It's been a bruising week for markets. After hitting the 14,000 level for the first time ever just last week, the Dow Jones fell more than 200 points in a single day on Tuesday. The FTSE 100 also slumped by more than 100 points as America's top mortgage lender revealed that even customers with high credit ratings were having trouble repaying their mortgages a problem most commentators had hoped would be confined to subprime' borrowers.
Yet it's all so obvious with hindsight. The current turmoil in the stockmarkets was eminently predictable. Not because of the collapse in the US housing market. Not because global equity markets had clambered to record highs despite a weak dollar, rising global interest rates, and surging oil and food prices. Not even because of the increasingly ridiculous multiples being paid for companies by private-equity groups, desperate to find targets to spend their money on.
No, for the clearest sign that harder times were on the way, market observers merely had to turn to the luxury car market. As Sean O'Grady pointed out in The Independent this week, "a rash of extremely expensive, extravagant motor cars often prefigures an economic slump". One make in particular, the Bugatti, seems to herald disaster. The launch of the Bugatti Royale, one of the most expensive cars in the world, was "the most notable automotive event before the Great Crash of 1929". The Bugatti EB110 GT arrived in the late 1980s, "just in time to bellyflop into the recession of the early 1990s". So the arrival in showrooms last year of the Bugatti Veyron, a snip at £850,000, should have set the early-warning alarm bells ringing.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
So, bad news for motor dealers aside, is this the start of something bigger? We think so as Reuters columnist James Saft puts it, "the subprime crisis' may need to be rebadged the housing crisis' and eventually maybe just the crisis'." In this week's cover story, we look at why the tidal wave of easy money lifting the price of everything from property to expensive cars is drying up and what it means for your portfolio. As ever, our City columnist, Simon Nixon has a more upbeat take, arguing that credit markets remain relaxed by historical standards. But the opposing view is that it's not the level of credit spreads but the direction they're heading that matters. It's at key turning points like this that greed and fear grapple in the markets and if fear takes over, the credit environment could rapidly become far less forgiving. As Bill Bonner points out in his Last Word column, we've had a very easy time of it in the past decade, but now it looks like real trouble could be just around the corner.
John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
House prices are falling in London but how does it compare to the rest of the UK?
Advice The capital remains the most expensive part of the UK to buy a property, but it isn’t being as badly hit by the housing market slump. Where are London house prices heading?
By Marc Shoffman Published
Will a Santa Rally provide festive cheer for investors this year?
News Equities often get a seasonal boost during December - will there be a Santa Rally in 2023?
By Marc Shoffman Published