Last weeks 700 plus point drop in the Dow seems like a distant memory and a much bigger sequel looks to be in the works. The world has caught up to the US, and the domestic credit crisis has officially become a Global one. Who knew that struggling home owners in Flint, Michigan facing foreclosure due to ARM’s resets could impact the financial well being of people living in Seoul, South Korea, so heavily and so quickly. The doom and gloom news is pervasive in the media today and here are some that have really got me worried:
Bailout Failure: U.S. stock futures tumbled Monday as the world’s financial crisis didn’t appear to be repaired by the $700 billion rescue plan. Since the bailout plan was approved the Dow has dropped more than 6%. So if the bailout plan fails to stem the tide, what is plan B? Do we even have a plan B?
Dow Falls Below 10,000 on Credit Fears in Europe and Emerging Markets Drop Most in 20 Years. European and Asian stock markets have had 3% – 8% drops on top of the big drops last week. The MSCI World Index lost 6% overnight, it lowest level in 3 years. The credit crisis has even spread to the oil rich Middle East with Dubai, the Construction Mecca of the world, finding it hard to get funding for new projects. Some European governments over the weekend have had to guarantee bank deposits to avoid a panic among consumers. The figurative run on the bank is a real possibility in some countries, and perhaps even in the US as the FDIC is forced to increase premiums it charges banks (to cover for all the failing banks).
Market Volatility set to continue. The benchmark index for the cost of using stock options as downside protection – the VIX – jumped to the highest in its 18-year history on concern that the global economic slowdown will continue on further credit-market losses. This suggests a lot more volatility to come and continued declines. The current market is only profitable for professional traders at the moment – or those that want to gamble their money away.
A vicious deflationary cycle is about to ensue: Banks worldwide, stung by $588 billion in write-downs related to toxic assets — especially mortgage-related securities — will further reduce the flow of credit, strangling growth. That will push house prices lower, forcing additional losses and making banks even more reluctant to lend. As the credit crisis worsens, businesses will find it almost impossible to raise prices. They will then be forced to close or start laying off employees, which will in turn reduce consumer demand and thus create a vicious downward economic spiral.
Full of Doubts, U.S. Shoppers Cut Spending. This will be the final nail in the coffin that is the US economy. Consumers have already cut back spending, and further cutbacks coming into the holiday season (which account for more than 50% of retail sales) will mean big job losses and a deep recession in the new year.
Oil drops below $90 a barrel for the first time since February, and Commodity Prices plunge the most in 50 years. Normally this would be good news and a time to cheer. Unfortunately this is just a confirmation that global demand is expected to slow and as a result the demand for oil and other commodities is expected to fall dramatically. Commodity rich countries like Canada, Australia and South Africa have seen much sharper falls in their markets and currencies than here in the US. Gold spikes $50, and $1000 is back in range this week. Gold, which is traditionally viewed as an investor haven rather than an industrial resource, was a notable exception to the commodity sell-off.
The US dollar is rallying because of its perception as a safe-haven currencies. With predictions of a severe global recession in 2009, Investors and financial institutions across the world are reversing positions out of the euro and emerging market currencies that had been financed by shorting the U.S. dollar. The euro fell overnight to its lowest level against the dollar since late August 2007, to $1.3540.
More to come…but the news is not good. A global recession is fast becoming a reality and there is little anyone can do to escape it. My bet is the Fed and other global banks will soon announce interest rate cuts to stem the credit crisis – but could be a little too late as looks like the financial crisis has become too big.
Sources: Marketwatch.com, WSJ.com, New York times (Picture), Bloomberg.com