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The only Fundamental worth looking at is debt level!


Mercury

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On a quiet post Easter Monday, having reread the Big Short over the weekend, I was pondering what actually drives a big market crash.  I don't mean sentiment etc, though obviously (at least to me) it is sentiment that does it, but what drives the sentiment?  I looked back to the past few big news crashes and the scandals that accompanies them to see if I could observe any commonality.

 

The first thing that struck me was how puny the 1987 bond market driven crash actually was compared to what has happened since.  This is the crash that started on the so-called Black Monday and shocked the financial world at the time and triggered (or presaged) a 7 year recession and housing crash (in the UK/London) at least).  The core of this was the bond market excesses of the 80s, driven mostly by Salomon Brothers, and the move to take financial firms public (they had been mostly private partnerships until then) - check out the book Liars Poker for an entertaining read on this era.  It was essentially an explosion in corporate debt issues and ultimately defaults.

 

The 2000/02 crash was at face value all about the internet bubble, those of us in the corporate world back then will remember the crazy valuations and a technology unable to deliver on the promise.  I don't have data on it but I bet there was a lot of debt out there to finance all the new businesses.  In addition, and perhaps more importantly, the central banks went into overdrive to stave off the worst of the bubble bursting with low interest rates and it i snow widely acknowledged that the law of unintended consequences kicked in at this point resulting in a boom in home buying through cheap mortgages and set up the conditions for the credit crunch.

 

2008/09 credit crunch needs little commentary, debt fueled greed.  Again the central banks and Treasury departments stepped in to bail out the spivs and tried to stimulate the economy with low interest rates but this time added QE.  All that happened is that the money flooded into the stock markets and the spivs took the opportunity once again to get rich quick.

 

2015/16???: we have massive debt, it has gone up not down in terms of government and corporate debt.  In some areas (US in particular) personal debt has gone down so consumers are not playing ball with the Fed!  Corporates have leveraged up, not to respond to demand, which has way lagged the stock market, not to invest in the future but to do crazy M&A and share buybacks.  Tech stock valuations are more crazy than the first internet bubble (Last year a stock picker tried to justify why Amazon at a P/E of 500 was a great buy!!!).  CAPE levels at all time highs (at least in the US).  Governments can't pay back their debts.  ZIRP/NIRP!  Totally bananas and economists trying to tell us how this is the "new normal".  Of course they are in the pay of the banks...

 

Debt, Debt, Debt.  Is the writing on the wall for another crash, or maybe even a catastrophe?  Even if you are a naysayer on this how can it be a good time to buy anything?  Unless you believe in the "new normal" hypothesis...

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