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Market Rout Continues

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After a very bad day in the US, Asian markets swooned and European markets fell again, but their declines are less gut wrenching. 2-3% falls in most Euromarkets at the opening (2.5% for the FTSE, 2% for the Dax, and 3.5%.for the Milan’s FTSE-MIB) but for the most part, they have come back somewhat as of this hour. The FTSE is now down 2.2%, the CAC 40 a mere 1.2%, the DAX 2.7%, and the FTSE-MIB has is in positive territory, up 0.25%. This follows plunges of 3.7% for the Nikkei and 4.5% for the Hang Seng indexes.

US futures had been up modestly as of now (9 points for the Dow and 2.5 points for the S&P 500) but are now in negative territory (67 points for the Dow and 6.4 for the S&P). Non-farm payrolls are released before trading opens, and a disappointing number could kick off more widespread selling (one analyst opined that it would take “a really strong report” of 150,000 or more job additions in July, to have a lasting impact on investor worries). The euro is up a smidge, 1.41 to the dollar, and the yen has strengthened to 78.5 despite heavy intervention by the Bank of Japan on Thursday.

There is plenty of evidence of rattled nerves. Commodities took a hit, another sign that deflationary expectations are taking hold. But perhaps the biggest change in attitude is lost faith that central bankers can or will intervene successfully. Bond purchases by the ECB did little to calm markets (a recovery in Italian and Spanish bonds quickly reversed). The Fed seems bizarrely preoccupied with inflation although the real problem is that what the US needs is fiscal stimulus to offset consumer deleveraging and failure of businesses to invest. We actually need more bankruptcies and asset writedowns in combination with more aggressive spending. In Euroland, the scope of the sovereign debt crisis has now reached the too big to fail Italy, and one of my German press reading contacts said that finance minister Wolfgang Schauble nixed yesterday the notion of enlarging rescue facilities.

Even though the US media has tended to focus on a series of bad data releases as teh trigger for the declines, in addition to no one being happy with the immediate resolution of the faux debt ceiling crisis, the bigger source of near term risk is the escalating Eurozone crisis (and Europe in not halfway around the world from an economic standpoint; the US economy is considerable integrated into it, with roughly 25% of S&P earnings dependent on it, for instance).

Thanks to the failure of the ECB intervention yesterday to accomplish much, Eurozone leader appear to recognize the need to Do Something, but given that they seem to need to Do Something every two weeks or so, their response time is increasingly lagging market demand.

On a cheery note, Marc Faber deems stocks to be “extremely oversold” and argued for a 40 to 50 point bounce on the S&P. But remember, violent rallies are a bear market staple.

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28 comments

  1. Jessica

    Trust is like air and sex. You don’t realize how much you need it until you don’t have it.
    And trust is precisely what the powers that be have been destroying. Both in creating the crisis during the years when few noticed and in the way that they handled since it became obvious.

  2. Jim Haygood

    From Bloomberg:

    Europe’s fractious government leaders were back in the spotlight after a divided ECB restarted its bond-purchase program yesterday following a four-month hiatus. The central bank refused to extend the purchases to Italy and Spain, the two countries at the center of the current turmoil.

    Over the opposition of the German central bank, the ECB bought bonds of Ireland and Portugal yesterday, two countries drawing on official aid. The ECB stopped short of buying Italian bonds, and ECB President Jean-Claude Trichet said Italy has to show it is “ahead of the curve” in taming its debt.

    http://www.bloomberg.com/news/2011-08-05/europe-struggles-to-tame-crisis-as-ecb-bond-buying-fails-to-halt-contagion.html

    Europe is in denial — denial of the size of haircuts that Greece, Ireland and Portugal are going to need; denial that Spain and Italy are in difficulty at all, despite their sovereign yield spreads of nearly 400 basis points over German bunds.

    When the authorities are in denial, the only rational response is to sell — with vigor, determination and relentlessness — until the abject surrender of the authorities occurs.

    Of course, the US is in denial too — denial that it can dial back fiscal stimulus without provoking a fresh recession (which may already be underway); denial that it can continue to squander 5 percent of GDP on a global military empire that literally vaporizes precious investment capital, along with dozens of poor brown people as collateral damage.

