The Correction Cometh: The Global Debt Effect
The very thing that the Market Bulls said would never happen, appears to be under way. The Dow has dropped from its all-time “Daily Theoretical High” and Record Close on September 19th by over 950 points … capping a loss of more than 5.5 % in less than a month. The S&P 500 is down, the Russell 2000 is down, the NASDAQ is down, U.S. Treasury yields are down, oil prices are way down, while the VIX Market Volatility Index is at its highest in over 2 years.
The markets have quite simply gotten treacherous as investors have endured a series of dramatic rallies followed by steep sell-offs. Red lines are diving across the Big Boards as red flags are waving all across the paper markets due to deep concerns about global growth.
Economic growth around the world has proven to be a study in shakiness and under-performance. A contraction in Italy, weakness in Germany, zero growth in France, dismal data from Spain, soft GDP expansion in Japan, a Chinese real estate and credit crisis, and economic struggles for Russia, Brazil, South Africa and even Switzerland has prompted the International Monetary Fund to trim global growth forecasts. Despite a broad range of financial support measures, “kitchen sink” tools, selective bail outs, and belt-tightening … the EU’s recovery has been patchy and underwhelming at best … prompting the IMF to admit that growth may “never” return to where it once was.
The question on the lips of every analyst and financial trend forecaster is whether our economy can sustain the drag from our friends across the pond. The EU continues to struggle with dangerously low inflation levels and a Euro that has declined 10% against the dollar since May. While a robust currency is often envious, a “too-strong” dollar increases the costs of American exports and can compromise US trade. The concern is so great that there are now whispers from the Fed about postponing rate increases or even delaying the impending end of bond buying which most expect to be announced in just a few weeks.
Global debt has recently crossed the $100 trillion mark as world governments have borrowed, printed, and floated mountains of stimulus … only to deliver lackluster and even negative growth. This belies fundamental and systemic problems that are not easily solved and whether we like it or not, have now become our problems.
As the correlation between world debt and market performance becomes clearer and clearer, there are grave, new and concerns about the gruesome violence in the Mideast, the intense protests in Hong Kong, and an Ebola pandemic that is shaping up to be the most challenging health crisis since the days of AIDS ... adding to international pessimism, world travel anxieties, and global health concerns.
It’s no wonder that it has been a rough, few weeks for our 401K’s and IRA accounts. Technical indicators are at the very least suggesting a market correction and at the very most a final requiem for the well-fed bulls that have gotten so plump, for so long. In this highly reactionary climate, we would be wise to embrace a sound diversification strategy before any crash talk or panic sets in.
In trying moments such as these, gold and silver have always provided peace of mind, safe haven, and protection from the historical risks of paper debt and the frenzied selling of a highly explosive and unstable world.