What is the market turbulence telling us?

13 January 2016 1:41 pm

2016 is shaping up to be a volatile year for financial markets. Two weeks into the year and there are signs it could be the most turbulent one yet. Markets are sending out signal that the raging bull cycle we've had the last few years has started to stall. That makes sense, Assets can't rise forever, and with stocks as rich as they are, forward returns look paltry.

With the Fed starting its hiking cycle, the growing monetary policy divergence between the US and the rest of the world is only going to drive the dollar higher. A stronger dollar will accelerate a collapse in profit margins of businesses. Hence the end of the bull market.

Commentator Bob Gottliebsen says global sharemarkets are falling because of a combination of the China slowdown, the flood of oil and iron ore leading to lower commodity prices, concerns about the US debt market and Europe’s migration problems. These forces are not about to disappear so we can expect the turbulence to increase.

Add to that a decade of ultra-low interest rates which has caused the mispricing of assets, a bubble, which could explode in 2016. Asset bubbles are raging in advanced countries, but also in emerging economies like China.

The bottom line is that in developed nations, growth seems stuck between 1 percent and 2 percent a year. It’s a weakness that leaves the world economy vulnerable to events (say, North Korea's nuclear bomb test) that reduce confidence. As a result, any ensuing declines of business or consumer spending could plunge markets into recession.

Maybe that is what the stock market is telling us.’

Martin Wolf at the Financial Times says another big driver of the turbulence is the deteriorating performance of the emerging economies — in cyclical and, more significant still, structural terms. Of the five Brics (Brazil, Russia, India, China and South Africa), only India is experiencing a revival. And China is extremely unbalanced, with incredibly high savings rates, wastefully high investment rates and high debt.

The result, he says, will leave us with a legacy of financial shocks and bad debt.

All of this means the world will have to clean up all the financial mistakes that created the massive debt and credit bubbles, a depressingly familiar scenario. It also means we'll have to find new engines of demand. Anyone expecting this will come from the US will be in for a surprise. It’s not going to happen.

Whichever way you look at it, we are now in uncharted territory.