    However, as long as the US and Germany can continue to borrow for 10 years at under 2.5%, and Japan at 1%, these regional hegemons can continue to finance themselves even as their threadbare neighbors slide off the edge of the continental plate. They will be tempted (mostly through multinational arrangements such as the EFSF and IMF) to take on even more debt to rescue their weaker sisters, just as sickly Spain and Italy are currently subscribers to EFSF.

    But it won’t work. You can’t treat a debt overdose with another injection of debt. It’s like treating a heroin addiction with krokodil:

    In Tver [Russia], most krokodil users inject the drug only when they run out of money for heroin. People become full-time krokodil addicts, giving them a life expectancy of less than a year.

    “If you miss the vein, that’s an abscess straight away,” says Sasha. Essentially, they are injecting poison directly into their flesh. One of their friends, in a neighbouring apartment block, is further down the line.

    “She won’t go to hospital, she just keeps injecting. Her flesh is falling off and she can hardly move anymore,” says Sasha. Photographs of late-stage krokodil addicts are disturbing in the extreme. Flesh goes grey and peels away to leave bones exposed. People literally rot to death.

    http://www.independent.co.uk/news/world/europe/krokodil-the-drug-that-eats-junkies-2300787.html

    That’s us — an empire rotting to death. Dude, share the needle!

    1. Jim Haygood

      Another Bloomberg article details two more disturbing developments:

      1. Italy’s bonds now yield more than Spain’s, a reversal in rank which reflects Italy’s 120% debt-to-GDP ratio vs. Spain’s more moderate 68%.

      2. French yields now exceed German ones by 90 basis points, a euro-era record. The unified core of Europe is now diverging. France, lest we forget, is a Latin country.

      http://www.bloomberg.com/news/2011-08-05/german-10-year-bunds-advance-11th-day-on-debt-crisis-italian-bonds-slump.html

      Monster raving bearish …

      1. Just Tired

        “Italy’s bonds now yield more than Spain”

        Contagion now is a foregone conclusion. The market is attacking Italy because the bailing out Spain now assumed and the market wants to know if the ECB is up to all in. That has always been the end of the TBTF game.

  3. Schofield

    “Trust is like air and sex. You don’t realize how much you need it until you don’t have it.
    And trust is precisely what the powers that be have been destroying. Both in creating the crisis during the years when few noticed and in the way that they handled since it became obvious.”

    Very true. And what discerning individual wants to buy Neo-Liberal stock these days.

  4. docG

    “The Fed seems bizarrely preoccupied with inflation although the real problem is that what the US needs is fiscal stimulus to offset consumer deleveraging and failure of businesses to invest. We actually need more bankruptcies and asset writedowns in combination with more aggressive spending.”

    I love you dearly, Yves, big fan, but sorry I can’t agree with the above, much as I’d like to. You know better than to think in terms of a return to the status quo. The good news is that no matter what we do, whether we try to control inflation or whether we try to stimulate the economy by borrowing even more, the collapse has already taken place and cannot be reversed. Why would any rational person want to reverse it?

    I’ve written a lot on this in my blog, but no one wants to hear it. E.g.:

    When the value of the dollar has finally diminished to zero, taking all the other currencies of the world down with it, then all those enormous debts, owed to banks, financial companies, speculators, hedge funds, etc., even the government, will no longer have any meaning. Stocks, bonds, securities, investments of every sort, including mortgages, both prime and subprime, all the many “derivatives” derived from those mortgages, and all the Collateralized Debt Obligations and other “financial products” concocted to insure those derivatives, will no longer have any meaning whatsoever. There will be a tremendous loss of wealth, and with it a social levelling such as the world has never seen. The Spell will be broken.

    Written back in March of 2009: http://amoleintheground.blogspot.com/2009/03/shape-of-things-to-come-part-12.html

  5. False Flag

    The press seems to be shrieking about a “jobs recovery” this morning. NPR, New Jork Times and the Washington Postal.

  6. optimader

    When the value of the dollar has finally diminished to zero, taking all the other currencies of the world down with it,

    doc ,,based on the strength of your post, I am dissolving my cash position. I went ahead and am closing the all cash deal on that bigshack nextdoor that my former neighbor, the unemployed porfolio manager built but never occupied, and I will be booking that trip to Disneyland for next month after I finish this post! The little ladies new breast augmentation sutures should be in good shape by then!!

    just ordered that 108″ online a minute ago..
    http://www.nypost.com/p/entertainment/tv/post_photo_composite_RPOmVX6qmczG8DVYo9GrkN

    Whats not to love about a deflationary depression? Or is it inflationary?.. no matter.

