Which ‘Snowflake’ will cause the Economic Avalanche?

Posted | 02/02/2017 / Views | 3576
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Yesterday we looked at some more valuation type charts showing how ‘full’ this market is currently running.  To use the avalanche analogy, the mountain is fully laden with snow; which snowflake will be the one to trigger the avalanche that sees it all come tumbling down?  History shows it is not often the one you expect.  Last year it was all about Deutsche Bank, Brexit, Trump etc to name a few.  Whilst Brexit caused reportedly the biggest 2 day sharemarket loss in history we saw it immediately rebound almost to where it started and then upward from there once people realised it was a process not an event.  Well that ‘process’ is about to get seriously ‘event-ish’ as PM May looks to enact article 50 by March, the so called ‘hard Brexit’.  That’s one serious snowflake and the first critical step happened last night with the law passing its first vote through Parliament.

The other thing we have seen this week is the realisation that the hope filled Trump trade may have been a little premature.  Notwithstanding the public revolt on some of his executive orders, we have also seen that many of the very key promises that excited financial markets so are delayed, or set to be through congress.  The tax breaks are on ice until ‘Spring 2018’ (US time), the huugge infrastructure spend looks likely to need Senate Democrat support and they have a whole other idea on the table, and the repeal of Obamacare too looks to be months away.  The market (down considerably this week) is smelling BS and snowflakes are settling.

Last night the US Fed met and whilst they predictably kept rates on hold, all eyes were deciphering the minutes for cues as to whether their ‘3 hikes this year’ story holds for starting in March.  On balance the market read them as more dovish and March less likely.  And so predicably shares rallied modestly.  The fact remains however that as inflation strengthens to 2 year highs and the sharemarket bubble (outside of this week) inflates further and further, the ‘story’ still supports a hike soon.  If so, how will the market handle 2 or more quick rate rises in succession?  To continue the snowflake analogy, the Fed sending dovish signals and keeping rates ultra low is like a giant ‘Fed Net’ above the mountain catching snowflakes before they hit it.  At some stage that net will give and all those accumulated snowflakes hit the mountain in one go…. The Fed may seem all powerful but you can’t defy economic gravity forever…

And of course, as we wrote last week, how will China react to a subsequently stronger USD?  The threat of a large devaluation looms as large as any snowflake out there.

But there are many yet to land and to pick one would be foolhardy.  The mountain may bear much more yet.  Just make sure you are ready.


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