Edition 8.8.2019

Lehman-like lions, Chinese currency tigers and bear markets… oh my!

Just this week, Nomura Securities warned that the US equity market may be heading toward a “Lehman-like shock” they “expect will arrive in late August or early September.” (CNBC.com)
So, Nomura believes “Lehman-like” lions may be lurking right around the corner.

Also this week, the US Treasury officially labeled China as a “currency manipulator”.

Chinese currency tigers?

Oh my!

Let’s take a step back, though, and ask: so what?

In the case of CNBC’s reporting of the equity strategy report from Nomura Securities, one of the key CNBC.com quotes is: “Nomura‚Äôs proprietary sentiment data, which incorporates a slew of macro and quantitative data, is showing a ‘deterioration in supply demand for equities and a sharp downward break in fundamentals,’ the analyst pointed out.”

Though the reporter goes on to interpret these words, we would make two points: 1) economists discuss “supply” and “demand” as coming from two separate sets of actors who, on the margin, establish a price through the process of trying to sell a product (the suppliers) and trying to buy a product (the demanders).  A discussion of “supply demand for equities” is nonsense, from an economic perspective.  And, 2) “fundamentals” typically refers to real-world phenomena such as sales or profits or wages.  “Technicals” typically refers to financial market factors such as supply of more equity coming to the financial markets or supply of new capital from more savings wanting to make more investments or changes in currency rates or interest rates causing changes in market participants’ demand for equity securities.  According to what we can glean from the CNBC.com reporting of the Nomura report, Nomura seems to be looking at market technical factors, such as hedge-funds’ desire to own securities, and attributing those factors incorrectly to “fundamental” economic activity.  Again, non-sense.

We are not making a prediction about the future direction of any financial market, especially in the next month.

To do so would require a crystal ball.

However, if the Nomura strategist comes to be correct, it will have been because real-world fundamentals will have deteriorated, which may cause the technical phenomena he is predicting to come to pass, ie hedge-funds unwinding their bullish trades, which would equate to selling stocks, which would put further downward pressure on equity / stock market values at a time when a deteriorating fundamental situation in the real world is causing other market participants also to reduce their exposure to stocks because of their assessment of likely lower profits.  

So, even though the language used in the reporting of the Nomura report points to flawed analysis, it may also be true that the Nomura report discussed on the CNBC.com website may serve as a good reminder that hedge-fund activity may increase the severity of market swings if market fundamentals suddenly turn bearish.

As for Treasury Department’s labeling China as a currency manipulator, as far as we can find, the only legal ramification is that the US government is now obligated to negotiate with China so that China changes its currency regime to allow for a more balanced payment and trade system.  Of course, the current administration is already doing this so in the short run it serves only to add political fervor to the on-going US-China trade negotiations.

So, is there a bear market on the horizon?

We don’t know the future direction of news events so we can’t predict the future direction of the financial markets. If the global trade network deteriorates the profits would likely decline and stock market prices would likely follow downward.

However, if the global economy strengthens even as global trade realigns then stock markets may go up.
In the midst of these, global interest rates, bond prices, gold prices and digital asset prices will also fluctuate based on changing fundamental and technical — including profit levels at corporations, interest rate policies at Central Banks and many other factors.

So, yes, there are threats. But there also many opportunities.   

Tim Shaler is Chief Economist of iTrust Capital.  He is a published Real Estate economist, was a portfolio manager and asset allocation expert at his previous firms and is an adjunct professor at Webster University. His MBA (Finance) and MA in Russian Economic History are both from the University of Chicago.

For all media inquiries, please contact Blake Skadron at b.skadron@itrustcapital.com