Markets Feel a Pain in the Neck

Global equity markets have spent months ‘shrugging off’ problems. But overnight, the weight become too much to bear. The shoulders cramped up…and markets got a pain in the neck. The Dow and S&P 500 both fell around 2%. Pick your reason why…Ukraine, Argentina, Portugal, company earnings…they are all valid reason not to keep chasing stocks to record highs.

But the primary reason for the pain in the neck was an obscure little data piece that showed employment costs rising much faster than expected. ‘Slack’ in the labour market has been one of the primary reasons behind the Fed’s lower for longer stance on interest rates. Now, Wall Street is coming around to the view that the Federal Reserve might raise rates sooner than they thought.

We’ll see about that…

But for now, the speculators are in a bit of a panic. Just as worrying is what is going on in Russia/Ukraine. The West has hastily placed sanctions on Russia, and there will be repercussions. You can see those repercussions starting to manifest on the German stock exchange, the DAX.

As you can see in the chart below, the DAX is under pressure, and last night broke below its 200-day moving average (red line). This is what happens when you impose economic sanctions on one of your biggest energy suppliers. Investors worry…and sell stocks.

The DAX — Dacked!

Of course, all this could just be another minor sell-off in an ongoing bull market. But given that US markets haven’t had a decent sell-off in years, the chances are this correction might be more than just a run-of-the-mill ‘buying opportunity’.

I know what my mate Dan Denning thinks. Recently, Dan has focussed on Australia’s defense vulnerability and economic weakness.  But his July issue, sent out to The Denning Report subscribers yesterday afternoon, took a different tack…and he pulled no punches.

In deference to his paid up clients, I can’t reveal the contents. But I can tell you they are explosive. If you’re long stocks, this report is worth the price of admission alone.

The Aussie market is off more than 1% in early trading. Will it continue to buck the trend of weaker Northern Hemisphere markets, or succumb and fall harder as the day progresses? I don’t know. Lately, Aussie stocks have rallied on renewed optimism on China and more money surging into rent-seeking banks.

I pointed out yesterday that the banks are huge beneficiaries of the land bubble. By the way, that’s what I’m going to start calling it from now on…a land bubble. It’s not a housing bubble. Housing, the structure on top of the land, depreciates. It’s the land value that rises. As Phil Anderson  repeatedly says, it’s the land that captures the value created by a nation’s economic progress. And banks own the land.

Check out this chart of the Commonwealth Bank [ASX:CBA], the largest land owner in Australia. On Wednesday, it broke out to new highs, with more follow through buying yesterday. The Aussie market duly followed. In our asset/debt dependent economy, what’s good for the CBA is good for the market.

CBA — no worries

Good for the country though? Not so much. It’s one thing for land to capture the economic wealth of a country, but when we leverage that wealth with truckloads of debt, it turns into a land boom/bubble.

When we leverage it with foreign money created by a central banker’s keyboard, well, it’s hardly stable finance underpinning the boom. Australia’s day of reckoning may not be here yet, but it’s coming. And there’s nothing Glenn Stevens, Tony Abbot or Joe Hockey can do about it.

Why? Because the whole global financial system operates on confidence. Central bankers create great wads of liquidity that then flow through the financial system and come out into the real economy as ‘capital’. But in reality, liquidity and capital are two separate things.

Read the rest of this article at The Daily Reckoning