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Categorized | Equities

Bears hit City and Street for Halloween

Posted on October 30, 2015

15th November 1963: English actor Christopher Lee playing a vampire in one of the many horror films he has starred in. (Photo by BIPS/Getty Images)©Getty

This weekend millions will dress up as ghouls, vampires, aliens, goblins and Justin Bieber to celebrate all things scary and horrific for Halloween. For the finance industry’s small cabal of “perma-bears” it is also celebration time.

While most markets are now back to near record highs, the litany of things investors worry about has grown no shorter over the past year, and new things keep cropping up to be added to the list and further cloud the outlook.

    Global debt levels continue to rise, deflation fears fester and extraordinary action from central banks has failed to buttress the economic recovery. The International Monetary Fund recently sliced its growth forecast for this year to 3.1 per cent, which, excepting the financial crisis, would be the lowest since 2002. International relations remain frosty.

    Drilling down, things also look bleak. Corporate revenues are stagnating or falling, Europe remains weak, politically fraught and vulnerable, the US recovery has hit the skids, and some fear another recession is in the pipeline.

    Japan’s “Abenomics” is failing, China’s growth is sliding and emerging markets as a whole are in a funk. The Federal Reserve is either going to cause carnage by lifting interest rates too early or too late, depending on your point of view.

    For the financial industry’s ultimate iconoclasts — investors, economists and analysts who see a hurricane brewing behind every innocuous cloud — this is partly a welcome vindication of their remorseless pessimism.

    “It gets a little boring, always rattling my chain and proclaiming the end is nigh,” Albert Edwards, Société Générale’s famously bearish strategist, told a collection of clients in New York last week, before gleefully launching into an explanation for why the end is indeed nigh.

    On fears that the US and Europe were going down the same path towards stagnancy trod by Japan, Mr Edwards said: “The west isn’t like Japan, it’s going to be much worse.” France is stagnating, Germany will soon become the weakest eurozone country and “Italy is bust,” he argued.

    China will devalue further, triggering currency wars, and the US 10-year bond yield will fall below 1 per cent as the economy “inevitably” falls into a recession.

    The SocGen strategist argued that the Fed should just lift interest rates as soon as possible and trigger the inevitable mayhem, because “the longer finance is allowed to pump itself full of crack the worse the recession will be”.

    chart: China GDP growth

    Aside from the perennial subject of the Fed, China is the current obsession of the perma-bears. While the economy expanded at a reasonable 6.9 per cent clip in the third quarter, fears over a devaluation have abated and signs of a rebalancing are growing, some observers continue to prophesy an impending calamity, after rampant borrowing in recent years.

    “This is a credit bubble of epic proportions,” Marc Faber, aa forecaster who writes a report called Gloom, Boom & Doom, told Bloomberg TV this week. “I would bet on the locals, who are shifting money out of China at a record rate.”

    Mark Grant, managing director at Hilltop Securities, is also worried about China, arguing that “no one believes their numbers any more”, as well as a litany of other concerns.

    “Now, any of these issues, taken alone, is bad enough and a cause for concern. However, all of them added up and considered together, is far past being just a concern and may be regarded as a potential catastrophe for the equity markets,” he wrote in a note this week. “It will be the Grinch this year I am afraid as Santa Claus remains at home in his ice palace.”

    Of course, most investors have shrugged off these concerns. After the turbulence of August and September, the combination of more central bank easing in Europe and China, and bets that the Fed will stay on hold until next year, have helped markets claw back much of their recent losses.

    chart: FTSE All World index and S&P 500 index

    The FTSE World index is just 6.5 per cent below its record peak, the S&P 500 is back in positive territory for the year, the FTSE Eurofirst is up 7.9 per cent and the Japanese Nikkei gauge is 8.5 per cent higher in 2015. Bond markets are steady and even commodities appear to have found a floor.

    However, some of the concerns are spreading to the “mainstream” analyst community as well. Willem Buiter, Citi’s chief economist, has predicted that another global recession is looming, this time led by the developing world. Although his definition of a recession is somewhat unusual, fears over China’s slowdown and the broader implications are endemic.

    In a Halloween-themed post at M&G’s ‘Bond Vigilantes’ blog, Anthony Doyle also spelt out some of the disconcerting signs — such as rising market correlations, often an ill omen.

    “Worryingly, the tendency for global asset prices to move in unison is now at a record high level and correlations have remained elevated even during periods of low volatility. A large scare in investment markets could really test the fragility of the financial system should asset values deteriorate across the board,” Mr Doyle wrote.