‘Euphoric’ markets at risk of another crash

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#1
‘Euphoric’ markets at risk of another crash
PUBLISHED: 0 HOUR 42 MINUTES AGO | UPDATE: 0 HOUR 42 MINUTES AGO


PHILIP BAKER

Disappointing element of deja vu from investors
Bankers have a habit of comforting themselves with facts and figures and coming up with a thousand reasons why there won’t be a repeat of all the mistakes that led to the financial crisis of 2008.

And they’re probably right; once investors lose money and learn a lesson, they are unlikely to repeat those mistakes.

The problem is, financial markets end up making entirely new mistakes and it’s those mistakes that spark the next crisis.

That theory seems to be the latest message from the bank for central banks, the Bank for International Settlements, which has warned that financial markets are losing touch with reality and another crisis could be just around the corner.

The BIS says financial markets are in a “euphoric’’ state and is calling for central banks around the world to lift interest rates as soon as they can.

Record low interest rates have fuelled a frenzy and the BIS are worried that the cheap money has caused a “disconnect between the markets’ buoyancy and underlying economic developments globally,” the bank wrote in its latest annual report released on the weekend.

“Financial markets have been exuberant over the past year, at least in advanced economies, dancing mainly to the tune of central bank decisions,” it also wrote.

“Volatility in equity, fixed income and foreign exchange markets have sagged to historical lows. Obviously, market participants are pricing in hardly any risks.”

It’s not the first time the bank has made these sorts of warnings. Just over 10 years ago the chief economist at the BIS, Bill White, warned that the ultra cheap money, provided by central banks such as the US Federal Reserve, would end in tears but his comments were largely shrugged off.

In addition to the BIS’s latest warning, that the current glow from shares, bonds and property is on shaky ground, Bill White has recently pointed out that the world is looking like a dangerous place again.

Behind all the warnings are signs that investors have built up speculative bubbles, just like they did in 2007, when sharemarkets were overvalued and credit spreads in the bond markets had contracted to record lows.

The BIS annual report released at the weekend said a “persistent easing bias” by policymakers had lulled governments “into a false sense of security” that meant the real reforms never see the light of day and investors get used to record low interest rates.

“Policy does not lean against the booms but eases aggressively and persistently during busts,” the BIS said. “This induces a downward bias in interest rates and an upward bias in debt levels, which in turn makes it hard to raise rates without damaging the economy – a debt trap”.

Furthermore, the record low rates eventually “lose their effectiveness and may end up fostering the very conditions they seek to prevent.”

So, while the underlying problems might be the same, it’s central bank policy that creates the next crisis while trying to clean up the mess of the first one.

And this time around there are some similarities.

There has been another large increase in debt levels. Private debt outside the banks is now about 30 per cent larger than where it was before the 2008 global financial crisis. The BIS are worried that the run up in debt has gone to all the wrong areas again and warn that because governments have failed to deal with the issues that caused the original crisis there could be a “bigger one down the road”.

The report comes as the European Central Bank prepares to meet this week, with some analysts expecting ECB president Mario Draghi to announce a version of the US Fed’s “quantitative easing” program in the months ahead. However, at the same time the Bank of England is getting investors ready for a rate rise.
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#2
Stock ETFs’ Valuation Metrics Paint a Different Picture
http://finance.yahoo.com/news/stock-etfs...0AovCTmYlQ
You can find more of my postings in http://investideas.net/forum/
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#3
Banker CEO confused? Cannot understand the impact of Global $ printing... I think I will go with career bankers...

http://www.businesstimes.com.sg/premium/...t-20140701

PUBLISHED JULY 01, 2014
DBS CEO baffled over US stock market
Stock markets, talk that hint at strong US growth not reflected in data
BYCAI HAOXIANG
haoxiang@sph.com.sg @HaoxiangCaiBT

