DANSKE: A NEW ECONOMIC CRISIS MAY BE APPROACHING
Analysts at Danske Bank are increasingly conccerned about the snow ball of bad news that is hitting markets. The laundry list of macro negatives is quickly gaining momentum and they believe it could result in a new economic crisis if confidence continues to deteriorate and creates a negative feedback loop:
“The equity market’s current jitters stem from an apparent lack of confidence in the US economy that is best illustrated by the monthly consumer confidence numbers (released by the US Conference Board). US consumer confidence is unusually frail and this seems to be affecting US society generally. As the US consumption cycle remains the single most important factor that could trigger a global hard landing, consumer confidence is incredibly significant at the moment. Furthermore, the gloom of the consumer has cast a pall on the corporate sector. Why should companies begin to invest in the future if they, like consumers, believe yet another crisis is not far off? In our view, this crisis sentiment could trigger a deep slowdown should the housing market get sucked into the maelstrom and house prices fall once more. One of the key sentiment boosters in the growth years of 2003-07 was the housing market. House prices rose and private consumption outpaced wage growth due to the accumulation of homeowner equity. However, now the US property market is experiencing its worst crisis of recent years and households feel poor. Wage and house price expectations are very weak and may turn negative again (as in summer 2008), which in our opinion is the greatest macroeconomic risk for today’s equity market. Furthermore, if the current crisis of confidence continues and tips into a full-blown economic tailspin it would be difficult to see how governments and central banks could respond – which is stoking fears of recession.”
Unfortunately, this is the cancer that is deflation. Deflation is as much a psychological event as it is an economic event. Falling prices create an environment of paralysis. A mentality of: “well, if prices are still falling we might as well wait to purchase”. If this mentality persists it snow balls and compounds. If it becomes accepted you become Japan and by then the game has been lost. Thus far, the world appears to be losing the battle with deflation.
Source: Danske
“As the US consumption cycle remains the single most important factor that could trigger a global hard landing,…”
What? I thought the world had decoupled on the fly and the demand from China would surpass any loss of US consumption as US exports doubled? Chronic, structural high unemployment was a non-issue, a plus due to increased corporate profits?
Yeah, where is all the decoupling chatter now? This is one of my favorite Peter Schiff quotes in August 2008 where he talks about how the world will decouple from the USA because the world has been financing their debt binge:
“The conventional wisdom is that foreign economies depend on Americans to buy their exports. This is false. The global expansion of the past decade has created new demand everywhere, and people and businesses in all corners of the world are spending. However, in America, spending has largely been achieved through a massive vendor financing scheme. Foreign supplied credit has allowed Americans to continue buying, even while American income and savings have dropped. As this credit goes bad, the losses are landing on the bottom lines of foreign financial firms. In other words, the global pain is not resulting from American contraction but from having financed our preceding expansion. This is a critical distinction few have been able to make, and it is vital to appreciating the decoupling that has already occurred beneath the surface.”
Then the world proceeded to collapse as the US consumer collapsed just two months later.
Decoupling makes sense on paper, but falls apart in reality. It’s a global economy now and the USA, as the largest player, still has an impact on everybody….
Danske Bank? Never heard of it.
140 years old. Largest bank in Denmark. #236 on the Fortune Global 500. Great global research outfit in my opinion.
Lehman Brother’s was around for more than 150 years and held in high regard. I am guessing they were considered a “great global research outfit” in many people’s opinion as well.
So what are you suggesting William? That we should ignore anyone with a good reputation who has been around for a while just because a few American firms decided to pee in the research pool? I’m as critical as anyone of sell side research, but that doesn’t mean I don’t soak it up and read the opinions of all parties involved in this insane place we call the “equity market”.
Who does not know the bear case? I’m not saying this disparagingly. The bear case, post bubble, makes the most sense. My problem after trading the markets for more than 30 years–markets usually sell off, possibly crash, before the news is known. Typically the news then follows at the bottom. Right now, if I’m to believe the very believable bear case, I’m being given the opportunity to liquidate or even go short knowing the news ahead of time.
