Financial markets now on the brink of a 2008-style crash
Posted on 22 November 2011 with no comments from readers
Financial markets have stepped up to the edge and so far their performance is entirely consistent with our warning of less than a month ago about an imminent dramatic crash (click here).
From a technical perspective the head-and-shoulders on the last of the three busts since 2000 has been completed, and we now face a sharp fall to the downside in another 2008-style crash unless some form of miracle can rescue us. That is what the best of the chartists say.
2008 precedent
Market analysts have gradually lost confidence in their own judgment in the long rally back from the slump of 2008 but there are plenty of siren voices among the cognescenti, many of them fairly quiet just in case they have this wrong and will look complete idiots if a crash does not happen.
Looking at fundamental rather than technical analysis this is also awful but still a tad deceptive to the casual observer. You can look around the world and see the global economy functioning pretty well in the circumstances with some good profit figures to boot.
But the old analogy of the Titantic steaming ahead while fatally wounded below the waterline comes to mind. Bond markets in the eurozone are falling like dominos raising the cost of capital and freezing up the banking system; and nobody is doing anything to stop this happening.
There has been a flight of capital from Europe to the US with eurozone banks doubling their reserves at the Fed in less than a year. This is a credit squeeze that will pull the plug on the eurozone in 2012, and the thought that the US and China will escape this maelstrom is wishful thinking that few on Wall Street now share.
US multinationals reporting record profits and new investors like Warren Buffett will suffer in the frontline as their eurozone profits will shrink due to the recession and a sinking currency. But the more immediate contagion will be in the US banks that will lose big time from guaranteeing debts in Europe.
US as eurozone creditor
After France the US banking system is the biggest loser from an Italian sovereign debt crisis (click here). Of course the dollar’s role as the global reserve currency does provide the US with a cushion to some extent but then again the high debts of the US financial system leave it even more vulnerable to external disruptions.
What on earth should individual investors do? In the short-term the flight to the US dollar makes sense but this is a safe haven that may not stay safe for long. You need to be fleet-of-foot and look for the exit point.
The ArabianMoney investment newsletter is the place for specific investment recommendations and a more detailed view of investment options in this very difficult environment (click here). Nobody is going to get this entirely right but it is a time for clever opportunism rather than sitting on your hands.
