When investors get complacent, nasty surprises are often not far behind, say John Robson and Andrew Selsby of RH Asset Management. And there is growing evidence that the next nasty surprise for the global economy may come from the US housing market...
Complacency rules, the CBOE Volatility Index (VIX) is at multi-year low. At times of unbelievable complacency and high stock market valuations, we would expect the eventual surprise to be to the downside.
In a recent speech, Alan Greenspan, the outgoing Fed Chairman, covered this risk issue when he said the following:
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"Thus, this vast increase in the market value of asset claims is in part the indirect result of investors accepting lower compensation for risk. Such an increase in market value is too often viewed by market participants as structural and permanent. To some extent, those higher values may be reflecting the increased flexibility and resilience of our economy. But what they perceive as newly abundant liquidity can readily disappear.
'Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher asset prices.
'This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums."
The US economy sits on a knife-edge and the world economy waits with baited breath. As Roger Bootle recently said "World growth is too dependent on the USA. US demand is too dependent upon the consumer. The US consumer is too dependent upon capital gains from housing."
So it does seem that at this point, at the start of 2006, the whole world economy is simply dependent upon the US housing market continuing to boom.
Apparently existing US home sales in November fell to an annualised rate of 9.73 million units, 1.7% lower than in October. Home inventories are at the highest level since 1986, a classic indication of supply dwarfing demand. The National Association of Realtors' Index for pending sales of existing homes in November was down 2.5% versus October.
According to certain economists, there is no need to worry about these issues because the US consumer will carry on regardless because since the Great Crash of 1929 they always have.
It seems to us that economists who say things like that must live on Mars!
By John Robson & Andrew Selsby at RH Asset Management Limited, as published in the Onassis Newsletter, a fortnightly newsletter that gives insight into the investment markets.
For more from RHAM, visit https://www.rhasset.co.uk/
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