Economic Indicators Signal a Major Collapse Ahead 26 comments
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Last week's 700 plus point drop in the Dow seems like a distant memory and a much bigger sequel looks to be in the works. The world has caught up to the US, and the domestic credit crisis has officially become a global one. Who knew that struggling home owners in Flint, Michigan facing foreclosure due to ARM resets could impact the financial well being of people living in Seoul, South Korea, so heavily and so quickly? The doom and gloom news is pervasive in the media today and here are some that have really got me worried:
Bailout Failure: U.S. stock futures tumbled Monday as the world's financial crisis didn't appear to be repaired by the $700 billion rescue plan. Since the bailout plan was approved the Dow has dropped more than 6%. So if the bailout plan fails to stem the tide, what is plan B? Do we even have a plan B?
The Dow falls below 10,000 on credit fears in Europe and Emerging Markets drop the most in 20 years. European and Asian stock markets have had 3% - 8% drops on top of the big drops last week. The MSCI World Index lost 6% overnight, its lowest level in 3 years. The credit crisis has even spread to the oil rich Middle East with Dubai, the Construction Mecca of the world, finding it hard to get funding for new projects. Some European governments over the weekend have had to guarantee bank deposits to avoid a panic among consumers. The figurative run on the bank is a real possibility in some countries, and perhaps even in the US as the FDIC is forced to increase premiums it charges banks (to cover for all the failing banks).
Market volatility set to continue. The benchmark index for the cost of using stock options as downside protection - the VIX - jumped to the highest in its 18-year history on concern that the global economic slowdown will continue on further credit-market losses. This suggests a lot more volatility to come and continued declines. The current market is only profitable for professional traders at the moment - or those that want to gamble their money away.
A vicious deflationary cycle is about to ensue: Banks worldwide, stung by $588 billion in write-downs related to toxic assets -- especially mortgage-related securities -- will further reduce the flow of credit, strangling growth. That will push house prices lower, forcing additional losses and making banks even more reluctant to lend. As the credit crisis worsens, businesses will find it almost impossible to raise prices. They will then be forced to close or start laying off employees, which will in turn reduce consumer demand and thus create a vicious downward economic spiral.
Full of doubts, U.S. shoppers cut spending. This will be the final nail in the coffin that is the US economy. Consumers have already cut back spending, and further cutbacks coming into the holiday season (which account for more than 50% of retail sales) will mean big job losses and a deep recession in the new year.
Oil drops below $90 a barrel for the first time since February, and commodity prices plunge the most in 50 years. Normally this would be good news and a time to cheer. Unfortunately this is just a confirmation that global demand is expected to slow and as a result the demand for oil and other commodities is expected to fall dramatically. Commodity rich countries like Canada, Australia and South Africa have seen much sharper falls in their markets and currencies than here in the US. Gold spikes $50, and $1000 is back in range this week. Gold, which is traditionally viewed as an investor haven rather than an industrial resource, was a notable exception to the commodity sell-off.
The US dollar is rallying because of its perception as a safe-haven currencies. With predictions of a severe global recession in 2009, investors and financial institutions across the world are reversing positions out of the euro and emerging market currencies that had been financed by shorting the U.S. dollar. The euro fell overnight to its lowest level against the dollar since late August 2007, to $1.3540.
More to come...but the news is not good. A global recession is fast becoming a reality and there is little anyone can do to escape it. My bet is the Fed and other global banks will soon announce interest rate cuts to stem the credit crisis - but could be a little too late as looks like the financial crisis has become too big.
Stock position: None.
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This article has 26 comments:
We are bankrupt, and need to behave accordingly by resetting all asset values and curbing leverage. Otherwise, inflation is the only way out.
This point is debatable. If the overextended MBS loans were auctioned off for pennies on the dollar perhaps. If the FED buys them for enough to keep banks solvent it will simply replace an illiquid asset with cash and the money supply will not shrink. Instead of being tied up in a worthless asset, the money will be freed up for spending and tend toward inflationary pressures.