    1. docG

      I’m touched to see that my words have fallen on fertile ground, optimador. :-)

      You may wind up losing all your money, but a trip to Disneyland is forever. As is breast augmentation.

      I’m writing this tongue in cheek, but now that I think about it . . . maybe it’s time for us all to re-study the Rubaiyat:

      Come, fill the Cup, and in the fires of Spring
      Your Winter-garment of Repentance fling:
      The Bird of Time has but a little way
      To flutter–and the Bird is on the Wing.

      1. Raymond Lotta

        The heart of the argument is that:

        “The struggle over the debt ceiling is an expression of deep problems confronting U.S. imperialism. I am speaking of the effects of the crisis in the world economy… an international economic environment in flux… and real budgetary constraints and contradictions bound up with the vast accumulation of government and private debt.

        “At the same time, powerful ruling class forces have used the specter of default to continue and intensify an unprecedented attack on government social spending on things like education and health and so-called entitlement programs, like Social Security. They are seizing on this moment to ratchet up an ideological offensive aimed at rallying public opinion around the idea that “government is living beyond its means,” that social spending has gotten out of control, the reactionary argument that we all have to stop making demands on government, that government shouldn’t be giving “handouts” to those who don’t deserve them, and who are living off the government.”

        1. Ransome

          Summary: The 2% want to move government spending to the private sector. These dollars will be borrowed privately. This increases the unearned income of those up town while decreasing the standard of living of those down town.

          1. optimader

            further simplification.

            the top 0.5% of the top 1% of the fifth quintile want everyones marbles until no one can play anymore – unfortunatly marbles then become meaningless.

  7. Ransome

    Yesterday Mr. Market valued Facebook at 100 billion, today Mr. Market says companies are trash. What has changed, nothing.

  8. Susan the other

    Consumers of the world unite! If you are an eater, a drinker, a reproducer, a traveler, a commuter, a shelter seeker, an education seeker, a person in need of medical services or any other services, etc. you now have power. Real power. You can name your price because your ranks will recede, shrink back relentlessly over the coming decades. You are becoming a scarce commodity. Name your price fellow consumers. Note: robots cannot name their price because they cannot consume! Cool.

  9. steelhead23

    Did anyone notice the wild volatility today – or were you too busy moving your stops to notice. Here I sit a 3:45 PDT looking at a market that closed up, reading the above. Turns out, at the end of the day – Mark Faber was right, or at least close. Who knew?

    I am very glad to be an observer on days like today. I know, volatility is a sharp player’s friend, but frankly, rather than downing two pots before lunch while getting stinking rich, I blew another stinking doob, watched and laughed.

  10. The lives of others

    It seems that investors try to out bluff each other and end up like sheep.
    Rams and ewes is more appropriate name than bulls and bears.

    1. bill

      so that sucks. at least they waited for after the market to close. expect some presidential stuff to be happening this weekend. I would guess this bodes poorly for mondays opening bell, but who knows.

    2. lambert strether

      Primary Obama. The Deal came unstuck.

      * * *

      Seriously, the whole point of the exercise was to avoid this outcome. And S&P went ahead and did it anyhow. Can’t anybody here play this game?

    3. decora

      i wouldn’t trust the S&P to rate a spelling bee. the NSROs have no credibility, after what they did in the Synthetic CDO “business”.

      1. ajax

        Both the Financial Times and the Guardian have a copy
        of the 8-page “resarch update”.

        This is in a category they call:
        “unsolicited rating(s)”. So, it’s natural to ask who
        pays for these.

        The ratings agencies had a conflict of interest in rating
        CDOs. Also, mortgage backed securities could involve
        hundreds or thousands of mortgages, some being liar loans,
        stated-income loans.

        ===

        I’m not sure how they get their data for the US.
        Some recent data (revised) was from the Congressional
        Budget Office. I take it as an 8-page opinion …
        Frankly, although I had read about rumours of
        a downgrade, I was greatly surprized on hearing it
        was official around 9 pm Friday.

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