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Economic News Articles in The Great Recession Blog, week of 05/13/2012

At the beginning of last week a big financial advisor proclaimed that the markets’ little downturn meant nothing. The market would go right back up. He was certain that Europe’s problems that week would quickly be yesterday’s worries. He gets paid too much to be that certain about that much and be that wrong. I thought at the time I should have copied this man’s words for later quoting because he’d surely be eating them soon. 

 

The fact is that the market is overinflated. Because it’s running on fumes, it doesn’t take much to bring it down. The fact is that there are many massive forces that teeter on bringing it down right now. Any single one of them has the potential to make the market crash. And the fact is that Europe’s problems are clearly not going away soon. For the big money he makes, the advisor above should have been able to see all of that clearly. By the end of the week, however, The Wall Street Journal reported…

A day billed as Facebook Inc.’s coming-out party ended up marking a much gloomier event: the stock market’s worst week in six months. As the long-anticipated listing of the social-networking company landed with a whimper, the Dow Jones Industrial Average sank 73.11 points, or 0.6%, to 12369.38, bringing its losing streak to six days. The blue-chip index has fallen in 12 of the past 13 days.

The latest wave of selling came as investors focused on fresh developments in Europe’s sovereign-debt and banking crisis, and concerns over the pace of global economic growth.

The selling came amid the heaviest trading volumes of the year.

Europe went to hell in a hand basket while the man mentioned above wasn’t looking.

Even Facebook couldn’t save the market. In fact, Facebook couldn’t have picked a worse time to come out, as surely the fast receding current of the market helped pull Facebook down some, too (though many of its problems were due to its own greedy pricing and market glitches). At, first, the WSJ reported that it appeared the market was set to close with its greatest streak of declines in forty years! Later in the day, they revised their tone slightly to what I’ve quoted above.

If “the worries about Europe could be felt in every corner of the U.S. asset markets” during the past two weeks, as the WSJ also said, what would the actual fall of Europe bring to every corner of the U.S. asset market?

At this point, you might recall one of my earlier predictions for 2012: (If not, you can count on me to remind you 😉 )

The heat of summer will look like the heat of hell for Europe. Money will flee Europe over the course of this year, including European money.

The money is now fleeing, even sooner than I anticipated, given that summer is yet a few weeks away, because other news was that several European countries were, for the first time in the great recession, experiencing near runs on their banks. (More on that below.)

It also looks as though we are marching steadily toward this part of the euro prediction:

So, prediction five follows from number four because it is its fraternal twin: Spain will consume the last of Europe’s ability to save the euro.

We are now at that point I predicted where the good news of the first quarter, which many economists were glowing about, would begin to evaporate in the spring under the harsh light of reality in Europe. By the end of last week, the DOW had almost eradicate all the gains it had made through the first quarter. So, in terms of the market, the evaporation happened in two week’s time. The last time the Dow suffered this many losses on a two-week stretch was in 1974 — almost forty years ago. Expect the market to seesaw wildly at this point because there are still many bulls trying their best to sell people on a bull market, while the forces that could collapse the market are looking more precariously balanced every day.

At the same time, it was reported that the U.S. is now paying record low interest on its national debt. Maybe it would be a good time to recall another one of my earlier 2012 predictions (which, as you recall, was made at a time when everything in the news was running contrary to my predictions):

The U.S. will not see its interest rates rise on the national debt in any significant way this year, even when its credit rating gets downgraded by one or two of the big-three credit-rating agencies. China and Europe combined insure the U.S. against this. The euro crisis is a windfall for the U.S. in terms of the cost of its credit, though the fall of Europe will hurt the U.S. in other ways. The U.S., in spite of how bad its situation is, is likely to remain the safest haven that is capable of selling huge amounts of notes and bonds, and China needs a huge seller of bonds to soak up its cash. That support from China will, however, ebb in time as China’s economy settles and it has less cash to bank in foreign markets. (So, longterm, the U.S. is in a boatload of trouble, but not this year … in terms of the cost of its debt.)

