Gold News

What the Panic's All About

Stock markets are sinking for nothing. And everything...
 
As RON BURGUNDY said in Anchorman, writes Greg Canavan in The Daily Reckoning Australia, "Boy...that escalated quickly. I mean that really got out of hand fast."
 
Indeed it did. It was a wild night of trading on US markets Wednesday. The S&P500 was down 3% at one point, before finishing just 0.8% lower. US Treasury yields plunged on fears of lower economic growth while gold momentarily surged $25 an ounce and closed out the session up nearly $20 an ounce.
 
An afternoon rally saved Wall Street. Apparently – and this is really pathetic if there's any truth to it – rumours surfaced that Janet Yellen thought the US recovery was on track, despite worries coming from Europe.
 
There were no such comments from Mario Draghi in Europe. As a result, European stocks took a beating. French and Spanish stocks fell more than 3.5%, while German and British bourses fell nearly 3%. But the rally in the US came after Europe closed for the day.
 
So what's all the panic about? Nothing in particular, it seems. Or nothing and everything, all at once.
 
These panic liquidations represent a psychological shift in trader positioning. It's representative of complacency giving way to risk aversion. And it has given way big time in the past few weeks.
 
You can see this change in the volatility index, the 'VIX', in the chart below. Also known as the fear index, you can clearly see the 'fear spike' since the start of October. This comes just a few months after volatility levels were the lowest since early 2007.
 
 
In other words, something has clearly changed in the mindset of the market. In the short term, it's probably gone too far...and you can expect to see a rally soon and a diminishment of the current high levels of fear.
 
But you should take the surge seriously. This is the highest level of fear since the Euro crisis of 2011. Except now there's no discernible crisis. That's the worrying bit. The market is saying that something is wrong. It's not immediately apparent, but something isn't quite right.
 
Maybe it's fear of the effects of a slowing global economy...an economy that has a truckload more debt weighing on it than it did before the last downturn. The Telegraph in the UK reports:
"Morgan Stanley calculates that gross global leverage has risen from $105 trillion to $150 trillion since 2007. Debt has risen to 275pc of GDP in the rich world, and to 175pc in emerging markets. Both are up 20 percentage points since 2007, and both are historic records."
Yep, debt levels are a major problem. And they become a very big problem when economic growth slows. That's because to service debt, you need to generate growth.
 
When growth stagnates or falls, the debt servicing burden becomes a problem. Debt-to-GDP ratios rise and there is less money left over in the economy for investment, wages and consumption.
 
Debt, especially unproductive government debt, has detrimental long term effects on an economy. Let it grow large enough and it will eventually choke an economy into recession/depression.
 
That the only apparent response to a slowdown in a debt-based monetary system is to increase debt levels tells you something is seriously wrong with the world's system of 'wealth creation'.
 
The only question now is how long it will take the Federal Reserve to start back-tracking on its 'interest rate hike for 2015' talk. After they do that, I wouldn't be surprised to see them dip into the QE playbook...again. The big question though, it whether it will be too late to inject another round of confidence into the speculating community.
 
They're wheeling Janet Yellen out to speak at the end of the week, so we may get an idea of just what the Fed is thinking. Yellen must be careful to retain the market's confidence. That the US Federal Reserve has no idea what it's doing is beside the point. What's important is that the market thinks the Fed knows what it's doing.
 
Yellen must keep this con game going at all costs. Good luck with that. When you've got a bunch of panicked, slobbering trader yahoos in your face desperate for some sign that you've got it all under control, any minor slip-up can be dangerous.
 
When traders panic, liquidity disappears in the blink of an eye. That's because confidence creates liquidity, and fear destroys it. And right now it's the fear of huge debt levels consuming economies that is weighing on traders' minds.
 
Why it's happening right now, when the issue has been around for a while, is irrelevant. The important point is that the punters are beginning to wake up to the risks. The only question is how much longer the Fed can continue to pull the wool over everyone's eyes.
 
Can another bout of QE do the job for another six or 12 months?

Greg Canavan is editor and publisher of Sound Money, Sound Investments, a weekly financial report devoted to unearthing great value investments amid today's "money illusion" of fiat currency. Formerly editor of Australia's market-leading finance newsletter, Greg has been a regular guest on CNBC, ABC and BoardRoomRadio, as well as a contributor to publications as diverse as LewRockwell.com and the Sydney Morning Herald.

See the full archive of Greg Canavan.

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