Saturday , 3 December 2016


RBS: ‘sell everything’ and brace for a ‘cataclysmic year’

According to RBS, the global financial markets are alreadystock-market-tsunamishowing signs of significant stress and the conditions are similar to those of the months before the Lehman crisis in 2008. Their advice is to ‘Sell everything’ and brace for a ‘cataclysmic year’!

(apauperinthemidstofwealth.com)

Automation, debt, bearish global commodities, deflation and currency wars are just five of the negative themes that are leading RBS to conclude that 2016 will see a 10% to 20% decline in equity prices. However, the bank stops short of calling for a full-blown crisis…

According to RBS, China is the eye of the storm brewing over the global economy. Global trade and credit growth is slowing, which indicates that the world is rapidly heading towards a global recession…

Unfortunately, it now looks as if we have come to the end of the willingness to build up such debt and this leaves emerging economies — China in particular — with only one option; devalue soon, and sharply.

The broad consensus among Wall Street analysts is that Chinese authorities can ‘buy time’ by their substantial intervention in cutting reserve ratio requirements, rate reductions, and easing in fiscal policy. However, in a world of slowing trade China, more so than any other country, needs to maintain its competitive advantages. Without cutting prices, the country will lose market share. The key question is around the yuan. In the words of RBS, ‘it needs to be dramatically lower.’

With a severely over-valued currency, China’s largest problem is now a continual, enormous capital outflow, which authorities are trying to stem with reserves shrinkage. RBS estimates that around $170 billion of private capital left China during December alone, and this money is going straight back into the U.S. dollar…

Further, figures show that China’s capital outflow is accelerating, and RBS estimates that to stem the capital outflow China needs to devalue by around 20%, very quickly.

sell everything

China’s devaluation is already starting to take place. The yuan has fallen 6.2% versus the USD since the summer, but there’s still a long way to go.

The problem is that if China does go ahead and aggressively devalues the yuan, the country will be effectively trying to grab a larger market share of shrinking world trade, leaving every company facing tougher conditions (‘a cheapening competitor selling their wares at a lower prices’). This scenario for ‘ Sell Everything ‘ will be bad for:

  • global earnings
  • global equities
  • corporate balance sheets
  • global credit spreads
  • commodities

If China chooses to take this drastic action to protect its economy, (China has showed its willingness to be ultra-aggressive to suit domestic policy in the past. Case and point the $4 trillion reserve portfolio designed to keep the yuan over-competitive) global disinflation will turn into global deflation.

Against this backdrop, the Federal Reserve’s decision to being hiking rates certainly looks out of place, and the outlook for equities is bleak.

[The original article was written b (apauperinthemidstofwealth.com) and is presented here by the editorial team of munKNEE.com (Your Key to Making Money!) and the FREE Market Intelligence Report newsletter in a slightly edited ([ ]) and abridged (…) format to provide a fast and easy read.]

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