Friday, January 30, 2015

Beware of governments

The bull market may be over. There are lots of reasons that experts are using to support the argument that our six year bull market is coming to an end.  Famous bond investor Bill Gross said at the year’s outset, “Good times are over.”

Chief amongst the concerns are the stresses on foreign governments.   These countries are facing varying degrees of stress. These stresses can be endured temporarily but they can reach a boiling point which can trigger government action.

This month, Switzerland found its balance sheet supported entirely by Euro denominated securities. When your assets are tied to a depreciating currency, this can stress a financial system.  The Swiss National Bank responded in necessary fashion by lifting the pegged exchange rate on the Euro.  This caused all of the Swiss National Bank assets denominated in Euros to decline in value. The markets didn’t like this.

Earlier this month, China lowered its broker loan rate to curb speculation on Chinese stocks. The condition in China is flashing a red warning to investors because this country has decelerating economic growth in the face of a skyrocketing stock market.  It is only a matter of time before this dichotomy is resolved one way or the other.

What will be next? Perhaps the most significant economic trend over the past two months is the decline in energy prices.  How will the petroleum exporting countries that depend on oil to support their entire infrastructure fare?  This is another example of a stress that can build before a government is forced to intervene.  Most of these interventions are not pleasant and don’t help the stock markets.

While the bull market may be over, it won’t clear a path for the bears.  These moves by sovereign governments in response to stress will serve to pin the broad market. This means that stocks are locked in a trading range.