The parts in red are now playing out, and the rest will follow in time. Europe’s woes have made the U.S. such a safe Haven that it has, for the time taken gold’s place. As one of the articles at the end of last week said,

“If gold was a safe haven, it should be higher. Physical demand is mediocre and the Europeans want the dollar, which is why it [the dollar] is so strong,” a physical U.S. gold trader said.

That — even from the mouth of a gold trader. Don’t worry about my gold predictions not panning out, though. By the end of last week, this market turmoil turned gold around, too, and it climbed for the last two days of the week. Apparently the U.S. dollar just couldn’t absorb all the European money that started fleeing its way. In fact, it turns out many of big investors are buying gold now — Soros, John Paulson, even Pimco. Soros more than tripled his investment.

(Remember, though, that I also said gold would take a rocky ride to the top — not the fairly straight line seen last year. Gold has some ballast this time that it didn’t have last year, but the negatives in the year that will boost gold will be the prevalent forces.)

Last week, European stocks posted their greatest drop in eight months.

All of these market tumbles (U.S. stock market, European stock market, value of the euro, solvency of European banks) is tumbling down the path toward this part of my predictions:

The perfect storm is brewing all around the world…. This is the year when all hope for reviving the old economy begins to crack and fall away.

Did anyone say “bank run?”

Now this one, I had to laugh at. At the beginning of last week, The Independent in the U.K. reported,

Italy’s banking and business community responded angrily yesterday to a mass downgrade of Italian banks by the credit rating agency Moody’s, calling the move irresponsible and an assault on the austerity-hit country as it struggles with an economic crisis.

Already battling shrinking demand and soaring bad loans, Italian banks suffered a further blow as the US agency slashed the credit ratings on 26 local lenders, adding to their difficulties in raising funds.

“Moody’s decision is an assault against Italy, its companies, its families,” the Italian banking lobby ABI said.

Stunning. Banks are ruthless to their clients and completely trusting of these same agencies when they downgrade loan applicants over minor little hiccups in their credit, but the banks think they are above being rated! They get furious when they are downgraded for absolutely serious global-scale problems they created. Their problems are infinitely greater than any problem one of their bad-credit clients walked in the door with. If you were applying for a loan with these same banks and found your credit had been downgraded for something like unemployment, you might explain that you just got a new job, but these same banks would respond, “Tough luck. You’re a credit risk.” What arrogance in thinking they should now be above the same kind of ratings just because it causes the same problems for them on a corporate level that it caused in your life on a personal level! The banks are worried that this hurts their already difficult funding abilities! What do they think it does for you when your funding abilities are already difficult? So, why should banks be cut any slack just because it makes their problems worse? They never cared that it made your problems worse.

In short, the U.S. stock market plunged like forty-five-degree rapids as a result of problems emerged in the previous week in Europe. Those problems played out in numerous credit downgrades on banks all over Europe, further credit downgrades of the nation of Greece, another rise in Spanish bond rates, and runs or near runs on banks in a number of European countries. The continent began to unravel, as predicted at the beginning of the year:Again, it looks as if bank problems will begin in a German-dominated central Europe, then spread to the U.K., which is outside the European Union’s eurozone, and finally to the U.S. A failed European econony will crash on U.S. shores later in the year in the form of diminished markets and further bank stresses. The present situation is almost a mirror image to how a great recession that ended the roaring twenties turned into The Great Depression for nearly the entire world, which would then last more than a decade.

Again, it looks as if bank problems will begin in a German-dominated central Europe, then spread to the U.K., which is outside the European Union’s eurozone, and finally to the U.S. A failed European econony will crash on U.S. shores later in the year in the form of diminished markets and further bank stresses. The present situation is almost a mirror image to how a great recession that ended the roaring twenties turned into The Great Depression for nearly the entire world, which would then last more than a decade.

