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The future of the current deleveraging: soft landing or depression?

Posted on 01. juin, 2010 by Steve Ohana in Weekly Focus | Commentaires fermés

We had signaled the expansion of massive financial bubbles on multiple risky asset classes since 2009: equities, corporate credit, depletable commodities, emerging debt and carry trades. Unsurprisingly, these dangerous patterns unfolded into a global deleveraging, as demonstrated by the chart below:

The last four instances we experienced such a deleveraging were in 2000, 2004, 2006 and 2007. In two occasions, in 2004 and 2006, it turned out eventually to be a sharp but harmless market consolidation. On both other phases, in 2000 and 2007, it was the beginning of long-lasting bear market trends.

In any case, such a deleveraging is at best precursory of a future economic slowdown. Riskelia’s anticipative financial indicator of the economic cycle predicts a downturn in the industrial cycle:

Not only the euro zone will be hit as a result of the austerity plans but also China, whose growth will be put on hold as a result of the recent credit tightening . Will the landing be smooth or brutal? Financial markets are betting on the second eventuality on real estate as revealed by Riskelia’s Radar:

Every part of the financial system is presently infected as the deleveraging has spread to every risky asset class. The following Bloomberg intraday charts on stocks, commodities and carry trades shows the systemic patterns that have been at play in the recent weeks :

We are at a deleveraging turning point with three possible roads in front of us: the first one is a soft landing with investors progressively regaining risk appetite after this salutary correction, the second one is a bit darker with one risky asset class serving as a haven in climate of suspicion against all the other asset classes (a bit like commodities after August 2007), the third one being a generalized deflationary spiral.

Our radar will give the answer promptly.

Tags: Austerity, Bear Market, Commodities, Deflationary Spiral, Downturn, Economic Cycle, Economic Slowdown, Emerging Debt, Euro Zone, Eventuality, Financial Bubbles, financial markets, Intraday Charts, Market Consolidation, Market Trends, Risk Appetite, Turning Point, Two Occasions