I'm not usually the prophet of impending doom, but a number of developments in Australian and overseas markets have caused raised eyebrows in recent months.
One of them is the continued rise of the 'big four' banks, lead by Commonwealth Bank of Australia (ASX: CBA).
Along with Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd. (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ), the valuations of the big banks are at record highs, and they are some of the most expensive stocks in the world, nevermind domestically.
(In fact I recently selected CBA as one of two overvalued stocks I would sell right now).
Combined with a general hunt for yield that has elevated stock prices, and low interest rates buoying housing loans and stock markets globally, I think the stage could be building for a sharp drop at some point in the future.
The Reserve Bank of Australia has already stated that the booming Australian housing sector is a major factor as it decides whether to drop rates further.
Thankfully Australian banks are firming up their balance sheets with Basel III capital requirements, but while this is all happening Chinese policymakers are desperately trying to light a fire under domestic growth.
As reported by Fairfax media yesterday, the central bank announced that the Reserve Requirement Ratio (RRR) would be cut by 1% to 18.5%.
This means that 18.5% of all loans made must be kept in cash in reserve at the bank, and effectively the cut is releasing around AU$209 billion dollars that can be loaned out to investors.
It also comes on the back of a previous 0.5% cut (from 20% to 19.5%) in February, and two recent interest rate cuts.
In an attempt to send the money to the right sectors, a further 1% was cut from rural banks and the Agricultural Bank of China.
This clearly shows the worry that freed reserves will find their way into China's resources or property markets, rather than the sectors that need it most.
With China's housing market already oversupplied, further investment there will effectively be wasted, even though it might buoy resource prices for BHP Billiton Limited (ASX: BHP) for a while.
If the money is used inefficiently it will force the Chinese government to either use more stimulus, accelerating the risk of a bubble, or accept that growth will fall below 7% which will depress activity and reduce the opportunities for Australian exporters like Amcor Limited (ASX: AMC), Elders Ltd (ASX: ELD) and Australian Agricultural Company Ltd (ASX: AAC).
Neither a bubble nor a depressed China is a happy situation for global markets, and investors should be aware of the potential risks.
If I can misquote a historical figure, 'plans are useless, but the planning process is indispensable.'
Have a plan so you won't panic if your portfolio gets painted red.