The World Is Stuck In A Vicious Cycle: The Global Economic Crisis Is About To Go To A Whole New Level And Investors On The Wrong End of The Coming Crash Are Going To Be Absolutely Wiped Out
Former Harvard president and former Obama economic advisor Larry Summers writes in the FT today that the debate between fiscal hawks and doves has paralyzed the global economy.
He refers to it as a struggle between “orthodox” fiscal hawks versus “demand support” views.
However you want to refer to them, their apparent inability to stop talking past each other has produced devastating consequences.
“International economic dialogue has vacillated between these two viewpoints in recent years. At moments of particularly acute concern about growth, such as in spring 2009 and now, the IMF and many but not all monetary and fiscal authorities tend to emphasize demand-support views. But the moment clouds start to lift, orthodoxy reasserts itself and attention shifts to fiscal contraction and long-run financial hygiene.
This is a dangerous cycle whatever your economic beliefs. Doctors who prescribe antibiotics warn their patients that they must complete the full course even if they feel much better quickly. Otherwise they risk a recurrence of illness and worse yet the development of more antibiotic resistance. So too with economic policy. Advocates of orthodoxy prize consistency. Those like me whose economic thinking emphasizes promoting demand worry that expansionary policies carried out for too short a time will prove insufficient to kick-start growth while at the same time discrediting their own efficacy and reducing confidence.”
The global debt crisis has reached a dangerous new phase. Unfortunately, most Americans are not taking notice of it yet because most of the action is taking place overseas, and because U.S. financial markets are riding high. But just because the global economic crisis is unfolding at the pace of a “slow-motion train wreck” right now does not mean that it isn’t incredibly dangerous. As I have written about previously, the economic collapse is not going to be a single event. Yes, there will be days when the Dow drops by more than 500 points. Yes, there will be days when the reporters on CNBC appear to be hyperventilating. But mostly there will be days of quiet despair as the global economic system slides even further toward oblivion. And right now things are clearly getting worse. Things in Greece are much worse than they were six months ago. Things in Spain are much worse than they were six months ago. The same thing could be said for Italy, France, Japan, Argentina and a whole bunch of other nations. The entire global economy is slowing down, and we are entering a time period that is going to be incredibly painful for everyone. At the moment, the U.S. is still experiencing a “sugar high” from unprecedented fiscal and monetary stimulus, but when that “sugar high” wears off the hangover will be excruciating. Reckless borrowing, spending and money printing has bought us a brief period of “economic stability”, but our foolish financial decisions will also make our eventual collapse far worse than it might have been. So don’t think for a second that the U.S. will somehow escape the coming global economic crisis. The truth is that before this is all over we will be seen as one of the primary causes of the crisis.
The following are 21 signs that the global economic crisis is about to go to a whole new level….
#1 Bank of Israel Governor Stanley Fischer says that the global economy is “awfully close” to recession.
#2 It was announced last week that the unemployment rate in Greece has reached an all-time high of 25.1 percent. Unemployment among those 24 years old or younger is now more than 54 percent. Back in April 2010, the unemployment rate in Greece was only sitting at 11.8 percent.
#3 The IMF is warning that Greek debt may have to be “restructured” yet again.
#4 Swedish Finance Minister Anders Borg says that it is “probable” that Greece will leave the euro, and that it might happen within the next six months.
#5 An angry crowd of approximately 40,000 angry Greeks recently descended on Athens to protest a visit by German Chancellor Angela Merkel…
It’s been a most unusual – some say crazy – year for global stock markets, certainly including that of the U.S.
The global economic recovery from the 2007-2009 financial collapse stalled last year and continues to worsen this year, with the International Monetary Fund cutting its forecasts for global economic recovery yet again, including for the U.S., and warning four days ago that risks of the world dropping back into a global recession “are alarmingly high,” and that “no significant improvements appear in the offing.”
