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Global Equities' Impending Fall to Herald the Demise of Free Market Capitalism

Amit Goel | 17 Aug, 2016  | Follow Author | Add to my Favourites 
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Global equities are back in a super-euphoric bull phase and the thumping noise from the bulls has not had such high decibels since the May of 2015. Marketmen believe that the equity markets are now insulated from any bad news from China; 20% correction in crude prices in July was countenanced by equity markets without any trepidation; terror attacks in Europe and tensions in Middle East in last few weeks didn't seem to matter; even the bad GDP numbers from US for the June quarter couldn't shake the marketmen from their comfort zone. This huge complacency can be to a large extent explained by the blind confidence of the markets in the power of central bankers. With central bankers from Japan, EU and UK already on board for QE; FED in no hurry to raise rates; and Australia, New Zealand and most of the emerging markets still cutting interest rates, money has never been easier.


It is also assumed that whenever the global economy slows meaningfully, the army of central bankers across the world will jump to the rescue by opening the flood gates of money (read: Helicopter Money). People believe that central bankers will continue to rule the world and will be able to fix the economic problems with the same élan that they did in 2009 after Lehman crisis. This effectively has provided a backstop to global equities and given them a gilt edge like never before. It is in such super bullish environment that we have chosen to aggressively build our shorts and bet on a bear run to start shortly.


The reasons are as follows:

  • Historically, it has paid to short equities when markets are as complacent as they are right now. VIX on S&P 500 is not very far away from its all time lows. This is a huge contrarian short signal.
  • DOW Transports is already flashing a red signal and historically has led S&P 500 on a major down move.
  • Commodities have clearly topped out and are looking very weak chartically. The up move in the beginning of the year was clearly led by commodities and they had begun to rally a few weeks before equities did that time. Now they could lead the equities lower.
  • The global equities are in their seventh month of the rally that started in February 2016. US equities are in their 8th year of the bull run that started in March 2009; NASDAQ composite has had 7 consecutive up weeks; and Global Emerging Markets' Index has been up for 8 consecutive days. One, this all shows how one sided the sentiment is and secondly; these technical hurdles can act as a speed breaker for any rally or Bull Run. With the seasonally weak patch of September-October just round the corner, this may well be the turning point.


Technically, the market is positioned for a brutal sell-off. In fact, it reeks of a setup to massacre the Bulls.  Apart from technical indicators, fundamentally we see the plateauing of US consumer spending. Auto sales have probably peaked out and Home sales are also showing signs of peaking out. These two sectors put together contribute to significant percentage of US GDP and any downtick in these categories would see the US GDP slowing down meaningfully.


If this indeed is the turning point for US equities, and consequently the global equities, we could see the beginning of a vicious bear run in next few days and weeks. Needless to say this would be accompanied by a sharp fall in industrial commodities, sell off in high yield corporate and emerging market bonds and a fall in the US 30 year Treasury yields.


How The World Will Never Be the Same Again


Global Economy's proverbial last undiscovered island is the inevitability of Greatest Depression and the inevitable collapse of Free Market Capitalism. It is shockingly naive that in today's world of vast information, knowledge and brilliance, everybody is blissfully unaware of this eventuality. With the highest ever number of alive and active Nobel laureates in Economics in the world, it’s truly incredible that nobody seems to have even a hint of this.


As far as we are concerned, the undated obituary of Capitalism was written about 500 years back when feudalism as a socio-economic system in Western and Northern Europe was giving way to Mercantilism and Capitalism. The eventual collapse of Capitalism was as much a certainty then as it is now; except that now it is perilously close. We are certainly not arguing that Capitalism is or has been bad for the world. Growth of Capitalism has been the most significant social and economic achievement of human race since the time they started agriculture more than ten thousand years back. Capitalism has uplifted billions out of the vicious cycle of poverty and hunger. It has led to the unleashing of a virtuous cycle of unparalleled innovation and discovery that has compressed at least 2000 years of human evolution and growth to a mere 500 years. It is no exaggeration to say that the standard of living in the US and other developed countries would have been impossible to achieve in any other economic system apart from Capitalism. However the time has come for world to evolve to the next phase of evolution, even though the transition period itself will, unarguably, be replete with pain and revolutions.


