Friday, 11th December 2020
When a market shows divergence it pays to pay attention. Whilst not a massive divergence yet, the failure of the RSI and Stochastic indicators to make new highs over the past week, could be telling. An inability to climb higher while the index makes new highs is an early-warning indicator.
This week, the XJO made a new recovery high at 6745 points. This level was last seen back in March this year at the beginning of the pandemic induced sell-off. Combined with falling volume this week, the XJO may be at the start of a short term correction.
Bull markets end on good news, not bad news. Over the past week we have seen Iron Ore rally to $150 a ton, which has seen BHP, RIO and Fortescue shares rally hard. In fact, Fortescue has reached a record high of over $22 per share.
Consumer confidence is high, share prices are rallying and Volatility has weakened. Therefore, we are currently in a period of complacency and a distinct lack of fear towards equity risk is prevalent.
Last week, this report noted the historic levels of optimism around the globe. We can follow that up this week with news that cash levels amongst fund managers in the States has reached a new low.
Mutual fund managers have just 0.07% of their funds in cash, whilst another measure shows portfolio managers using leverage with no cash on hand at all.
This disregard for cash is significant as it reflects the mania thinking that has pervaded all levels of the investment cycle. For example, a recent report from the Journal of Portfolio Management shows public pension exposure to alternative investments is running at 28%. Education endowments have 58% of their assets in alternative investments.
These investments are usually illiquid and opaque and buyers simply disappear when fear rises. With a huge reliance on pension payments for retirement income amongst government employees, the outlook becomes clouded when 9 out of 10 pension fund managers expect lower returns for this decade, according to a recent survey .
Government interest rate goes negative in $550m Treasury note sale
The above headline is not remarkable as we have seen negative interest rates, especially in Europe, for a number of years. However, this headline is remarkable as it refers to the latest sale of Australian 180-day Treasury notes.
Interest rates reflect credit demand and a need for safety. Credit demand is low in Australia and rates are priced accordingly. On the other hand, people are willing to get a negative return on their money to guarantee being repaid.
With a growing debt burden, the Australian economy is under pressure. A COVID-19 vaccine may arrive here in the first quarter of next year, but there are logistical issues with its delivery to the country.
The recent announcement cancelling the University of Queensland COVID-19 trial due to some false positives shows us the future is uncertain.
Debt Swallows Universe
This year has seen an unprecedented rise in debt, both public and private. Debt by and of itself is not a problem when it is used to generate production or some other economic activity. This means that the debt can be serviced in the normal course of business.
What we have seen this year is an explosion in private sector debt and it is not healthy, self-liquidating debt which, for example, would come from borrowing to invest in a new factory, the debt being paid off via the increased production.
No, this is unhealthy, non-self-liquidating debt which is being added and the same is true for households’ binge on mortgage debt.
The reasoning that this debt is fine as long as it is serviceable relies on a growing vibrant economy. With economies around the world suffering from falling GDP, the ability to service the debt falls as well.
Recently the Queensland government announced that it would need to borrow money for everyday expenses.
Total global debt is estimated to hit US$277 trillion this year. Global GDP is approximately US$120 trillion. The effects of COVID-19 will be felt for years to come.