Party’s Almost Over: This Market Is Looking Like 2006-2008 With A 100% Chance of A Global Recession, We’re Entering A Correction Time Where Stock Markets Can easily Drop 20%, And Things Don’t Get Better Anytime Soon
Jefferies global head of equity strategy Sean Darby warns in his latest note to clients that a key change in the underlying fundamentals of the stock market rally is going unnoticed amid all of the talk about QE3 and the U.S. elections.
Darby writes that “corporate earnings are now forecast to drop in 3Q after consecutive quarterly gains since the 2008 financial crisis.”
From the note:
While the markets will continue to fret over Europe’s sovereign destiny and the US Presidential elections, the US profit cycle appears to be finally turning. Last quarter, the slew of earnings downgrades ahead of the results season was so well flagged that markets rose during the announcements. This time round, the deterioration in aggregate profits will be much more transparent.
Darby goes on to compare the current stock market environment to that directly preceding the financial crisis in 2008, saying that there are some “subtle similarities” between the two:
Ironically, there are some subtle similarities of the recent equity rise to the 2006-08 stock rally. At that time, the global economy was booming, but conditions within the US housing market were deteriorating with physical prices falling and spreads on subprime widening. It took nearly a year for the infection from the housing market to spread to the real economy through a widening of interbank and corporate bond spreads.
Today, the housing market is improving, but the global economy is slowing. However, credit spreads have tightened as the Federal Reserve’s QE policies have forced institutions and investors to acquire yield. Hence, a turning point for equity investors under the current monetary conditions is likely to occur when revisions to corporate ratings swings sharply negative.
While Faber favors gold, he thinks that it too is due for a correction after staging a huge rally.
He spoke with Fox Business News on Friday:
It has a huge rally from around – the low was at $1,522 last December and we are now over $1,700 and I think we need a correction here. In fact, I am now bearish about practically all assets near term I think we’re entering a correction time where there will be some disappointments, where stock markets, from the recent times can easily drop 20%.
Here’s the whole interview courtesy of Fox Business News:
Everywhere we look the masses are hurting. Whether it be the 100 million Americans dependent on the government safety net to survive, or the millions of Europeans rioting in the streets of Spain and Greece, a sense of serious crisis is in the air.
Over the last four years, slowly and without abatement, the economic outlook across the globe has worsened significantly.
In France, a new 75% income tax on individuals earning over a million Euro ($1.2 million) per year was announced today. Incomes of $150,000 will be taxed at 40%. French business owners and citizens are scrambling to leave the country to avoid the new legislation. This has been done to offset the billions being used to bail out failing banks and reckless government spending.
Similarly, in the United States next year, individuals and small business owners will be hit with massive tax increases as universal health care is implemented across America.
Last week the Spanish Congress had to literally barricade themselves behind police and locked doors as thousands of protesters stormed their Congressional hall demanding the resignations of every representative.
The austerity sledgehammer is coming down hard, and everyone is starting to feel it.
The response from the political and financial elite has been to continue doing what they’ve been doing, because somehow the same financial and economic policies they’ve implemented over the last four years, those which have done nothing to increase jobs or economic growth, are going to make a difference now.
The decline is happening before our eyes. Millions of people in once stable economies have been impoverished by job losses, taxation and out of control price inflation on essential commodities like food and energy.
Euro zone manufacturing put in its worst performance in the three months to September since the depths of the Great Recession, with factories hit by falling demand despite cutting prices, a business survey showed on Monday — pointing to a new recession.
Factories helped lift the 17-nation bloc out of its last recession but the survey suggests a downturn that began in smaller periphery countries has taken root in core members Germany and France.
“Despite seeing some easing in the rate of decline last month, manufacturers across the euro area suffered the worst quarter for three years in the three months to September,” said Chris Williamson, chief economist at data collator Markit.
“The sector will act as a severe drag on economic growth. It therefore seems inevitable that the region will have fallen back into a new recession in the third quarter.”
