Blue Skies
Pfäffikon SZ, Switzerland – Doom prophets have popped up like mushrooms recently. They warn that many issues have not been resolved since 2008. A derivative crisis is just a matter of time and, additionally, a scandal in the inflated ETF era is no longer to be ruled out. Still, optimists have the right on their side, but for how long?
Derivatives
There are signals that the outbound derivative positions are a ticking time bomb under the financial system. Innovation in the financial world has advanced the market and is, therefore, not in relation to the original. Specialists have signaled this problem for much longer, but it is impossible to predict when the cord snaps. The previous problems with Deutsche Bank have shown that derivatives are a point of attention for the market as a whole.
Debts
The debt problem is another issue that does not seem to exist. Consumers owing a lot of money, but do not worry. A long period of extremely loose monetary policy even dozes off the most suspicious mortgage lender. The system is now accepted by everyone, while nobody is wondering if this situation is healthy. This makes the issue, in my eyes, even more precarious.
Signatures
Not only doomsayers are warning, but also important agencies such as the BIS and authorities make remarks. The playing field will change substantially in many situations the coming years, but this does not seem to concern the consumer. They are crisis-tired and behave complacently. I have discussed before the so-called ‘Minsky Moment.’ A total collapse of asset prices is the result after a long period of speculation and exuberant growth. Also, I think that many consumers do not have a frame of reference anymore and, therefore, play with fire. However, they deny it in all respects; not to mention the disconnection between equity markets and the real economy.
Doom sells better than blue skies. On the other hand, there are enough signals and reference frames that give warning signals. This has nothing to do with gloom-mongering, but with hard historical facts. A possible collapse of the stock market can not be predicted and does not appear to be on the agenda in the short term. A simple approach is that if the interest rate rises –which is currently the case– stock markets will collapse. Old problems with governments, businesses, and individuals will then re-emerge. In spite of the beautiful blue skies.
It remains for me to wish you a good weekend.
Jan Dwarshuis is CIO at Thirteen Asset Management AG. Dwarshuis writes his columns in a personal capacity. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has no position in above mentioned shares and has no intention of doing so in the next 72 hours.