Mr Piyush: Not alone in not being able to make up his mind on US market
THE United States market has left DBS Bank chief executive Piyush Gupta "quite confused". Stock markets and market talk suggest that the US will grow strongly, but data has not borne that out, he said.
"For the first time in a long time I'm actually quite confused about the US market," he told a group of private banking clients over lunch at the Ritz-Carlton ballroom yesterday.
US stock markets are at all-time highs, with the S&P 500 index near 2,000 points and the Dow Jones Industrial Average near 17,000 points. They have been climbing for the last five years. Markets recently shrugged off a first quarter gross domestic product (GDP) contraction of 2.9 per cent, expecting better results in Q2.
Mr Gupta said that US GDP growth "will be lucky to come in at 1.6 to 1.8 per cent this year", significantly lower than the near-3 per cent that economists forecast at the end of last year - and below the latest 2.1 to 2.3 per cent projections of the Fed. This is because personal consumption growth in the US remains weak at around one per cent.
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#4
http://www.todayonline.com/business/asia...es-dbs-ceo

Asia’s prospects positive despite global uncertainties: DBS CEO
BY
WONG WEI HAN
PUBLISHED: JULY 1, 4:03 AM
SINGAPORE — While there are a number of uncertainties surrounding the state of the global economy, with the United States in particular giving off mixed signals as it inches its way towards a stronger economic position, the prospects for the Asia-Pacific remain positive even with a slowing China.

“All of these stories about Asia’s and China’s demise are a bit premature,” said DBS chief executive Piyush Gupta yesterday at an economic outlook briefing held by the bank.

“On a macro level, China is a US$8 trillion (S$10 trillion) to US$9 trillion economy. Even with a 6 per cent growth rate, it’s still US$500 billion of growth. That’s a lot more growth than any other country in any other part of the world has. So are there opportunities to do good business and find good money there? The answer has to be ‘yes’,” he said.

“So, on balance, Asia’s prospects — anchored on a more stable China than people think and a resurgent India in the mid-term — are likely to be somewhat better than expected,” Mr Gupta added.

China, the world’s second-largest economy, has seen growth moderate from three decades of double-digit annual expansion as it undergoes broad restructuring. A Reuters poll in April forecast the country’s economic growth could slow to 7.3 per cent in the second quarter from an 18-month low of 7.4 per cent in the previous quarter, with full-year growth of 7.3 per cent in 2014 — the weakest in 24 years.

Despite those economic uncertainties, the market remains a priority for DBS, South-east Asia’s biggest bank by assets, said Mr Gupta.

But prospects for the US are not as clear-cut. “For the first time in a long time, I’m actually quite confused about the US market, because the data coming out of the US is very, very mixed,” he said. “US GDP (gross domestic product) growth will be lucky to reach 1.6 to 1.8 per cent this year. This is remarkable because the earlier consensus forecast was 3 per cent ... And since then, the consensus forecast has been coming down.”

The US economy in the first quarter saw its sharpest pullback since the depths of the last recession, falling at a seasonally adjusted annual rate of 2.9 per cent as consumer spending cooled.

“Consumption in the first quarter went up only 1 per cent. And in April and May, the consumption numbers were also weak; even after the impact of winter wore off, consumption is still not kicking in. In the second quarter, consumption will be somewhere to the tune of 1.2 per cent,” said Mr Gupta.

“But some of the data has been good. Mortgage and housing — which is an important part of the US economy — had been slowing last year, but went up 19 per cent in May, just out of nowhere,” he added. “Job payroll is also holding up quite okay … Industrial production and the purchasing managers’ index were also up in May.

“So, (because of) slow consumption, GDP growth won’t be strong this year, (with) clearly no wage-price inflation. But some signs of growth are coming from manufacturing. When you put these together, it’s no wonder it’s difficult to call where the US market is going.”
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#5
Central Bank Analysts Say Stocks Are In ‘Euphoric’ Territory And We’re Screwed When The Recession Hits
http://www.businessinsider.sg/europe-ban...7IxwsIrjIU
You can find more of my postings in http://investideas.net/forum/
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#6
Singapore faces a credit meltdown
http://sbr.com.sg/economy/news/singapore...t-meltdown


Chart of the Day: Take a look at the worrying drop in Singapore’s domestic deposits
http://sbr.com.sg/economy/news/chart-day...c-deposits
You can find more of my postings in http://investideas.net/forum/
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#7
I think it is important to engage in second level thinking of current situation.

