Hold on to Your hats!
I make no apologies for returning to the major question all investors have first and foremost today: will October’s downturn become a real bear market? I mean by that a fall in markets of 25% or more, with all the second order consequences that brings. In my opinion the odds are now more than 90% that it will.
The core reason behind this view remains the fact that funding liquidity (ie. the money and credit available to pay debts) is close to rock bottom in the West. Only in China is the picture at all different.
The evidence is a further decline in western central banks’ liquidity position, now at 10.7 (range 0 to 100) combined with three other signals which have historically been strongly predictive. On their own, none of them are conclusive but together they are just about as strong a signal as can be. The first is that investors’ risk appetite, as measured by our friends at CrossBorder Capital, is high, albeit not sky-high, and a long, long way above the capitulation levels which normally signal bear market turning points; the second is similarly high levels of speculative cross border flows; the third is the flattening yield curves, long seen as a predictor of recessions.
What could derail this on-rushing train? Events evolve every day but an abrupt policy about-turn by central banks is the one which could change its direction. China is easing, which may ameliorate some of the worst effects, but the key is the currently hawkish US Federal Reserve. Unfortunately, the US today seems to be permeated by super-optimism and a sudden change of heart looks highly unlikely. So our advice is to don your steel helmets and hold on to them.
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