Is a New Economic Crisis Approaching?

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 |  Includes: DIA, QQQ, SPY
by: Cullen Roche

Analysts at Danske Bank are increasingly conccerned about the snow ball of bad news that is hitting markets. The laundry list of macro negatives is quickly gaining momentum and they believe it could result in a new economic crisis if confidence continues to deteriorate and creates a negative feedback loop:

The equity market’s current jitters stem from an apparent lack of confidence in the US economy that is best illustrated by the monthly consumer confidence numbers (released by the US Conference Board). US consumer confidence is unusually frail and this seems to be affecting US society generally. As the US consumption cycle remains the single most important factor that could trigger a global hard landing, consumer confidence is incredibly significant at the moment. Furthermore, the gloom of the consumer has cast a pall on the corporate sector. Why should companies begin to invest in the future if they, like consumers, believe yet another crisis is not far off? In our view, this crisis sentiment could trigger a deep slowdown should the housing market get sucked into the maelstrom and house prices fall once more. One of the key sentiment boosters in the growth years of 2003-07 was the housing market. House prices rose and private consumption outpaced wage growth due to the accumulation of homeowner equity. However, now the US property market is experiencing its worst crisis of recent years and households feel poor. Wage and house price expectations are very weak and may turn negative again (as in summer 2008), which in our opinion is the greatest macroeconomic risk for today’s equity market. Furthermore, if the current crisis of confidence continues and tips into a full-blown economic tailspin it would be difficult to see how governments and central banks could respond – which is stoking fears of recession.

Unfortunately, this is the cancer that is deflation. Deflation is as much a psychological event as it is an economic event. Falling prices create an environment of paralysis. A mentality of: “well, if prices are still falling we might as well wait to purchase”. If this mentality persists it snow balls and compounds. If it becomes accepted you become Japan and by then the game has been lost. Thus far, the world appears to be losing the battle with deflation.

Source: Danske