…It is not just the inability of nations to finance debts in an increasingly furious bond market that is the problem, but the likelihood of European bank failures in the midst of all that. As noted in the “Tipping Point” article referenced above, it did not take a major bank failure in 1931 to bring the Great Depression fully on. Credit Anstalt was a smaller bank in central Europe’s economy. Failure of another small European bank like Credit Anstalt could happen anytime. And, such a small trigger, could release an avalanche of bone-chilling problems, just as it did in 1931.

And that was just last week’s news:

 

Recap of economic news articles on The Great Recession Blog last week

(Current week’s news is posted in the right sidebar each day.)

China syndrome — following the Great Recession to the Great Wall

Economic indicators and stock market responses in the news this week

  • 05/15 US retail sales slow sharply in April US retail sales barely grew in April, rising 0.1% from March’s level, while consumer prices were unchanged.
  • 05/15 US stocks mixed; euro dives on Greece turmoil Stocks are having one of their worst months in the past eight. For the month, the Dow is down 518 points — about 4% — after hitting a four-year high on May 1. The average is on track to post its first monthly loss since September, when it fell 6%.
  • 05/17 Jobless Claims in U.S. Unchanged at 370,000 Last Week More Americans than forecast filed applications for unemployment benefits last week, a sign the labor market has stalled. Three consecutive weeks have shown essentially zero change in unemployment claims. Economists had called for a drop to 365,000.
  • 05/17 Wall Street goes bearish on US stocks Investor worries mount over the threat of a eurozone break-up and the outlook for the global economy. Stocks peaked in their best first quarter since 1997. Since March, however, the S&P 500 has shed more than half its prior gains for the year.
  • 05/18 Dow Sinks for 12th Time in 13 Session Blue chips extended a streak of declines the likes of which hasn’t been seen in almost 40 years, amid concerns about the euro zone and Facebook’s lackluster debut. It was the worst 13-session performance since October 1974.
  • 05/18 U.S. Stocks: Global fear trumps Facebook debut U.S. investors resumed focus on the global issues plaguing world markets Friday, following a brief euphoric pop from Facebook’s debut. “People are talking about Facebook, but it’s really a sideshow.”
  • 05/18 Wall Street banks facing slowdown Wall Street banks are predicted to report sharp declines in trading and investment banking revenues in the second quarter because of weaker client activity. The unusually sharp declines are due to less liquidity provided by the European Central Bank.

Economic predictions / forecasts that made news headlines

  • 05/17 Jim Rogers: 2013 to Be Bad, ‘God Knows What Will Happen in 2014 If investors think 2012 isn’t going their way, they need to brace for a bumpy ride, international investor Jim Rogers says. Election-year politics and loose monetary policies will keep the economy afloat this year, but get ready for a sell-off.
  • 05/18 Krugman: Apocalypse Fairly Soon Suddenly, it has become easy to see how the euro — that grand, flawed experiment in monetary union without political union — could come apart at the seams. We’re not talking about a distant prospect, either. Things could fall apart with stunning speed.
  • 05/18 Rogers: Buy Gold, Silver Before ‘More Turmoil’ Jolts the Globe Roiling capital markets aren’t going to calm any time soon so investors would be better off putting their money in hard assets like gold, silver and agricultural commodities, says international investor Jim Rogers.