** Brutal: Car Sales Collapse In Spain And France – FIAT ITALY NEW CAR SALES FALL 24% IN SEPT, FRENCH CAR SALES FALL 18.3% IN SEPTEMBER, DOWN 13.9% THROUGH SEPTEMBER, PORTUGUESE LIGHT VEHICLE SALES DROP 42% THROUGH SEPTEMBER
(Reuters) – The EU warned on Monday of an “economic and social disaster” if joblessness among young Europeans continued to rise, calling for a joint effort to combat record high unemployment in the countries which share the euro.
Joblessness in the 17 country bloc was 11.4 percent of the working population in August, stable compared to July on a statistical basis, but with another 34,000 people finding themselves out of work in the month, the EU’s statistics office Eurostat said. It was 16th straight monthly rise.
“It is clearly unacceptable that 25 million Europeans are out of work,” European Commission spokesman Jonathan Todd told a regular briefing. In a separate statement, the EU executive said the data showing a record 22.7 percent of 18-to-25-year-olds out of work in Europe in August was of real concern.
China’s manufacturing contraction persisted last month, Japanese industrial companies grewmore pessimistic and South Korean exports fell, signaling East Asia’s biggest economies have yet to reverse their slowdowns.
A Chinese factory index was at 49.8 for September, the first time that it has been below 50 for two straight months since 2009, a statistics bureau report showed in Beijing today. Japan’s Tankan index of large manufacturers’ confidence fell to minus 3 for the past quarter. South Korean shipments slid for a third month.
In China, measures to support growth may be stepped up after the Communist Party dealt with political issues including laying charges against ousted Politburo member Bo Xilai and setting Nov. 8 for the start of a party congress, Bank of America Corp. said today. Japan’s fiscal response may be complicated by a parliamentary stand-off over financing and an election as early as this year, with Prime Minister Yoshihiko Noda reshuffling his cabinet today to revive support.
In his latest weekly letter, investor John Hussman reiterates his belief that we are already in recession.
In regard to a U.S. recession, keep in mind that the consensus of economic forecasters – not to mention central bankers – has never recognized the start of a recession in real-time, largely because their assessments typically revolve around a “stream of anecdotes” approach that treats each new economic report with equal weight, without distinguishing leading/lagging and upstream/downstream structure. For example, we’ve noted that real consumption growth and real income lead new factory orders, which lead employment. Yet observers have already largely dismissed the soft data on income, consumption and factory orders thanks to last week’s single outlier on new weekly unemployment claims. As for the payroll report this Friday, we fully expect that September payroll growth will ultimately be reported as a significant loss in jobs. The main wrinkle, as I’ve noted frequently, is that the “real-time” employment figures in the early months of a recession are often hundreds of thousands of jobs off from where they are ultimately revised (see the economic notes in Late Stage, High Risk). So while Friday’s employment report seems likely to be disappointing, the data tends to be heavily revised, and even the seasonal adjustments amount to hundreds of thousands of jobs, so our expectations for a negative figure may or may not be realized in the initial report.
Last week, the second quarter GDP growth figure was revised down to 1.3%, from the previous estimate of 1.7%. Durable goods orders plunged at a 13.2% rate in August, largely on reduced transportation orders, but even ex-transportation, new orders dropped at the sharpest rate since 2009. It is also notable that Gross Domestic Income – the theoretically equal “income” companion of gross domestic “production” – grew at an annual rate of just 0.1% in the second quarter. The difference between GDI and GDP is nothing but a statistical discrepancy, so the two series track each other very closely over time despite short-term disparities. Because GDI has often led GDP at recessionary turns, Alan Greenspan was well-known for paying close attention to GDI – though not closely enough to recognize that the economy was already in recession when he was interviewed by Business Week in mid-2008, fully two-quarters after that recession had actually begun.