Also: "Full of doubts, U.S. shoppers cut spending". Doubt would be the wrong motivating factor. Try 'overloaded with debt'. You can't spend what you don't have, especially if you're trying to pay off what you've already spent and still owe.
Author's conclusion is correct however. Things are going to be rather ugly going forward regardless of what central banks and governments around the globe try to deal with the situation.
Ahem. Education is #1 in all 50 states. Health care is #2.
The entire political class including the voters have to decide whether they want the services of capital or not. If the answer is yes, then they need to be paid for - that means it must become profitable to be a banker again. If everyone on earth hates that idea too much to contemplate it, then everyone goes straight to hell.
But it is all readily repairable, if the authorities just stop listening to the insanity of the populists, and start helping the finance sector instead of dropping bombs on it. No, adding more liquidity rope and then forcing everyone into bankruptcy if the lend any of it out doesn't count!
Here is how you start. Arbitrage the giant spread between financial bonds and treasuries, by buying the former and issuing the latter. Make it *safe* to be a lender to banks on their notes, again. Safe and profitable. Show the way by making that trade yourself, with the treasury or the Fed doing the buying.
And stop starving panics. The ECB gets $122 billion in bids for overnight loans, and fills only half of them while demanding a 9.5% interest rate. Keep that up for a week and the governments will be the only bankers in the western world. Fill the *whole* bid, at the 3.75% stated rate.
Can't anyone here play this game?
To Jason C - If your government tells you to follow it like a lemming over a cliff and spend every penny you have (just like it was doing), you can expect that such results will occur.
Fortunately, I spend time on research and economics but the majority of the population doesn't. The word 'populist' should be substituded with the words 'lack of trust'. America doesn't have a problem with a banking system, America has a huge lack of trust with government that steered them in the wrong direction and then lied to them that there was no problem at all when there was a huge problem.
Messaging to educate the public and does not incur panic is tricky business but it can be done. And because this was not done, Americans were in for a shock that they are now being forced to pay part of the tab. All enjoyed the party, all shall pay the tab. But when no individual is held responsible in any fashion, because in doing so implicated politicians in Washington, then you have a total lack of trust from our own citizenship and the global investor. And let me ask you this: Why is it the citizenships fault that CDS & CDO investments had zero risk management practices applied to it damaging citizens balance sheets? Think the 300 M citizens are all deadbeats? Problem is not isolating the deadbeats Jason, it is that government is refusing to do so to cover up there own fraud, schemes and lack of doing there job.
New leadership must emerge before this economy can truly recover. And Washington had better figure out a way to create policy that directly assists Main St. instead of simple trickle down economics.
Something like direct loan consolidation would work at the Fed rate and Main St. would need 85% collateral between home value and other assets such as autos. Banks themselves have been highly unwilling to offer such programs to there own detriment and now face increasing defaults in mortgages, auto loans, student loans and credit cards.
Government is still running on Efficient Market with plenty of taxpayer dough to shovel around while the citizenship has to move into Save and Invest economy first with massive saddled debt, much of that debt due to inflation these past two years (especially credit card debt) and no wage increase. Washington/Banking cartel thinking low wages are great are yesterdays thinking. No wage increase on Main St., no Wall St, increasing falling tax receipts for State and Federal Government.
This is an old story Jason C. Those in power that protect the vault take for themselves while selling it all as a benefit to it's population while knowing the long-term consequences will be heinous for it's citizenship. Eventually, the population catches up with the shams and takes matters into there own hands. That is not popularism, it's human nature between the have's and have nots and a reconciliation by bloodshed, voter revolution or a nation is conquered.
"There is nothing new under the sun" -King Solomon
The author is making the same mistake so many news networks are making- Inderstand the difference between having a plan and executing the plan. The author implies that the execution of the plan is immaterial. Simply announcing that there is a plan should have been all that was required for the markets to turn. That not having happened is supposedly proof that the plan has failed.
