It’s becoming increasingly obvious to Mr. Market that the officialdom in Europe is not on a path to resolving its burgeoning sovereign/bank crisis. It is insisting on imposing austerity on debt burdened countries, which will only shrink their GDPs, making their debt hangovers even worse.
And Germany wants to have its cake and eat it too. It wants to preserve the Eurozone for the express reason of maintaining its trade surpluses, yet not continue to lend to its trade partners. Angela Merkel has stated the reason not to allow Greece to exit the currency union and depreciate its currency is that the Euro would rise on the assumption that other periphery countries would exit, and a strong Euro would hurt German exports. Duh. The Eurozone needs a combination of debt writeoffs, recapitalization of banks, and a program to reduce the magnitude of German surpluses with its EU trade partners. Even if the Eurocrats can figure out a way to create a big enough rescue facility to get through the next year or so, a solution will break down under continuing stresses unless the fundamental pressures are addressed.
The immediate trigger for the market downdraft was the admission by Greece over the weekend that it won’t meet its debt targets. The Financial Times points out that the latest ISM report today wasn’t terrible, but the two forward looking components, new orders and inventories, weren’t encouraging. New orders were flat and inventories fell a smide (which is a positive, it means parties in the supply chain will presumably at some point need to place orders to increase inventory levels). But the inventory decline was small, 0.3%, and lower than the rate of the month prior.
Unfortunately, this focus on the sustained but subpar activity in the real economy sounds an awful lot like early Great Depression statements that nothing had changed in the wake of the market crash. While the 1929 market meltdown was not the primary cause of the Depression, there were similar unsustainable accumulations of private sector debt, and a disastrous decision to go back on the gold standard by the participants in the Great War which put deflationary pressures on countries burdened by war debts. We know how that movie ended. We have banking systems in the US and the Eurozone that are too large relative to the real economy and are increasingly extractive in their behavior. Until we have a significant change in the role and posture of the major capital markets players, we are unlikely to see a solid recovery.
An overview from the Wall Street Journal:
The Dow Jones Industrial Average dropped 258.08 points, or 2.4%, to 10655.30. Selling accelerated throughout the trading session, with stocks finishing at their lows of the day. The blue-chip index set a 2011 low, wiping away the previous level hit on Aug. 10.
The Standard & Poor’s 500-stock index slipped 32.19 points, or 2.9%, to 1099.23. All 10 of the index’s sectors closed in negative territory, led lower by declines in financial and energy stocks. The index, which also set a 2011 closing low, is down 19% from its high point for the year. It only is nine points from bear-market territory, considered a drop of at least 20%.
The technology-oriented Nasdaq Composite lost 79.57 points, or 3.3%, to 2335.83, marking its lowest close since Sept. 23, 2010.
The wave of selling picked up in the afternoon as worries over Greece and Europe’s sovereign-debt woes offset better-than-expected readings on manufacturing and construction spending in the U.S. Greece said over the weekend that it would miss its deficit targets this year. The acknowledgment raises concerns that the country may not get necessary bailout funds to avoid a default.
Gold may have regained some of its luster as a store of value. It rose over 2% today to $1657 per ounce, while Brent crude fell 2%. The euro fell to just under 1.32.
Bank of America’s stock fell 9.6% today. The possible news triggers for its rout were the exit of California attorney general Kamala Harris from the “50 state” attorney general
whitewash settlement negotiations and a new analyst report suggesting that banks may be exposed to yet another source of mortgage related damage. Per Reuters:
A federal housing insurance program may be forced to deny bank claims for money lost in home loan foreclosures, costing them another $13.5 billion in mortgage-related losses, according to a report on Monday from bank analyst Paul Miller of FBR Capital Markets.
Bank of America Corp, JPMorgan Chase & Co and Wells Fargo, three of the four largest U.S. banks, are at risk for the biggest losses, the analyst estimated.
Investors may be coming to grips with the fact that the legal liability facing the bank is likely to be overwhelming. Warren Buffett’s vote of confidence won’t cut any ice with judges (and one has to note his investment was likely defensive, since if Bank of America comes a cropper, all eyes will be on Wells Fargo, whose mortgage exposures are even larger relative to the size of the bank).
Citi was hit even harder, suggesting that Mr. Market is back to worrying about the banks that nearly perished in the financial crisis. Its stock fell nearly 9.8%:
The plunge in the price of Bank of America’s stock today suggests the US regulators are going to have the opportunity that they missed in 2009, to resolve a major bank and send a warning to the rest that the costs of failure will be imposed on those responsible, management and the board, and those who signed up to invest in risk capital, meaning BofA stock and bondholders. But as we indicated last year, Team Obama has cast its lot in with the banks, and no “Nixon goes to China” moment can be expected from the banksters’ best friend, Timothy Geithner.