Euro crisis updates as the Great Recession goes viral

  •  05/13 Francois Hollande threatens to block eurozone’s new financial treaty The new French president wants the treaty to focus more on encouraging growth. Angela Merkel, the German chancellor, on Thursday told France that there was no alternative to spending cuts and painful deficit cutting measures.
  • 05/13 Greece, euro zone exit and the drummer in the band A year ago, it was nearly impossible to get a diplomat in Brussels to talk about the possibility of Greece leaving the euro zone. Now, it’s the opening to most conversations.
  • 05/13 Merkel’s party routed in big German state Chancellor Angela Merkel’s conservatives suffered a crushing defeat on Sunday in an election in Germany’s most populous state, a result which could embolden the left opposition to step up its criticism of her European austerity policies.
  • 05/13 Opinion: It’s too late for Germany to save the euro Greece must take back control of its own destiny by leaving the euro. As it is, the economy is condemned only to permanent depression. Youth unemployment was just revealed to have overtaken even that of Spain, at an almost unbelievable 54 percent.
  • 05/13 Thousands march against economic gloom in Spain, UK Thousands of Spaniards fed up with economic misery and waving banners against bankers marched on Saturday to mark the first anniversary of the grassroots “Indignados” movement that has sparked similar protests around the world.
  • 05/14 Despite Germany, euro zone sinks into recession European officials and economists have repeatedly said Europe’s recession will be mild, with a recovery in the second half of this year. But the strong economic data seen in January has unexpectedly faded and business surveys point to a deeper downturn.
  • 05/14 Greek impasse prompts euro exit warnings, rattles markets With Greece set to run out of money as early as next month and no new government in place to negotiate the next aid installment, investors have begun betting that a chaotic Greek default and euro exit will happen sooner rather than later.
  • 05/14 Greek parties try to form government, stocks tank “The dramatic drop in state revenues during the election campaign and the serious souring of the atmosphere in Europe toward Greece mean that after almost certain repeat elections there will be a need for even tougher austerity measures.”
  • 05/14 Merkel tells Greece to back cuts or face euro exit Greece may be forced to leave the euro if the country refuses to implement spending cuts agreed with the European Union, Angela Merkel warned. An outgoing Greek minister warned that the country could descend into “civil war” amid the chaos of a euro exit.
  • 05/14 Moody’s downgrades credit of 26 Italian banks The ratings agency said the banks are suffering because Italy is back in recession and government measures are cutting demand for loans. Banks are facing more loan losses, limited access to funding and weaker profits.
  • 05/14 Spain Hit By Fears on Banks, Greece Fears of a messy Greek exit from the euro zone washed up on Spain’s shores, pulling local stock prices to 8-1/2 year lows and driving T-bills up to 6.24% int., a level many analysts see as unsustainable. A bad omen for Spain’s bond auction this week.
  • 05/15 Europe’s Banks Continue to Feel Pinch from Debt Crisis “The beginning of the year started off with a bang, but the optimism has definitely come to an end,” said a leading European banker. Greece’s exit from the euro could cost European governments and their banks a combined 400 billion euros ($512 billion).
  • 05/15 Eurozone avoids recession after strong German growth The eurozone has narrowly avoided returning to recession after recording zero growth in the first three months of the year, figures have shown. The stronger-than-expected performance was in large part due to growth of 0.5% in the German economy.
  • 05/15 Greece Faces Big Debt Payment Tuesday: Now What? As if the Greek situation wasn’t messy enough, a missing paragraph from a key legal document is throwing a wrench into a debt deadline. Greece has a 436 million euro principal repayment due today. So far, the country has not decided what to do.
  • 05/15 New Greek elections as coalition talks fail Greece is set to go to the polls again after the final round of coalition talks failed to produce agreement on a new government, says the leader of the Socialist Pasok party, Evangelos Venizelos.
  • 05/15 Powered By Germany, Eurozone Avoids Recession Huge economic disparities exist across the eurozone. Of the euro’s 17 members, 7 are in recession. Though the zone posted flat output, against expectations that it might slip into recession, the months ahead may be more difficult.
