Be you bear or bull, stock markets at these levels make no sense.

The window is closing on equities.

I know quite a few people who are still in the Stock Market – if not up to their necks, then certainly for a lot of money. They smile knowingly and say, “Do you know a better place to have made money in 2010?” The answer is, “Yes – gold”, which is where I’ve been. But nevertheless, they do have a point: had I held less cash – and added Stocks to my portfolio – last year would’ve been even better than it was for my SIPP.

I’ll be out of the stock market (to take the FTSE as an example) until it reaches 3000. There are a number of reasons for this, chiefly that the 6000 level bears no relationship to the reality on the ground – and more and more these days, the Bourses are being run for a few crooks using high-speed liquidity pool trading to evade capture. But what really worries me is the number of honest people in there purely on the basis of relative return.

Using this criterion for, say,  having a deposit account rather than government bonds is fair enough…if interest rates are rising and Sovereign stability is ubiquitous. Relativism is not – and never has been – a good reason to be in the stock market. Bourse investment is about either knowing what you’re doing – or hiring somebody who does.

If, at the moment, a key thing propping up the stock market is the lack of returns elsewhere, then watch out. As China uses rates as a brake, our rates will have to follow. Get that rate up to 5 or 6%, and conservative stock investors will pull out in favour of greater security. And as America has chosen to carry on bashing its Federal credit card, bond rates must rise too. In the EU, that is a cast-iron certainty: and once Greece finally caves in (and more PIIGS are found out) the money will switch into Asia and gold; with bonds unsafe and retail banks still desperate for funds, T-Bills and rates will produce yet bigger yields.

What will accelerate the bourse panic when it finally happens is the smart (often crooked) money shipping out the second the time is right. Once that goes, the dive will be spectacular.

So given these assertions – and like anything to do with investment, peculiar events plus eccentric government intervention could change the outcome dramatically – what might be the sequence of events that leads to a halving of the FTSE index? Bear with me while I lay one out in summary:

Chinese slowdown continues – rates rise further – US recovery too timid – flight from eurozone bonds – EU/UK rates rise – China continues diversification away from T-Bills – Bond yields skyrocket – crooked money exits Bourses – rate rises make UK and US look more unsafe – UK deficit remains and debt grows – EU default/bailout shocks – eurobonds deserted – desperate banks up rates again – as exports drop, China clamps down further on imports – German exports collapse – bourse confidence falls as sophisticated money exits – confidence crisis in US worsened by election year – EU bank debts become due – ECB has to step in again – citizen unrest across EU – banks so desperate for inflow, increase rates again – UK makes noises about inability to fund further QE and bank bailouts – Germany leaves EU but bails out worthwhile members – bonds and T-Bills now at record levels – French output plummets – with nothing else to trust, everything – cash, stock investments, bank deposits, commodity investments, bonds – deserted in favour of Chinese Yuan, gold, Swiss franc and Asian assets – to prick asset bubble, Asia clamps down completely on lending – China starts using cash mountain to buy Europe – White House frozen in headlights, UK Coalition collapsing – Dow in freefall – FTSE hits 3000. (To be continued).

The obvious end-effect of this vortex would be a world of nations gathering behind trade barriers, and a shrinkage in global trade of hitherto unknown proportions. And in this doom-scenario, remember that we haven’t even included Russia (bankrupted by falling energy demand), Australia (bankrupted by falling raw materials demand) or Brazil (printing money with abandon as its economic miracle evaporates.)

At or soon after this point, hyperinflation would be endemic in almost every country, military takeovers would be rife, international tensions strained to breaking point, and middle-class wealth vapourised. So frankly, whether the FTSE is at 3000 or 56 by then becomes somewhat academic. My point is this: I can’t give advice and this isn’t advice (he wrote carefully) but ask yourselves these questions:

1. Zero rates aren’t working, and China is raising rates. Would you, as the US Fed Treaurer, Trichet or Mervyn King, have to follow suit sooner or later? (Yes)

2. Confidence in the safety of most Sovereign debt is shot. Wouldn’t you as a bond investor insist on higher yields? (Yes)

3. Could you, as a retail bank conglomerate CEO, do your fiduciary duty and NOT raise rates? (No)

4. Given the bankers and multinationals care only about profits and shareholders, will they plough money into the economy – or be guided by Corporate Finance Directors in looking for better returns and more safety? (The latter)

5. If in the light of better, safer options elsewhere, do you have the confidence to stay in the stock market – with recovery looking limp – once the smart money makes an exit? (No)

If you agree with two or more of those answers, it may well be time to rethink your position in relation to equities. The choice is yours.

5 thoughts on “Be you bear or bull, stock markets at these levels make no sense.

  1. Dead right, and I think all over by the end of this year. I cannot see the charade of stock markets lasting much longer. Personally I am only in gold and silver stocks.

    Hunter

  2. I beg to differ (a little). The new government I am sure are horrified after examining the nations books, and dare not tell the public how catastrophic the situation is. Proposed spending cuts of 3.3 % will make no difference and inflation is the only (seemingly) bloodless way out of the government’s debt trap. Therefore BOE base rates will not rise at the rate people expect and inflation will be allowed to rise above 5% to nearer 10% in the not too distant future.

    Each increase in inflation will be ‘surprising’, ‘unexpected’ ‘temporary’ etc. etc. Though the BOE and the government will be complicit in this and will use these terms as reasons for not increasing base rates to where they should be.

    The net result, with incomes largely static will of course be a severe drop in living standards. Shares may therefore rise as a hedge against inflation (in nominal terms at least) in the future. The alternative, of allowing rates to rise to counter inflation would mean savage government spending cuts to reign in the debt. I’m afraid however politicians (of all parties) and the public are now so socialist in their instincts that they will never allow this to happen.

    • I agree with most every word of of that.

      It finally blows out of the water any claim that the BoE is independent of government…Merv King has been setting interest rates to suit govt since back in the early 2000s and continues to do so. ZIRP has always been about encouraging inflation to rise to reduce the value of govt debt. Merv has a lot to answer for.

      It also means that the main people paying the heavy price for this mess are savers: the very people who played no part in creating it. Since they tend to be over 40, govt will safely assume they’ll take this financial rape lying down.

      Finally, it also strongly implies that the new coalition govt are following the same dishonest policies of Gordon Brown. Since socialist thinking is endemic among politicians of all parties, why not.

      • BT
        I think ZIRP was introduced for many reasons, but it only screwed one sort of person: those who hadn’t been mad from 2001-2007.

  3. Stocks and stock picking is no place to be, even they’re Gold and Silver miners. The Indexes are heading for a 1932-35 style crash to almost worthless pieces of paper (IOU’s).

    Companies are doing what they should do in such a risky uncertain economy. Piling up cash for safety and not investing until they see what happens (ie. hedging their bets). But they’re not going to get any good news which portends years of low investment (and employment) and stagnant, at best, economic activity.

    The only safe place is as companies are doing, staying in cash. And if you can’t find a safe bank to store it (avoid all bailed-out banks) withdraw it and put it under the mattress

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