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In the eye of a storm? May 14
Being Street Smart
Sy Smith
In the eye of a storm? 14 May.
Living in Florida I've been in the eye of several hurricanes. In the eye, one side of the storm has passed and there is a great relief. There a bit of debris and signs of destruction, but the sun is shining. We started to pick up the pieces. There is a feeling of hope that the danger has passed. Then listen weather forecasting and learning is only a temporary respite. You are in the eye of the storm. The other side of it is about to arrive, sometimes with more fury than the first team.
Unfortunately, economic radar is not as mature as the weather radar.
However, we can observe the conditions in the distance and guess if what you experienced was just an isolated financial cold front passing through, or current problems we have in the eye of a storm.
In January, stock markets fell by a correction of 10% on concerns about a potential debt crisis of government in Greece, and initial moves by China to slow its economy. But the clouds blew and recovered most of the securities markets.
Three weeks ago, the storm met again, and Global markets began to fall again. The debt crisis in Greece turned out to be real, and this time there were fears of the spread to other European countries. There were also more tax moves by China to slow its economy.
The slump worsened with a 1000 intraday point mini-crash (and rapid partial recovery) a week ago Thursday, and another triple-digit drop the next day.
Fears of a crash real, then around the world, pushing European leaders to panic secret meetings over the weekend. The surprise announcement that came out of those meetings last night Sunday, a massive rescue plan billions of dollars in troubled European countries brought instant relief.
The sun rose Monday, with markets higher world. But there was no follow-up. The market was three of the last four days.
The eye of the storm?
Look at this, and we see Asian markets tank, no response is almost the same excitement with the announcement of Europe. The Chinese stock market is at a minimum of 11 months, 24% from its peak in July. Hong Kong has dropped 15% from its peak of last November.
Search in the opposite direction, to Europe, and the public debt crisis Greece is spreading to Portugal and Spain. After the protest marches and strikes in Greece last week, Spain's largest union calls for public employees to strike in Spain in protest against austerity measures and pay and pension cuts, required by the IC or the IMF rescue plan.
Meanwhile, European stock markets were briefly reunited in response to the announcement of the rescue plan, skeptical that it will be a success. As indicators for European stock markets, the European avant-garde ETF (VGK) is down 16% from its peak last November.
Look south and the Brazilian stock market has fallen by 12.4% the iShares Latin America ETF (ILF) by 14%.
The storm clouds around the world.
Record levels of debt taken on by consumers in times bubble was transferred to the banking system when the bubbles burst and households to pay their mortgages and loans. With the result near collapse of financial systems Globally, banks wanted the burden of debt on the balance sheets of governments as part of government rescue efforts.
That is why now governments feel with record debt levels and budget deficits annual record.
Experts say that governments have only three options.
Smaller countries could pay their debts, essentially declaring bankruptcy, stiffing investors in their bonds, and like all entrepreneurs that have gone bankrupt trying to start over with access to credit markets paralyzed. The major developed countries, particularly the U.S., could not believe the route. But as we have seen recently, only the possibility of a breach by even a small country creates panic in the markets. Given the tangle of debts and international loans, one or two small countries could actually create another failure down financial meltdown similar to what followed the bankruptcy of Lehman Brothers.
That leaves two other options.
Governments can pass the responsibility to pay the debt back to consumers, where it started, through high taxes and diminished services. That is the approach of austerity demanded by the EU and the IMF as conditions for their great European rescue package announced last week. Already we can see in the protest marches and strikes that will be a difficult plan to implement. Such an approach also means less consumer austerity, business and government spending, giving lead to a slowdown in the economies.
The third option would be to try to inflate the output, by allowing inflation to rise so that governments could pay their debts faster (with inflation-devaluation of the currencies). Who has worked at times in the past. Unfortunately, markets do not like the growing inflation. So there were good times for investors.
Meanwhile, although other world markets have reacted very negatively to the situation, U.S. market bull market reached a new high just three weeks ago, and although more volatile, since, has fallen only 6% from that high.
It was the big rally on Monday, a clear signal to everyone, as some believe, what justifies complacency? Or is the lack of follow-through and are an indication that in the eye of a storm?
Sy Smith is editor of the Street Report Smart, the stock short and long Advisor , and the daily blog free market www.streetsmartpost.com .
About the Author
Sy Harding is CEO of Asset Management Research Corp., author of 1999’s Riding the Bear and 2007’s Beat the Market the Easy Way, editor of www.StreetSmartReport.com, and www.StreetSmartPost.com.
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