If you were superstitious, you’d get the hell out of the markets this month.
September is bad juju. It’s been the worst month for US stocks for the past 100 years, according to a Bespoke Investment Group report cited by USA Today, declining an average of 0.83%.
If September is the markets equivalent of a haunted house then we’re about to be reminded of the biggest scare in recent memory.
The seventh anniversary of the fall of Lehman Brothers is in two weeks and the picture is looking dire again — but for different reasons.
Before the 2008 fall, fear came in the form of the credit crunch which slowly sucked the air out the banking sector over the course of a year. The crunch made it hard for banks to fund themselves on a short-term basis.
Investors weren’t sure how many toxic mortgages banks were held, and whether the heavy losses would eat through the banks’ capital, leaving them out of pocket on the money they’d lent.
Confidence disappeared and when Lehman Brothers appealed for help, no-one answered and the bank went down, sending markets into total free fall.
It was the shock that crystallised the latent fears about the financial system and, appropriately, it looks like a heart attack on every price chart, for every asset in 2008.
You can spot it a mile away. Here it is on a Barclays chart of world stocks:
Now fear comes in the form of China.
There are parallels with the credit crunch. Just like with the pre-2008 banks, there’s a lack of solid information which pushes investors to think China is hiding something.
For a start, no-one trusts the country’s growth figures. China claims a growth rate of around 7% despite the manufacturing data suggesting otherwise with zero growth.
Then there’s the fact that China itself is acting scared,
taking a top fund manager into custody to help with an investigation into market turbulence.
The VVIX index, which is a measure of how volatile people think stocks might be in the future, is up at record highs. It suggests there’s something lurking out there in the darkness:
One can argue that the risk to the global system of a Lehman-style shock is more limited this time around because of higher bank capital requirements and the fact that China’s financial sector is pretty closed off.
But there’s no reason to think markets will be consider all that and act rationally when something unexpected happens.
There’s also the problem of central banks having used up a lot of their ammo on the last big monster.
A Bank of England official once told me the market quiet in the years after Lehman was “uncanny.” It was spurred by global central banks cutting interest rates and boosting the money supply, which were policies aimed partly at keeping asset prices high so the financial world could keep trucking along.
Those options aren’t so readily available now, and there’s a worry that the process of removing those measures, as the US Fed might do this month, could trigger a run for the exits. “Uncanny” can quickly turn into “what the hell were we thinking.”
This bear trap has been thirty five years in the making, postponed by slowly reducing interest rates and adding liquidity every time the bear so much as sneezes.
But, whilst we know that the system is fragile, we don’t know which snowflake will eventually cause the avalanche.
There will always be shocks leading to a rethink of what everything is worth based on new information — it’s just a case of where, when and how big a rethink is needed.
Business Insider Emails & Alerts
Site highlights each day to your inbox.