – each. And let’s not even look at France. EU banks are it seems leveraged to the tune of at least 26 to 1. That is just somewhat less than the US banks 30 to 1 leverage prior to the Lehman Brothers implosion in 2008.
But Greece isn’t the only problem. It appears Puerto Rico is on the verge of default and Ukraine is expected to officially default in July. But the real danger lies in China where their stock market appears to be imploding. This is a stock market fueled by massive margin debt. And the Chinese growth since the 2008 financial crisis has been fueled almost exclusively by issuing a mountain of debt. Some say it was the greatest credit expansion in history. The US stock market is also showing record margin debt. It doesn’t take much of a collapse and suddenly a lot of margin calls are being issued.
This I suspect is merely the beginning with the real collapse most likely getting underway in 2016. Recall that the 2008 collapse actually started in 2007. It took until 2008 to really break down. The stock markets topped in 2000 but it was 2001 and 2002 where things really collapsed.
What was the best performing asset during today’s mini meltdown? It was gold. No it was not spectacular as it was just a quiet $5 rise. The gold stocks were down but they were down very small in comparison to the major stock market. For gold it is interesting to note that while gold fell along with the broader market during the 2008 financial meltdown when the recovery got underway gold led the way to upside. During the 2000-2002 high tech internet crash gold was actually making a stealth rally quietly to the upside. The final low for gold at the time was in early 2001 long before the global stock markets found their bottoms in 2002.
There will be twists and turns as time moves forward. The stock markets may even find a bottom and rally to new highs as they did in 2007 following the initial collapse. In 2000 the US markets couldn’t make new highs but the TSX did make new highs at the time. Patterns tend to repeat themselves.
Another day or so down and intermediate trends most likely could turn down to join the short term trend that has turned firmly to the downside.
But the odds now favour that the financial crisis of 2015-2016 could well be under way. Note that the US markets took out recent lows today. A bad sign that suggests that the markets are headed lower.
BA, FCSI, CIM
Investment Advisor, Technical Strategist
Industrial Alliance Securities Inc.
26 Wellington Street E, Suite 900
Toronto, ON M5E 1S2