All Fall Down

Back after a gap of more than a year. A lot happened in the interim. Completed my 40th turn around the sun, have been reading a lot (all non-fiction) and struggling to overcome my writer’s block. I guess a few of you literally kicked me out of my slumber to start writing again. Another motivator to post is what I have been reading lately:

That the markets may be getting ready to fall big this fall. All over the world stock markets are crashing. Even The Telegraph has started talking about doomsday and other apocalyptic messages. Do read the link if possible – has a lot of charts and explanations in a (hopefully) simple to understand manner. The Chinese devaluation of their currency was a shocker (in more ways than one). Not that I was long on the Remnimbi Yuan but some things happened. I had to down myself a couple of pegs even as our neighbours downed their currency a peg or two down. So I looked up the performance of some world equity indices and their corresponding currencies during the trailing twelve months to develop a personal view on what’s happening.

The chart below shows a scatter of the % change of a country’s representative stock index plotted against the corresponding % change in its national currency vs. the USD. A few outliers like Venezuela (stock market up 500%?) and Ukraine (equity down 27% and currency down 60%) were left out to bring the other data points into comparative focus. The worrisome point is that while we may not think much about a Ukraine being an outlier (due to relatively lower market cap) but then what would you say to a Russia with a currency devaluation of 77%? The other thing of note in the chart below is the bunching up of the green dots. They represent the various Eurozone countries, most of them falling in a common “y-band” due to the pegs that they have on the Euro. The question of entropy and equilibrium that I am asking is: How can a -40% to +40% range in equity returns sustain itself on a foundation of such a narrow difference between the movements of their respective national currencies. Doesn’t this portend to the Euro equilibrium going out of balance?

While the above chart has data corresponding to 85 countries, the chart below shows the top 20 countries. Look at the golden quadrilateral formed by the points represented by the BRICS. Clearly each of the BRICs have followed unique paths to get where they are on this chart. Already fewer than 20% of Emerging Markets are trading above their 200 DMA levels (link, link). My hunch is that China will quickly begin moving towards the left on this chart. Smart Chinese money has already moved out of equity (link). My hunch is that China and Russia will move left the most. India will certainly move left but perhaps not to the extent that China will fall. That’s my hunch. I may be wrong, but I think soon enough a time will come when it will pay to be ready with your shopping bag. Hopefully the stock market will go ON SALE!!!