Article published by José Alberto León Alonso in El Día on 12/20/15.
The Ibex 35 had a ten-day negative streak last Monday, the worst streak in its history, and many wonder why this is due, if the economy has improved substantially over the last year and we are heading towards an exit from the crisis. The answer to that question is condensed into a single word, but the explanation is complex and not so succinct. The word is FEAR, and the explanation is related to the numerous bubbles that have been generated in the international economy after the outbreak of the crisis.
The reaction of the authorities to the bursting of the financial bubble in 2008, “watering” the markets with cheap and abundant money with which something had to be done, has laid the foundations for other new bubbles that are at risk of bursting. The stock market crisis is not exclusive to Spain, as it is occurring with greater or lesser severity in all countries. The explanation for this bad streak lies in the high volatility of the markets, which has rebounded since the spring until most assets are above historical averages. The markets had been waiting for a long time for the possible increase in interest rates by the United States Federal Reserve, which indicates that the times of abundant and cheap money are close to an end, and the uncertainty that this fact generates has been added to the collapse of oil prices and its terrible expectations for the future. In Spain, on the other hand, the uncertainty about the outcome of the elections and the country's governance adds even more uncertainty to potential investors, who postpone their investment decisions or, directly, escape from our stock market just in case.
Of all these elements, the most pressing today seems to be the drop in the price of oil, which for weeks seems to have no end, and which has intensified after the last OPEC meeting, where there was no agreement to reduce production. The price of crude oil is at the 2008 lows and the market foresees and anticipates new falls. Cheap oil, although in principle it favors consumer countries like Spain, greatly harms emerging producing countries, oil companies and, especially, the new American hydraulic fracturing or fracking operators, whose technology does not allow them to obtain profitability at low prices. This can lead to the bankruptcy of countries and companies that are dedicated to producing energy or other types of raw materials at very low prices. Fracking operators have financed a good part of their investments when oil was expensive with high-risk, high-yield corporate bonds. And the price of these bonds, which the market calls “junk bonds” due to their low collateral, has plummeted in recent weeks and are currently almost illiquid. They find no buyers at almost any price, and some hedge funds that invested in them are experiencing difficulties in reimbursing their own investors when they want to exit this market. Thus, at least two of these funds have suspended participation redemptions in the United States, which greatly worries the markets that are beginning to glimpse, once again, what could be a financial panic if investors decide to abandon the most indebted companies en masse to take refuge in those that have cash.
Although the size of this market and the firms that invest in it is small compared to the total debt market and, therefore, does not have the capacity by itself to cause large-scale problems, the existence of a gigantic speculative bubble in the sovereign debt market, this gigantic one, is what generates fear. This bubble in the sovereign debt market means that, for example, Spain, Switzerland or France charge money for borrowing money for one year. States are increasingly indebted and yet the cost of borrowing is increasingly lower, and a shiver runs down the spines of many when the “herd” of investors begins to experience great nervousness. In a herd of thirsty and therefore restless cattle, any small shock can cause a stampede. And if this is headed towards the sovereign debt market, we are ready.
The monetary laxity that dominated during the last eight years in the United States fueled investors' money to go towards very poor quality bonds despite their high risk, that is, junk bonds from companies and emerging countries. The persistence of low energy prices, in parallel, is putting countries and oil-producing companies that have difficulties financing past debt into serious difficulties. Whether the same central banks that generated this speculative bubble are able to control the restless flock of investors will depend on whether stampedes occur, so slow movements and calls for calm are imposed. We are entering unknown territory because so much money has never been injected so cheaply into the economy, and we cannot learn from the mistakes of the past to end the exceptional situation of interest rates close to zero. The statements of the President of the Federal Reserve declaring her confidence in the solidity of the economy and that the “return to monetary normality” will be gradual, is in this sense a step in the right direction. Let's not disturb our cattle. At the moment he is very restless, as demonstrated by the falls in the stock markets.
U!
