Financial Non-Reform Won't Save the Market

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


Two years after the global financial meltdown, details of the so-called Financial Reform bill meant to reign in the excesses and abuses of Wall Street have finally been worked out. Former SEC chair Arthur Levitt described the bill as having been "bled dry of every meaningful protection for investors". As the senate was fiddling around with its usual back room deals and sweetheart arrangements for the special interests, evidence of further deterioration of the U.S. economy and global financial system mounted.

U.S. GDP for the first quarter was revised downward again today. Official figures now have it 2.7% and the reason cited for the drop was less consumer spending than originally thought. Before the Credit Crisis, consumer purchases were responsible for 72% of the economy. Because of high unemployment consumers have less income and they also have less access to credit because banks have reduced lending. Where consumers are getting the money from to increase their spending by any amount is a mystery apparently known only to statisticians who calculate the GDP. Moreover todays downward move of the GDP looks like it is a precursor to much bigger drops that will be taking place later this year. Leading indicators from the ECRI, which predicts the economy six months in advance, have turned negative.

While U.S. GDP is slowly crumbling, problems with the global financial system continue. French sovereign debt has come under pressure today. Credit default swaps for Greek debt now indicate Greece is the second most likely country in the world to default - only quasi-communist Venezuela is considered to have worse finances. Greece has a very small economy though and yet problems there have managed to rattle world markets. Investors should ponder the impact of a default in larger Spain or even much larger Italy.

Problems in Europe have caused capital to flow into the U.S. dollar and treasuries, a common response when the financial system is stressed. Interest rates on two-year treasuries just fell to 0.63%, only a tinge above their all-time low of 0.60% at the height of the Credit Crisis. Is the market telling us that the current eurozone crisis is just as bad as the 2008 global meltdown?

After peaking in late April, the U.S. stock market has been declining for the last two months. Both the S&P 500 and Dow are on course for giving a bear market signal next week. The stock market itself is a leading indicator and should be turning down around six months before the economy does. The Financial non-Reform legislation just passed by congress is not going to help. It would not have prevented the Credit Crisis meltdown, nor will it prevent the next meltdown. Investors need to realize that the possibility of another 2008 exists and it could even happen later this year.

Disclosure: None

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.