It seems to this simple mind, that it is the execution of the plan that would drive a result.
JasonC, on the other hand, is insane if he thinks that kind of "spin" will be believed by most of the people now living through it. Try to spin it in 20, maybe 30 years, JasonC, when enough new pople are born who don't remember the GREAT financial crisis of 2008.
Realtors must forfeit fees on foreclosed homes. Also banks.
Walk-aways must pay 5 years interest to bail out. The IRS will collect.
No new credit will be given.
The next day headline reads: "FORECLOSURES ABRUPTLY END!"
Deadbeats forced to pay up.
No party has ever made a serious attempt to direct its policies toward the welfare of the majority working people, although the rhetoric differs a lot.
It would be impossible to confront the purveyors of financial power and gain any influence or office.
On Oct 08 02:29 PM Matthew wrote:
> iThinkBig - Thank you for the thoughtful post.
On Oct 08 07:58 PM Carly Simon wrote:
> To " iThinkBig" : You should consider spending less time on "research
> and economics" and more time on English lessons. That ramble of yours
> was appropriate for a bright eight-year old, but glaringly juvenile
> for an adult, particularily for one who "Thinks Big". In addition,
> your armchair analysis of the current financial crisis was pitifully
> shallow and weak, revealing your utter inability to grasp even the
> most basic economic theory. Better crack them books, professor! (not
> that it will do you any good).
if we dont quickly get accountability for this mess (theres plenty of blaim to go around is not acceptible as 'accountability')
AND we dont get instituted accountability for government actions and financial bodies such as GSE's (FNM etc) we will have more of this type of circus.
its human nature. put almost anyone in control of a lot of money and let them make nice bonuses with little or no accountability and you will get a lot of risky tinkering.
let a few of these 'leaders' lose their mansions and you'd be amazed how stable and far thinking financial policy can become
'too big to fail' institutions should have been broken up by SEC , Fed , treasury . where is their accountability. no accountability no results. democrats or republicans means nothing without accountability. i'm so disappointed we dont hear that in all the election bs.
Dave
On Oct 10 03:04 AM david rojas wrote:
> to Carly Simon, which part of "I think big" did you feel was glaringly
> juvenile? Can you be more specific (without insults.) I thought "I
> think big" was right on. Could it be your comment was politicaly
> motivated? Give me a specific comment of where he is wrong, not just
> insulting someone who is exposing the coruption of your favorite
> party or President.
>
> Dave
However, the new philanthropy is getting rid of the corrupt in Washington. That will take years and coordinated conservative movement and sacrifice similar to the Founding Fathers of old. Some of us will serve in 2010 or 2012 in the House to baby sit the economic mental dwarves and others will help educate and organize the masses. I'll do both. I expected to retire to Costa Rica next year. I'll push that off and in my mind it will be 2016 before that can happen.
On Oct 09 03:35 PM short WFC wrote:
> i also wish to thanks thinkbig and wonder why someone would attack
> him so viciously without so much as alluding to even one specific
> notion..wow...that was kind of scary ...
>
> if we dont quickly get accountability for this mess (theres plenty
> of blaim to go around is not acceptible as 'accountability')
>
> AND we dont get instituted accountability for government actions
> and financial bodies such as GSE's (FNM etc) we will have more of
> this type of circus.
>
> its human nature. put almost anyone in control of a lot of money
> and let them make nice bonuses with little or no accountability and
> you will get a lot of risky tinkering.
>
> let a few of these 'leaders' lose their mansions and you'd be amazed
> how stable and far thinking financial policy can become
>
> 'too big to fail' institutions should have been broken up by SEC
> , Fed , treasury . where is their accountability. no accountability
> no results. democrats or republicans means nothing without accountability.
> i'm so disappointed we dont hear that in all the election bs.
Dave