"So it has come to this." (Last words or something similar of just about everyone from Ned Kelly to Homer Simpson)
Or note the item about real estate in China in the following - all Australian markets are especially vulnerable to downturns in our #1 trading partner although they and a more muted mortgage availability saved our own housing market in 2008 from the US experience of the 'jingle mail.'
It starts with unease, something has been too good to be true and it falls over. But there are millions of believers waiting anxiously in the wings; fretting that there would never be a pullback to let them in. It happens and their capital emerges to put a floor in the market and a new burst of momentum drives it to new heights. But sellers flush with paper profits have been rattled and re-emerge and a fresh new panic begins but is halted (whew!) at the previously defined floor that proved ironclad last time. More capital emerges from the last emboldened hold-outs and again it levitates but barely makes that first turning point. And by now there are no more savings or untapped creditworthiness out there. Again it turns and if it's the share market, governors rush in with legislative packages like the outlawing of shortselling to stem the losses in the near term even as it removes the last floor, which would be those same sellers ultimately covering their short sales. Central banks drop interest rates to institutions again but where can you go from zero? And from there on the poison gas of leverage finds it way into every crack and crevice and boardroom and bedroom on the marketing planet and the virtuous and profitable wall of worry gives way to the downward ladder of hope wherein the exit opportunity of each small respite is ignored in case it is the start of a new bull, and promptly regretted as a lost opportunity to get the hell out as it all grinds lower. Desperate bankers call in margin loans before they are themselves forced to the wall, home owners watch plunging valuations and it becomes obvious that their own equity has evaporated leaving only the mortgage which they were already paying with their credit card anyway.
They called it the 'jingle mail' in 2008 when distressed homeowners left their keys in the mailbox and drove away into the sunset; mattresses tied to the roof like the westward flight of the Okies in the dustbowl days or the Jap attack on Santa Barbara a couple decades later when they fled inland to the Mojave desert.
It having come to this, Chart Reading 100 shows a perfect 'head and shoulders' formation that is the signature of life and then death. Or it can be a slow upward churning within an ever narrowing bound that eats up all the supportive capital until the shoeshine boy gives Rockefeller the heads up, he gets cold feet and cashes out. It's a formation suspiciously like todays' S and P 500 share market index. Whichever, a drop below the trendline is the signature of doom; there is no more easily available personal savings out there and even if the Fed buys their own bonds and lends to JP Morgan at zero percent - no-one dares or wants to borrow it, or at least no-one with a credit rating. But life goes on for a while; Morgan's is a playground of Gen Y or Z in-house trading monkeys at their screens, as yet unblooded and busting for the bonuses they will gain for putting the bank's free money to work at 90 to 1 leverage; playing for pennies front-running retail share investors, churning out 'credit default swaps' or interest rate hedges that take for granted a future of seamless ZIRP (zero interest rate policy) from the Fed. They are backstopped by iron-clad warp-speed computer programs, the fact it is not their personal fortunes being gambled, and the only real known amongst unknowns; that the government will step in with a rescue plan if they inadvertently break the bank when everyone tries to get out the same exit in the same microsecond.
That's called a 'Black Swan' these days. Once it referred to a San Francisco earthquake or the Yellowstone volcano - the pending thirty thousand year on average global disaster that FBI-infiltrated- and- encouraged jihadist groups plot to trigger with Federally- supplied bundles of dynamite so they can be arrested with appropriate fanfare. The last swan can be blamed on the Swiss for reneging without notice on their commitment to peg to the Euro; without notice to all those leveraged hedge funds who had been bleeding them so mercilessly. So the hedgies didn't get bailed nor have time to find the bigger fool and can be forgiven for feeling betrayed. But that was chicken feed, the quadrillion nominal dollars of OTC derivative 'value' worldwide hasn't been closed out or in any way reduced; just re- estimated to a mere $750 trillion. So you don't need a really black swan; it just goes to show that with enough risk on the books anything with webbed feet can toddle out of the pondscum to shake the world.
Holy Mary, Mother of God, pray for us sinners now and in the hour of our death. Amen.
The trouble began a long time ago with modern banking - speculative booms and busts have always been with us but it was only in the last century with fractional reserve banking that interest rates began to be set by governments rather than markets. Previously they had to make do with coin clipping and other confidence games and thereby exploit a time lag in market smarts. But now we have easy money; it's always a crowd pleaser and boosted GDP by twice the amount thrown onto the bonfireway back when but was kind of like drug addiction - it stopped being productive or pleasurable and became a necessity. The world was hooked and we need free money now just to keep our heads above the water, puddling around as we do in our oceans of debt. So with exponentially growing populations needing employment to pay for exponentially growing consumption while money supply and velocity and credit facilities have to grow similarly; eventually consumer and national debt; bloated inventories and productive capacity can be pushed no further and there has to be a breather. Normally this is recession and bankruptcies but that is politically intolerable and so we have to dance with the protracted death of money. Fed Chairman Bernanke famously promised to throw bundles of it from helicopters if necessary. But that doesn't mean the lucky finders can use it to buy anything.
Hard money theorists have a smug answer that gold and free markets will solve the problem of inflation and the boom/bust cycle. Maybe it did once outside of the Spanish anomaly when they plundered the new Americas and forged their own social ruination in the process. Maybe it could do now with a limited human population in an infinite world of resources but even gold has hit the wall - we are now mining half a gram per tonne of the stuff where once mines needed grades 20 times better than that. And as before, its scarcity is a function of depleting mines and rising mining costs For those low grades costs and profitability is increasingly being defined by the rising cost of energy. There has to be a better safe harbour for our diminishing fortunes.
Next to come on the Joe Hockey series: "Safe as Houses."