It's been this growing disquiet all year around China. The cracks were showing but maybe the market was in denial. Or maybe they convinced themselves all was well in the face of the share market rises in Shanghai. After all, if the shares are rocketing up, something must be going right in the market, people figured. But slowly we kept hearing things that belied that simple understanding. We heard that the growth figures were not something measured, but more like aspirational targets expressed by the Communist central government, which would prompt everybody to chip in and hit the target. We had read reports of ghost cities built on borrowed money with price tags too high; and then of course there was this notion that China would simply move to a consumer-consumption driven economy.
This must be the month where it all went out the window because fear has gripped international markets and everybody's selling out their positions. They're not even going to wait for October, they're going, getting right out. And so we're seeing the entire worlds' markets all retreating at once, one retreat feeding on to the next in the timezone domino of market collapses. It hasn't been quite like this since 2012, and quite honestly, it's sharing hallmarks of the 2007 collapse. It's all very ugly because the problems of 2007 haven't been solved enough to make us weather these moments better than 2007. And of course 2007 turned to the bailouts of 2008 and the rest fit has been about kicking cans down the road, which of course includes the Greek situation which is tethered to the rest of the PIIGS.
In short, we're on a clock of about 12 to 14 months before the Lehman Moment gets a sequel and people will scramble for bail outs - on the eve of a Presidential election. All the same, the most important notion is that this time, there's nowhere to go. They can't go below ZIRP to stimulate more credit growth; they can't cut taxes even more to stimulate consumption - that trick's already hit its limit; and none of the creditors can afford to let the debts go bad because it would blow up their own position - which last time prompted Quantitative Easing so people could get over the hump. "Moral Hazards" - and I say that with irony because you know it turned out that it was more important to save everybody's bacon than encouraging "Moral Hazards".
So depending on how badly this drop affects Australia and its consumer sentiment, you can count on the RBA to go to ZIRP, just to support asset prices. There's not much more they could do as the perfect storm hits for the second time in a decade.
AUD $60 Billion In A Day
Just how crappy was the All Ords today? Take a look at this:
Ouch. A few weeks ago, the ASX was hovering closer to 6000 than 5500. There was talk of a secular Bull Market forming, even though the earnings were not exactly like for what people had hoped. The splatting sounds you're hearing are leveraged investors leaping off the ledge. At least, it used to be in the 1929 crash. It's early days yet as investors will go on a big purge of companies carrying too much debt. The four major banks have beaten a retreat of 20% off their highs this year, just in this month, so this could transmogrify into something a bit scarier quickly. If you cast your mind back to 2008, when global credit totally seized up, there was talk that banks would fail and there would be a big run on banks. At the time Kevin Rudd stepped in by guaranteeing deposits and backing the banks to the hilt. He took lightning fast action to stave off the GFC induced collapse of banks.
This time, we're stuck with captain Snaily Failure in the Lodge, so we may not get a Decisive bit of action out of this idiot government until it's too late and even then it will likely be too little. Some ideologue - I'd guess Cory Bernardi or Eric Abetz - will bang on about moral hazard as Sydney and Melbourne property markets descend into carnage. Remember, we've got record private sector debt. A lot of positions are ready to burst if the margin calls are made. Hold on to your hats!
You Know What's Weird? Gold
Gold is a commodity as well as the metal by which currency used to be measured. Of course, none of the major currencies have the God Standard going, and it's been this way since Richard Nixon shocked the world and took the US Dollar of the gold standard. You'd think with this crisis brewing for the last few weeks that Gold would go up as people lost faith in equities and bonds and fiat currency notes. But no - it's been going down.
...which is weird.
So, in 2008, they start QE and you can understand the impulse to buy gold because, hey, they're "printing money". We would expect to see the sort of inflation that broke out in Germany between the war as it printed money to pay off the reparations for World War I. Now, inflation an the measurement thereof is a separate bugbear, but there simply hasn't been that kind of inflation going on. Instead the Central Banks have worried about deflationary pressures and so interest rates have plummeted to zero or near-zero in many advanced economies. Gold peaked at 2011, but has been sliding ever since - which I suppose suggests the inflation expectation is less than zero, and has been for a long time.
When you include the fact that gold actually has commercial uses beyond just being precious, then it makes sense that the Commodities collapse as well as the ongoing deflationary pressures has pushed gold down to this level we see today. What's weird is that if fear was really running around the globe, you would expect that gold price to jump.
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