In particular, I think investors should consider the fact that bubbles form during mass delusion of prosperity.

Which also means that if big organizations and institutions recognise bubbly scenarios, how then can bubbles inflate beyond recognition?

Of course it is easy to say that stock market has risen and is ahead of fundamentals. But there has never been one rule that demands stock market valuation to correlate directly with fundamentals. In fact, it is often ahead. So being looking at fundamentals and then at valuation lends itself to poor investment decisions.

I am not saying that we should not look at fundamentals. But I need to stress that markets have been slightly overvalued/undervalued throughout history (like the current scenario). Looking at fundamentals does not lend credence unless its mass exuberance of extreme prosperity or pessimism.

Until then, looking at macro picture almost certainly leads to wrong decisions in these slight over/undervaluation scenarios. The most important thing is still looking for undervalued companies.

Disclaimer: I am solely referring to the US market though since I am a US investor. But I hope it trigger some thinking on our part in these scenarios.
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#8
^^ To identify bubbles, you have to see anecdotal evidence. Like people and corporate behaviour.
Read or living thru Japan bubble, Taiwan stock bubble, Msian bubble, HK red chip bubble, dotcom bubble, global credit bubble.

As usual, bubbles can last longer than you think. Rather to avoid bubbles, investors should embrace bubbles. and HOPE to
get out safely.
"... but quitting while you're ahead is not the same as quitting." - Quote from the movie American Gangster
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#9
Agree and disagree with scottleey Smile

Were people unaware of the property bubbles in Singapore or HK or China? Today are people really oblivious of the property bubble in Australia and UK? Even if people recognise bubbles, the herd mentality and the catching up with the Joneses mentality will ensure that markets are irrational longer than we are solvent. Veterans Buffett Soros Vinik Robertson all saw the dot com bubble since 1997 and all are casualties.

In the Big Short on GFC we read also about Michael Burry. He would have been zero instead of hero if the bubble lasted another 6-12 months. On the other spectrum, Nick Leeson would have been a hero instead of zero if he could hold his position for another 3 months.

Who did it the best during GFC? IMHO Goldman Sachs. Frankly I don't think they were looking to time their CDS shorts. They were managing their risk on the long CDO positions very adequately. They know the market can be way overextended beyond their imagination and not willing to take a position either way. They turn out to be net short because the delta of their shorts increased when the volatility jumped.

Point is: It is about timing and also strategy. The market never required you to do a binary trade even if you are 100% confident.

Valuations and funamentals are utmost important but one should not neglect these 2 factors. Valuation is not an exact science, neither is market psychology. Too many people still stuck in the deterministic world of absolutes.
Before you speak, listen. Before you write, think. Before you spend, earn. Before you invest, investigate. Before you criticize, wait. Before you pray, forgive. Before you quit, try. Before you retire, save. Before you die, give. –William A. Ward

Think Asset-Business-Structure (ABS)
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#10
No one can be certain about the uncertainty of the market. That's why anyone can participate. Even low to average IQ. If not there will be no market soon. So Lady Luck or GOD is Fair. Or this is Nature.
WB:-

1) Rule # 1, do not lose money.
2) Rule # 2, refer to # 1.
3) Not until you can manage your emotions, you can manage your money.

Truism of Investments.
A) Buying a security is buying RISK not Return
B) You can control RISK (to a certain level, hopefully only.) But definitely not the outcome of the Return.

NB:-
My signature is meant for psychoing myself. No offence to anyone. i am trying not to lose money unnecessary anymore.
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