The chart below presents the 6-quarter growth of real gross domestic product (GDP) and real gross domestic income (GDI) since 1950. A good look at this chart provides some insight into why recession concerns have had a “Chicken Little” quality in recent quarters. Note that by the time the 6-quarter growth in income and production has slowed below 2.3% in the past, the economy was always either approaching or already in recession. It’s also worth observing the weakness in GDI growth approaching the 1990-91 and 2008-2009 recessions.
- Japan: Markit/JMMA Manufacturing PMI — 48.0, up from 47.7 in August
- China: HSBC Manufacturing PMI — 47.9, up from 47.6 in August
- Australia: AiG Manufacturing PMI — 44.1, down from 45.3 in August
- Netherlands: NEVI Manufacturing PMI — 50.7, up from 49.7 in August
- China: Official PMI — 49.8, up from 49.2 in August
- Taiwan: HSBC Manufacturing PMI — 45.6, down from 46.1 in August
- Vietnam: HSBC Manufacturing PMI — 49.2, up from 47.9 in August
- Indonesia: HSBC Manufacturing PMI — 50.5, down from 51.6 in August
- India: HSBC Manufacturing PMI — 52.8, unchanged from 52.8 in August
- Russia: HSBC Manufacturing PMI — 52.4, up from 51.0 in August
- Ireland: NCB Manufacturing PMI — 51.8, up from 50.9 in August
- Poland: HSBC Manufacturing PMI — 47.0, down from 48.3 in August
- Turkey: HSBC Manufacturing PMI — 52.2, up from 50.0 in August
- Spain: Markit Manufacturing PMI — 44.5, up from 44.0 in August
- Czech Republic: Manufacturing PMI — 48.0, down from 48.7 in August
- Switzerland: Manufacturing PMI — 43.6, down from 46.7 in August
- Italy: Markit/ADACI Manufacturing PMI — 45.7, up from 43.6 in August
- France: Markit Manufacturing PMI — 42.7, down from 46.0 in August
- Germany: Markit/BME Manufacturing PMI — 47.4, up from 44.7 in August
- Greece: Markit Manufacturing PMI — 42.2, up from 42.1 in August
- Eurozone Manufacturing PMI — 46.1, up from 45.1 in August
- U.K. Markit/CIPS Manufacturing PMI — 48.4 down from 49.5 in August
- U.S. PMI Final — 51.5 up from 49.6 in August
- Tuesday 10/2: 8:00 PM: South Korea: HSBC Manufacturing PMI — 47.5 in August
Markets are bracing for a possible downgrade of Spanish government debt to ‘junk’ status.
Ratings agency Moody’s is due to release its decision after a review of Spain’s credit rating wrapped up on Friday.
Analysts widely believe a decision will be forthcoming and that the outcome is unlikely to be positive.
Spain’s credit rating currently sits one notch above ‘junk’ status.
Any downgrade would have severe consequences for the country, as some investors can’t hold non-investment grade debt.
Whereas earlier today we presented one of the most exhaustive presentations on the state of the student debt bubble, one question that has always evaded greater scrutiny has been the very critical default rate for student borrowers: a number which few if any lenders and colleges openly disclose for fears the general public would comprehend not only the true extent of the student loan bubble, but that it has now burst.
This is a question that we specifically posed a month ago when we asked “As HELOC delinquency rates hit a record, are student loans next?”
Ironically in that same earlier post we showed a chart of default rates for federal loan borrowers that while rising was still not too troubling: as it turns out, the reason why it was low is it was made using fudged data that drastically misrepresented the seriousness of the situation, dramatically undercutting the amount of bad debt in the system.
Luckily, this is a question that has now been answered, courtesy of the Department of Education, which today for the first time ever released official three-year, or much more thorough than the heretofore standard two-year benchmark, federal student loan cohort default rates.
The number, for all colleges, stood at a stunning 13.4% for the 2009 cohort. The number is stunning because it is nearly 50% greater than the old benchmark, which tracked a two-year default cohort, and which was a “mere” 8.8% for the 2009 year.
Broken down by…