Can we get on with the crash and the financial apocalypse now? Summers â especially August â are typically boring in financial markets. Traders go on holiday. Volume is light and for that reason alone, you donât get a lot of stockmarket chicanery in August.
September and October are different beasts, though. As we approach the more traditional time for manias and panics, you can see a few signs that capital markets are due for a reversal. Take for example, an exchange-traded fund that âequitisesâ high yield corporate debt. Iâm talking about HYG, the iShares iBoxx High Yield Corporate Bond Fund.
By âequitiseâ I mean itâs a retail investment fund that makes it possible for fund managers and individual investors to allocate money to another asset class. Mind you, itâs still an equity. But itâs a way of ârentingâ the return on an asset class without actually owning it. For lazy investors, you have the added bonus of being able to speculate in bonds without knowing how to price (or value) a bond. Check out the chart below.
(Source: Stockcharts.com)
Is it panic stations yet? Well, note quite yet. But casual chart enthusiasts will note the appearance of the âdeath crossâ. Thatâs the infamous and headline-grabbing formation wherein a short-term moving average crosses below a long-term moving average. Itâs bearish. But why?
Itâs momentum. In the case above, HYGâs 50-day moving average crossed below its 200-day moving average last week. Thatâs technically bearish. But does it presage something more ominous in the stockmarket?
That single data point isnât enough to make the case for a bear market. Youâd have to look at other signals in the credit market or other prices (of cash and gold, for example). Also, itâs possible HYG and other proxies for high-yield credit are off the boil because investors are content to buy stocks at these prices.
But. But. Yes. Itâs also possible that a financial crisis usually begins as a liquidity crisis. And a liquidity crisis usually begins on the fringes of the stockmarket, at the periphery in speculative vehicles like HYG. Think of disturbing price movements in the credit markets as what geologists call the âcompression shockâ before an earthquake.
In seismology and geology, a âcompression shockâ isnât detectable to human senses. Dogs and other animals can hear it. Thatâs why you see such strange animal behavior before a natural disaster. They can literally sense something you and I canât.
You donât need to be a dog, or even own one, to see a stockmarket crash coming. You do, however, need to be alert to the right signals. Right now, HYG is flashing red. Stay tuned.
In the meantime, the preference for cash â to have your wealth in a physical form and in your hot little hand â is another sign of strained financial markets. When your worries about the world are low, you donât mind having your money tied up in banks or the stockmarket.
But did you know that 80% of global payments are still made in cash? Thatâs according to todayâs Financial Times. Hundreds of billions in banknotes of all different colours and denominations are printed each year by both the public and private sector. Itâs a big tent in the religion of paper money, with room for all sorts of variety, provided youâre a believer.
The truth is that cash isnât wealth either. Itâs a way of storing value in liquid form so you can freely exchange it for other goods and services. But itâs not beer.
Beer is liquid (literally), but not easy to exchange. For example, I wandered down the Thames to Rotherhithe to have lunch at the Mayflower pub. Iâve been exploring my new neighbourhood east of Tower Bridge. The pub was recommended by a friend.
What a great little pub. You can eat fish and chips with a great view of the City and the sound of the river lapping at the pilings of the deck. The pub claims to be the oldest riverside pub in London. It was also the mooring point for the Mayflower, the ship that set sail for the New World in July of 1620.
The only way you can pay for your food and drink at the Mayflower is with cash or credit. Barter wonât get you far. And I canât imagine trying to pay for a pint in silver coin. At least not yet.
Category: Market updates