  • 05/16 Bank of England governor warns of eurozone crisis ‘storm’ “We have been through a big global financial crisis, the biggest downturn in world output since the 1930s, the biggest banking crisis … and our biggest trading partner, the euro area, is tearing itself apart without any obvious solution.”
  • 05/16 Debt crisis: Greek euro exit looms closer as banks crumble A tsunami of capital flight from Greece threatens to overwhelm the authorities. Greeks have pulled €4bn a week out of banks since the triumph of anti-bailout parties. Steen Jakobsen from Saxo Bank said outflows are becoming unstoppable.
  • 05/16 Greek euro exit talk ups chance of endgame, but uncertainty may drag on Speculation about an endgame in Greece’s protracted crisis has flooded markets with euro exit scenarios this week because public money will run out before the next elections, but there’s still every chance that uncertainty will simply drag on.
  • 05/16 Greek exit ‘somewhere between catastrophic and armageddon’ The damage to the rest of Europe from Greece leaving the euro would be “somewhere between catastrophic and Armageddon”, said the chief negotiator for the private sector bond holders caught in Greece’s debt restructuring.
  • 05/16 Greek turmoil spreads pessimism across markets The unending turmoil in Greece spread fallout across the financial markets Wednesday, as Greece called for new elections. The Dow Jones industrial average fell for the ninth day out of 10, and gold, oil, and the euro all dropped to multi-month lows.
  • 05/16 Greeks withdraw money from banks as worries grow Bordering on panic, Greeks withdrew 700m euros ($894m) from the country’s banks in the week ending on Monday. The action comes as fears increase that the country may be forced out of the eurozone and on to a weaker currency.
  • 05/16 Italy’s banks furious at Moody’s over mass rating downgrade Italy’s banking and business community responded angrily to a mass downgrade of Italian banks by the credit rating agency Moody’s, saying, “Moody’s decision is an assault against Italy, its companies, its families.”
  • 05/16 Merkel and Hollande spell out Greek fear The new leader of France joined Germany to urge Greece to reaffirm its commitment to membership of the eurozone. François Hollande flew to Berlin for talks with Angela Merkel, German chancellor, within hours of being installed as French president.
  • 05/17 Greeks not alone in bank savings exodus It is not only Greeks who are worried about their savings. Data shows depositors have also taken flight from banks in Belgium, France and Italy. And on Thursday, Spain’s Bankia was reported to have seen more than 1 billion euros drained in one week.
  • 05/17 Softening, Merkel Says She Is Open to Stimulus for Greece Chancellor Merkel of Germany said Wednesday that she was ready to discuss stimulus programs to get the Greek economy growing again and that she was committed to keeping Greece in the euro zone, signaling a softer approach toward the struggling country.
  • 05/17 Spanish Bank Hit by Report of Withdrawals Shares for Bankia, just nationalized by Spain, plummeted Thursday after a newspaper reported that depositors were rushing to withdraw money under the fallout of higher Spanish bond rates and the Greek crisis. Bankia’s stock is down 70% in less than a year.
  • 05/17 Spanish Banks Downgraded as Borrowing Costs Soar Spain’s borrowing costs shot up at a bond auction on Thursday and its troubled banks suffered a double blow, with shares in part-nationalized Bankia diving and 16 lenders — including the euro zone’s biggest — having their credit ratings cut.
  • 05/17 U.S. 10-Year Yields Approach Record Low on Economic Data, Europe Treasury 10-year yields fell to almost the record low reached in September as reports suggested the U.S. economic recovery is faltering and as investors sought a haven from Europe’s worsening debt crisis.
  • 05/18 European Stocks Post Biggest Weekly Drop In Eight Months The Stoxx Europe 600 Index fell 5.2%. Banco Espirito in Spain lost the most since 1993. Bankia lost 15%. Opap closed in Athens with the biggest slide since it sold shares to the public in 2001. “The markets are signaling … fatigue regarding … Greece.”
  • 05/19 Days of turmoil for Europe and Greece The world avoided a repeat of the Great Depression by the skin of its teeth in the wake of the Lehman collapse. Now the threat has returned, this time in even more virulent form. Europe seems on the brink of one of its periodic collapses into chaos and division.

Federal Reserve actions tracked in the economic headlines

The Iranium Reaction as it makes and shakes the news

U.S. banking / financial crisis as it shapes the economic news of our times

U.S. government moves (and blunders) in articles about the economy

Other economic updates / miscellaneous news articles

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