Sharp sell-off in US stocks is just beginning
Posted on 02 June 2011 with 3 comments from readers
Yesterday all the major US stock indices tumbled by around 2.3 per cent and the yield on treasuries dipped below three per cent for the first time since December 6th.
Weak US employment and manufacturing data and another downgrade for Greek debt rattled markets. But investors sat on large stock portfolios should start asking themselves is the rally over?
Rally over
With stocks closing lower for four weeks the writing is on the wall. The optimistic spinning of economic data to present a nascent recovery is increasingly exposed as a shabby lie or wishful thinking, depending on how charitable you are feeling.
As Mark Mobius reminded us this week the real issue is that the banking crisis was not fixed three years ago. The debt burden was merely transferred to the public sector to buy time. Nothing was done to solve the rising debt, indeed it was just allowed to get even bigger.
Debt bubbles always burst in the end and when they do it is not a moment to be invested in stock markets, and while bonds gained yesterday this may not be a pattern that endures as the global debt mountains are leveled.
For if you look to Greece at the yields it pays on debt that is the future. You do not borrow your way out of a debt crisis. It can only ever be a temporary solution. But what if nothing turns up? And how could it possibly for entire nations?
So we have an investment community that has leveraged up to the hilt and bought into a recovery that is not happening. That entire community and its bankers and brokers will be the ones who feel this most as the markets implode.
Housing markets
Housing is already on some kind of a floor but prices can still go lower. In places like the UK this process has hardly begun. There is massive debt that has to be squeezed out of the system and those who have borrowed heavily to buy homes in recent years will suffer a dreadful loss of capital that is not theirs to lose.
Why risk capital now in markets that can only deliver losses? Wall Street is finally waking up to this reality having duped the entire world into thinking a strong economic rebound was in prospect when we actually have no such thing.
3 Comments posted by readers:
“Housing is already on some kind of a floor but prices can still go lower. In places like the UK this process has hardly begun.”
Dear Ed,
Do you think it will happen in the UK? I know the following sounds selfish but I hope it does because it’s the only way I’ll be able to afford a house, however , for some reason some of the press keep trying to “talk” up the prices.
John Taylor, former vice president of Citi Bank, says look out below for stocks. Look for 1,000 on the S&P 500. He says the dollar will go up because the debt ceiling will force action to reduce the deficit. He said ‘we have another recession coming’ by the end of this year. Next year will be ‘truly miserable’. He likes it because it will help his Republican friends in next year’s election. He said they will blame everything on the Democrats. He believes the price of oil & commodities, including gold, will go down for the next 18 months or so. He said the USA is in a period like 1937. The budget cutting will hurt the economy by reducing demand. The more they cut the deficit, the worse it is going to be. Housing will only recover because of population growth, which could take 10 years.
(Jobless claims came in at 422,000, slightly higher than expected.)
He said QE3 won’t start until the Fed sees some negative numbers. He likes Australian, South African, and Turkish stocks for a while longer, then he will buy dollars. Europe is in a worse fix with the euro. Expect at least 2 quarters of negative GDP. QE 2 has only been good for trading, the money hasn’t gone into the economy because banks aren’t lending enough. The more trouble we have with raising the debt ceiling, the stronger the bond market will be, and the stronger the dollar, because ‘it means we’re going to do something’. And when we do something, that is going to really drive the dollar up. Europe can’t do anything. Europe is falling apart. Everyone is going to say the USA is doing what they have to do.
All of the above are his opinions. He was on CNBC a few months ago and predicted a slowing economy and eventual recession back then.
He forgot to mention how many State & local government employees will get let go this year as the Federal stimulus money runs out.
Also someone in Europe just said that Europe needs to establish a transfer mechanism between countries like the USA has between States. So we can’t write Europe off yet. Germany has decided that it is cheaper to keep bailing out the cheaters, than to bail out German banks.The debt crisis may finally forge the United States of Europe. What armies could never do, the bankers will.
interesting comment bill