By MoneyMorning.com.au
Are You an “Innie” or an “Outie”?
“It’s starting to crack”, said our in-house technical analyst, Murray Dawes this morning.
He was referring to the Aussie stock market.
Late yesterday afternoon he told his Slipstream Traders to take part profit in one of his short-sell trades. Of course, it would have been nicer to still have the full position on. But that’s what risk management is all about. Especially in a world moving towards global debt default.
You’re never going to buy right at the bottom and sell right at the top.
This morning the market has opened lower… and the other half of Murray’s short position has gone further into profit.
So, with the market going all over the place, how should you play it? We’ll get to that in a moment. First, just why are the markets behaving this way…
Global Debt Means More Downgrades are on the Way
Well, it’s no wonder when you see news items like this from Agence France-Presse:
“An increase in French government borrowing costs, slowing growth and the Eurozone debt crisis threatens the country’s top credit rating, Moody’s ratings agency has warned.”
Two weeks ago we reported how ratings agency Standard & Poor’s (S&P) had “mistakenly” issued a ratings downgrade for France.
At the time we wrote:
“Our guess is it was supposed to be an internal alert for S&P analysts. And that somehow – whether it was a fat finger or some other error – S&P released the internal alert to subscribers.”
Of course, it could still have been a “fat finger or some other error”. But we doubt it.
That’s the problem with a highly leveraged and inter-connected global debt market. There’s no sanctuary. Unless an economy is fully self-sufficient there will always be cross-border equity and debt deals. And that means problems flowing from one country to another…
Greece borrows from Italy… Italy borrows from France… France borrows from Germany… and even Germany borrows from someone – the French, Italians and Greeks probably!
And don’t forget China.
China Next in the Global Debt Bubble?
Today the Financial Times reports:
“In October, however, property transactions fell 39 per cent year-on-year in China’s 15 biggest cities, according to government data. Nationwide, transactions dropped 11.6 per cent, accelerating from a 7 per cent fall in September.”
Don’t forget how China has financed much of its construction. By selling bonds against land so local governments can build high-rise towers, sports stadiums and roads.
But if property transactions are falling off a cliff, who in their right mind will buy a bond against over-valued Chinese land? Especially as prices will drop as demand falls. (More on Chinese debt from Greg Canavan below).
The fact is the global debt problem can only end in one of two ways…
By debt default. Or by continuing the current practice of going further into debt (and hoping nobody notices).
That creates a big problem for investors.
Why?
Because both “solutions” could result in different market behaviour…
Cheers.
Kris.
P.S. I don’t know if you’ve seen the email. But right now you have a limited-time chance to look over all my latest small-cap stock tips for FREE… for 30 days. If you’d like to know more, click here…
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From the Archives…
The Onward March of the State
2011-11-11 – Kris Sayce
Lose a Shirt, But Gain a Wardrobe
2011-11-10 – Kris Sayce
Neither a Borrower Nor a Seller Be…
2011-11-09 – Kris Sayce
Roman or Zimbabwean
2011-11-08 – Kris Sayce
Lighting a Match to Inflation
2011-11-07 – Kris Sayce
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