And there lies the rub–it has never been this way before for me.
Consensus earnings estimates are still very high. Consensus economic estimates are still fairly high. A double dip is by no means priced in. Let’s wait and see if earnings start getting cut. Then we’ll see the bear case come to fruition and perhaps some real fear.
Thus far, it’s a big stretch to say that the bear case is “priced in”. The estimates tell a very different story.
Take a look at the historical Shiller data, specifically the path of the four secular bear markets (both price action and PE compression from the secular bull market high), including the current one, that US equities have confronted (01-21, 29-42, 66-82, 00-present)).
The current secular bear has tracked nearly precisely to the cycle in the 01-21 and 29-42 bears.
The highest probability (very high) outcome here is an SPX print in the 950-975 range at some point during Sept followed by a rally back to the 1115-1130 range into 2011 on the heels of GOP wins in Nov followed by a year or two of grinding downside.
That’s history’s opinion at least. At the same time I recognize the uniqueness of our current situation what with a world full of broken financial systems, unprecedented debtt levels, a housing/credit bubble in China and the beginning of global austerity as the icing on the cake, and that what we are about to witness might be much more akin to the early 30s in its speed, depth and ferocity.
http://www.zerohedge.com/sites/default/files/images/user5/imageroot/trichet/Chart%206.jpg
Whatever its going to be a wild ride.
Also – Patrick’s comments are nothing short of ridiculous in their logic…sorry for the honesty…
Patrick, if in your 30 years of trading it has been your experience that you have only been aware of the catalysts that drive bear markets at the absolute bottom, how on earth have you survived for “30 years”?
According to your logic bear markets are only recognizable after the fact, which is silly.
Yours is nothing short of a market efficiency argument. The question is why are you trading the market when you clearly might be better suited as a tenured college professor.
Apparently I have to make my point even simpler. The consensus is usually wrong and they find out after the move has taken place. Right now the consensus for the reasons mentioned by countless pundits is that the markets, the economy, and life in general is going lower. In fact you can go short right now so have at it. You have lots of company telling us why the market should go lower.
How’s that house you bought a few years ago? Just kidding.
“Deflation is a cancer”
10% of the people are unemployed
10% are underemployed
20% scared shiit for their jobs.
50% not getting any raises
10% – Government Employees – are happy
Are they supposed to be happy when prices rise? Falling inflation or deflation is a problem only for the corporate bosses – they can’t show inflated profits and get outsize bonuses. For the 90% of people, it is a welcome relief.
Not to be snarky, but this error is made so often in the financial press and blogosphere that it drives me a bit nuts. If you are going to borrow phrases from electrical engineering, then you should know that the process described above is a positive feedback loop that continues to exacerbate instability in systems and circuits. Negative feedback loops are a source of stability and can be thought of as self-correcting mechanisms and are in general, the most widely used technique for reducing distortion in amplifying circuits. So, what the researchers fear is yet another positive feedback loop which is by the way, pretty much what either deflation or excessive inflation cause, leading to the inability to establish an equilibrium, that most cherished intellectual edifice of the crumbling neo-classical view of modern economic theory. I don’t mean to be annoying, but really language is important, particularly given the way in which it is systematically abused to promulgate dreadful public policy.
VERY interesting. I had no idea. Snarkiness appreciated. Remind me never to write anything regarding electrical engineering!
Deflation is not a psychological event, it is a deterministic one. Too much debt leads to deleveraging which, when practiced on a systemic level, sucks the life blood out of an economy. The cold realization that the party is over, that your house is worth less than your mortgage(s) is not “psychological”, its rational. An adult stops borrowing and starts paying down debt of all kinds. It’s either that or you walk away.
The mind set switch does not happen on a schedule, but the new state of mind is predictable. This happens in physics: a super-staruated solution can sit in the wrong state for a long time until suddenly it changes phase. The outcome is predictable, only the timing is a mystery.
So confidence is lost, but is not the cause. Making people confident again, wouldn’t make them borrow stupidly again.