At the cost of sounding repetitive, we would like to reiterate that the fact that Capitalism will merely be a transient phase, and will be eventually replaced by an egalitarian, welfare state should have been public knowledge by now. However, the fact that this would come as a huge shock to not just ordinary folks but even the top Economists, Finance men and Wall Street wizards, really shows the world's collective understanding of evolutionary economics in a very poor light. We will cover in a subsequent newsletter why the collapse of capitalism is so inevitable and why the existing economic wisdom and thinking has been woefully inadequate in understanding this phenomenon.


We also believe that the generation born in late 60s to early 70s will go down in human history as the generation which was witness to more revolutions than any other generation in human history. We have been witness to the Cold War, then the end of the Cold War, dismantling of Socialism from large parts of the world, fall of the Berlin Wall, dissolution of the USSR, series of wars and revolutions in Middle East, the revolution in Financial Services, TMT revolution, Social Networking revolution, the biggest Economic Boom in history, creation of the biggest Economic Bubble in history which is to be followed by Greatest Depression and then a series of social, economic and political revolutions across the world resulting in the climactic fall of Free Market Capitalism; and last but not the least, creation of a new world order with new multilateral institutions, new trade framework and a new economic system to take the place of Free Market Capitalism. Witnessing all the above in one life time and specially with the real time coverage of all events on media and internet is like being through the Rise and Fall of Roman Republic, Rise of Christianity, the Dark Ages, the Renaissance, Rise of Capitalism, American and French Revolutions and the Industrial revolution, all in the same life time! 1000 years hence, when humans will look back at history and evolution, this generation will be crowned as the most eventful generation ever. Even within this life span, the next two decades would be the most eventful years ever. Do watch this space as we try to predict every major twist and turn through this most amazing and treacherous journey.


In a way, the next two decades will be the culmination of hundreds of millenniums of human evolution. The end of this phase would begin the final chapter of human evolution and in some ways may be called the End of History. At this stage it will be pertinent to point out that the Developing World and the Developed world will have very different trajectories going forward. While both will experience economic and social upheavals to begin with, much of the Developed World will settle down as an egalitarian and welfare state eventually; but the Developing World will continue to face troubled times. The Developing World did not follow the same natural path to Growth in last 500 years as the Developed World, and mostly borrowed technology and processes from overseas to leapfrog from one phase to another often skipping the vital phases in between. This will come back to haunt them big time. Most of them could actually never become truly meritocratic, capitalistic economies in their own right, and hence lack the resources, infrastructure and systems to become truly egalitarian, welfare states. They would have a tendency to gravitate back towards feudalism instead, which could make them go through many painful decades of economic and social dark ages.


Finally,

 

We now want to once again shift our focus back to the relatively mundane task of multiplying our capital a hundred times in next 10 years and work towards our dream of making a dollar trillionaire walk this planet!! If our economic understanding is correct, multiplying capital 100 times should be roughly as difficult as a walk in the park! In Fact, our lurking fear is that once the dust settles down, we may be held guilty of insider trading for shorting S&P 500 futures, knowing fully well that they would be pretty much worthless after a decade or so!!  Yes, we see a complete obliteration, and even a move towards irrelevance for almost all financial assets, even though it will not all happen at the same time. Stocks and high yield corporate bonds would be the first to go; low rated sovereign bonds would be next; highly rated corporate bonds would follow; highly rated sovereign bonds would be next and last will be money in the bank and money under the mattress. Among the real assets, industrial commodities and commercial real estate will be the first to crash and will be followed by urban residential space. Fertile agricultural land and gold will go up in value and will practically be the only assets to come out unscathed from the ashes of free markets!!!

 


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About Amit Goel

Amit Goel is Cofounder & Director of www.pacefin.com, a premier financial services group with a pan India presence and a global footprint. Amit specialises in Macro Economic Research and medium to long term forecasting of trends in various asset classes particularly Equities, Bonds and Commodities.


For more information please write in to [email protected]


Disclaimer: The author has taken due care and caution to compile and analyse the data. The opinions expressed above are only the views of the author, and not a recommendation to buy or sell. Neither the author nor IndiaNotes.com accept any liability whatsoever arising from the use of any of the above contents.




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