We seem to be heading towards an economic downturn equivalent to the Great Depression of the 1930s. This isn't a secret. The synthesis below is derived from: Lawrence Summers, Nouriel Roubini, Simon Johnson, Niall Ferguson, Paul Krugman to name just a few. This crisis is not happening quickly. It's more of a slow-motion train wreck -- Greece's crisis started in 2009. But that leaves a puzzle -- why is the American stock market not reacting to obvious warning signs?
Greece and Spain already have unemployment rates exceeding 20 percent. If that isn't a depression -- what is?
Greece is in very deep trouble. Spain (the Euro's fourth largest economy) just needed a $125 billion bank bailout. The weaker economies (Portugal, Ireland, Italy, Greece, Spain) face severe credit crunches as local banks lose deposits (withdrawn because of credit concerns and fear of forced devaluations following a Euro exit).
Serious discussion is already taking place about the demise of the Euro, or even worse the break-up of the European common market -- in which case unemployment rates across Europe will exceed 20 percent. National incomes will decline sharply, resulting in large-scale corporate insolvencies, with the crisis spilling over into the U.S. and Asia.
Arguably, the Germans have a sufficiently healthy economy to avert the crisis. But they are reluctant to act -- without clear structural changes in the European Union/member states to prevent future problems. Amidst a crisis, it's difficult to make structural changes quickly. The Germans (with some legitimacy) fear that a bailout lacking agreement on structural changes will result in some combination of a larger financial disaster later, and/or the German economy permanently subsidizing some of the weaker economies.
Europe's economies provide little reason for optimism.
The U.S. faces a recession next year if the Budget Control Act takes effect, which is likely if Obama wins and partisan gridlock continues. House Speaker Boehner already announced that if Obama's re-elected, the GOP will treat us to another debt ceiling confrontation. If Romney wins, the Democrats (having learnt their lesson from the Republicans) would be as disruptive as possible. If the U.S. faces a major economic crisis triggered by the Euro's collapse, bipartisan consensus on how to resolve it is unlikely.
China's growth model may be reaching its limit. If the rest of the world's problem is too much ideology, China's is arguably the absence of any ideology except kleptocracy. China lacks a functioning legal system. Its officials are disciplined by shadowy communist party entities, rather than accountable to a transparent legal system. Nominally ruling in the name of the proletarian vanguard, China is governed by princelings and kleptocrats, with friction escalating among the kleptocrats.
Internationally, another regional war appears increasingly likely in the Middle East. The U.S. and/or Israel might have a military confrontation with Iran, over Iran's nuclear ambitions. The Syrian situation has the potential to become a regional conflict (Syria, Iran and Russia fighting Syrian dissidents supported by some coalition of Saudi Arabia, the U.S., Turkey and other countries). A Middle Eastern war would lead to significant oil price increases, and trigger a global recession (at a minimum).
Compared to the financial crisis of 2008, governments everywhere are far more constrained by weaker balance sheets, loss of public trust and crisis fatigue.
I'm not saying everything listed above will go wrong (though if that happens, it would be a "global perfect storm"). However, even 1-2 of these plausible misfortunes would make 2013 a really bad year, and the world will have other challenges we cannot foresee (e.g., another nuclear accident, major earthquakes, etc.).
Depressed yet?
So why is the stock market trading as though all's well? The S&P 500 closed on June 15th at 1343. Based upon stock price divided by earnings (P/E ratio), the market now trades at about 21 times the prior 10 years' average earnings. The long-term 10 year P/E ratio is about 16, so today's premium over that long-term average is difficult to explain, considering the risks listed above. At the top of the bubble in October 2007, the S&P was at 1565. Currently, we're only about 15 percent below that peak, and (again) the market isn't reflecting the referenced risks.
Is it a case of short-term delusions, leading to later major stock market debacles? If so -- is it time to go short?
Or does the market know something we don't? Are the risks outlined above really not so bad? Is the market assuming losses will be paid by the government, so let's party like it's 2006? Or could it be that all investments at this stage have poor prospects -- so there's no place to hide?
Stay tuned: 2013 will be an interesting year!
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About the Author: Steven Strauss was founding Managing Director of the Center for Economic Transformation at the New York City Economic Development Corporation (NYCEDC). He is an Advanced Leadership Fellow at Harvard University for 2012. He has a Ph.D. in Management from Yale University and over 20 years' private sector work experience. You can follow him on twitter at @Steven_Strauss or on Facebook at https://www.facebook.com/Steven.Strauss.Updates.
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Edward Goldberg: It's the Euro, Stupid -- or Europe's Gift to Mitt Romney (Updated)
Oh yeah? Just because the gop does something stupid, the dems will too? Here goes the false equivalence again.
I didn't expect that on HuffPo.
1) Stock market started rising slowly when Obama won 2008 election, and continued at that pace as he named his cabinet that was full of Clinton Admin retreads.
2) Kept on rising during 2009, early 2010 as Obama passed stimulus package which included many tax cuts.
3) Stock market started dipping and waving up/down during 2011 when GOP started making demands on cut spending, balance budgets, shut down govt, the big controversial over 'raising the debt ceiling.' Then it bounced back and forth when European Union fought over whether or not to bail out Greece, Span, etc.
My observations show the markets want govt intervention to bail them out of their nefarious gambling. So if GOP wins control in November, their infighting between tea party and other GOP will cause the markets to slip significantly in 2013.
If your investments have rebounded, it would be better to look at pulling out your gains.
Wall Street is really not for the little guy because no matter, the house always wins in the end. WS wants you to think anyone can make it big, but that is the rare occasion.
The speculators have access to unlimited funds at bargain prices provided by the Federal Reserve. Every time a piece of bad news rears its ugly head the speculators drool over the Fed’s response of quantitative easing. Quantitative easing is the politically correct term for printing money. We are told that these newly printed dollars will stimulate the economy but this is of course a load of horse pucky. This money stays in the financial system of Wall Street so speculators can bid up prices selling pieces of paper back and forth and pocket their profits. In other words it stays at the top. The Fed has been easing for almost 5 years with little to show for it. It is like pushing on a rope expecting the other end to move.
This Ponzi scheme will continue until it stops. It will stop when the full faith and credit of the United States comes into question. When that happens Wall Street will catch up to Main Street in the race to the bottom. The crisis of 2008 will, at that time, look like a mere hic-cup.
Excess capital from the Fed printing money and capital fleeing in from overseas.
Get out of the markets now before the correction in reaction to the deepening recession. The economic stats have been unrelentingly bad for the past 2-3 months.
Of course, this has a price. The money only returns to savvy investors who know this game, and people who actually get duped into buying & holding (because, well, it was bullish before, so imagine one month from now, instead of 15 minutes) end up losing a lot of money. This has a net effect of concentrating cash even more, on the hands on speculators instead of real investors interested in profiting through a particular company's growth instead of swapping. That's why even if you get a record number of businesses closing, the stock market is still high. Construction workers are jobless in droves, but you can't tell that from the stocks of the companies if they are the hot trade right now. It skews everything about the market, every warning sign it could give. Also, by concentrating the cash, it keeps the cash from circulating where it should - to companies that really need an investment instead of more debt. If people are playing with their stocks, their value and investments are all suddenly uncertain...
...and it