Tuesday, June 29, 2010

We are Now Experiencing Global Credit Crisis #2

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.

The key markers of a crisis in the global financial system are falling U.S. treasury yields and a rising dollar. Interest rates on the two-year treasury hit an all-time low of 0.59% today and the U.S. dollar has already tested its high from the Credit Crisis. Stocks are still well above their lows from that period however.

During the meltdown in the fall of 2008, the U.S. had already been in a recession for approximately nine months before it began. It looks like the U.S. will be heading back into recession once again. The ECRI weekly leading indicators fell to -6.9% for the week of June 18th. They have been below zero for a few weeks now. When they turned negative in 2007, a recession started approximately three months later. If that same time lag holds up this time, the U.S. will be in recession around September. It may be even sooner however.

Consumer Confidence numbers took a nosedive in June according to the Conference Board.  Analysts had expected 62.8 and missed the mark by a mile. The number came in at 52.9, falling almost a full 10 points from May. A level of 90 or above is considered healthy. The Present Situation Index, consumer's view of the current state of the economy, fell to 25.5. Consumers have not had an optimistic view of the economy for quite a long time now. What has caused the recent rise in confidence numbers was a view that the economy was going to get better in the future. U.S. Consumers got this idea from the mainstream media, which repeated it ad nauseum for months and months on end. They have yet to see much evidence of any actual improvement though and it seems they are starting to have their doubts.

During the first credit crisis, stocks were also in collapse mode. They are now just coming off a recent high reached on April 26th. The underpinnings for stocks are progressively weakening however. The Dow and S&P 500 should be giving a bear market trading signal this Friday. Moreover, the Flash Crash on May 6th should also be seen by investors as not as an isolated event, but as a precursor to greater stock market weakness in the future.

What is causing the current difference between the overall market picture in the fall of 2008 and what exists now is that there is a currently much greater support from government spending and central bank policy. The U.S. is running a $1.6 trillion deficit in 2010, compared to around $400 billion in 2008. The Fed only dropped interests rates to zero in December 2008. Stocks have benefited from these low rates since then. One of the many programs implemented during and in the aftermath of the first credit crisis was a 442 billion euro lending program from the ECB. The fiscally weaker countries in the eurozone have become disproportionately dependent on this facility. It is supposed to expire this Thursday and the impact will be devastating if it does. Expect it to be renewed in some way, shape or form.

Central banks during the last credit crisis used every weapon in their arsenal to attack the problems in the global financial system. Governments engaged in massive bailouts and ratcheted up stimulus spending to unprecedented levels. Yet, the problems seem to be returning. What ammunition do they have left to combat a second credit crisis? We should be finding out soon. While the ECR weekly indicators turned down three months before the recession began in 2007, the stock market turned down only two months before the economy did. The stock market just peaked in April, which is two months ago.

Disclosure: None

Daryl Montgomery
Organizer, New York Investing meetup

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.

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