The five pillars of global financial stability are faltering dangerously, according to quant research shop Gavekal-IS.
Currently, “the conditions for a global equity crash are met,” Gavekal said in a note. “No prophecy here, simply the observation of risk states.”
The five pillars are world dollar liquidity, energy costs, international trade, inflation and fear.
Looking at them separately:
World liquidity in U.S. dollars contracting fast
The MSCI World index (URTH) returned -2% cash per annum in liquidity contraction times vs. cash +135% in expansion, they said..
U.S. energy costs spiking at uncharted levels
Gavekal’s U.S. Primary Energy Index rose by 150% in the last 12 months, the highest inflation in 120 years.
Global trade is severely damaged
The Dow Transportation Index (DJT) (IYT) is a good proxy for international trade and is at its lowest leve in seven months. When “it reaches new highs, US and global equity markets follow,” they said.
Inflation has diffused globally
Gavekal’s Inflation Index tracks 40 countries with a range of 0% (no countries with inflation) to 100% (all countries). It now stands at 100% for the second time in 50 years, the last being September 2008.
Fear Index similar to ‘dangerous’ periods
Gavekal’s Fear Diffusion Index, a measure of equity tail risks exhibited in 40 different markets, is now 70% on a scale of 0% to 100% (see chart at bottom).
“The Fear Index is a warning that equity markets are ready to amplify bad news if they occur, not that bad news will occur.”
In deperate times, strong leaders have been able to turn situations around, but international leaders are weakened by domestic concerns, Gavekal added.
“The chances of a strong and coordinated international leadership to set things straight do not look promising.”