However, U.S. investors remain bullish and confident as evidenced by the resilience in the U.S. stock market. For instance, while China’s stock market is in a bear market and at a 4-year low, the S&P 500 reached a four-year high in mid September, and has settled back less than 3% since.
That’s quite a contrast to the worsening worries of the IMF, China and Japan, U.S. corporations, company insiders, professional hedge fund and other institutional managers.
But it’s not just U.S. investors that are confident and bullish, but U.S. consumers as well.
The University of Michigan – Thomson Reuters Consumer Sentiment Index was released Friday. It shows that consumer confidence has jumped to 83.1 in October from 78.3 in September. That’s much better than forecasts that it would decline to 78.0.
UBS technical analysts Michael Riesner and Marc Müller make some grim predictions for the stock market in their latest weekly market commentary.
Riesner and Müller write that the continued outperformance of U.S. stocks versus the rest of the world does not seem sustainable.
From their note:
Last week we highlighted the increasing divergences on the inter-market side between the still resilient SPX and the weak picture in Asian markets, underperforming cyclical sectors, declining inflation expectations, and the intact bull trend in the US dollar. All this finally results in a major divergence forming in the SPX versus the MSCI World, which was not able to break its May 2011 reaction high.
Last week we said that pressure in the financial system is building. If we are correct then it is very likely that this pressure will unfold in a short and sharp correction and the most likely timeframe for this move/event will be later Q3 and/or Q4.
They think 1325 is an especially important level to watch on the S&P 500, saying that if the index breaks below that level, the next stop could be somewhere in the 1100s…
Let’s take a look at some of the financial experts that are predicting really bad things for our financial markets in the months ahead….
According to Doug Short, the vice president of research at Advisor Perspectives, the stock market is somewhere between 33% and 51% overvalued at this point. In a recent article he offered the following evidence to support his position….
? The Crestmont Research P/E Ratio (more)
? The cyclical P/E ratio using the trailing 10-year earnings as the divisor (more)
? The Q Ratio, which is the total price of the market divided by its replacement cost (more)
? The relationship of the S&P Composite price to a regression trendline (more)
Peter Schiff, the CEO of Euro Pacific Capital, has been one of the leading voices in the financial community warning people about the crisis that is coming.
During a recent interview with Fox Business, Schiff stated that the massive financial collapse that we witnessed back in 2008 “wasn’t the real crash” and he boldly declared that the “real crash is coming”.
So is Schiff right?
We shall see.
Economist Robert Wiedemer warned people what was coming before the crash of 2008, and now he is warning that what is coming next is going to be even worse….
“The data is clear, 50% unemployment, a 90% stock market drop, and 100% annual inflation . . . starting in 2012.”
Financial author Harry Dent believes that the stock market could fall by as much as 60 percent in the coming months. He is convinced that stocks are hugely overvalued right now….
“We have the greatest debt bubble in history. We will see a worldwide downturn. And when you are in this type of recessionary environment stocks should be trading at five to seven times earnings.”
So are these guys right?
We shall see.
But I do find it interesting that some of the biggest names in the financial world are currently making moves as if they also believe that a massive financial crisis is coming.
For example, as I have written about previously, George Soros has dumped all of his holdings in banking giants JP Morgan, Citigroup and Goldman Sachs.
Infamous billionaire hedge fund manager John Paulson, the man who made somewhere around 20 billion dollarsbetting against the U.S. housing market during the last financial crisis, is making massive bets against the euro right now.
So where are these financial titans putting their money?
According to the Telegraph, both of these men are pouring enormous amounts of money into gold….
There was also news last week in an SEC filing that both George Soros and John Paulson had increased their investment in SPDR Gold Trust, the world’s largest publicly traded physical gold exchange traded fund (ETF).
Mr Soros upped his stake in the ETF to 884,400 shares from 319,550 and Mr Paulson bought 4.53m shares, bringing his stake to 21.3m.
At the current price of about $156 a share, these are new investments of about $88m of Mr Soros’ cash and more than $700m from Mr Paulson’s funds. These are significant positions.