The stock markets are telling us something. Stock markets around the world have fallen off a cliff since late July. As this is written, the Dow Jones Industrial Average is down almost 18% from the peak. The markets plunged after the Fed’s policy announcement on Wednesday afternoon and again on Thursday. The S&P 500 Index lost over 6% this week alone.
Regular readers of my work will remember that I warned about just this scenario in my July 19 E-Letter. I became very concerned earlier this summer that the global markets had become complacent about the European debt crisis. Greece had gotten its first major bailout loan, after all. Default risks had lessened, or so we were told by the media.
But my sources, including Stratfor, warned that the Eurozone crisis was far from over, with its founder, Dr. George Friedman, predicting that the euro would NOT survive. It was then that I warned my readers that the equity markets were very vulnerable:
If Stratfor and GaveKal are remotely correct, we are very likely facing another global financial crisis that could be sparked if Greece defaults on its debt. If this happens, I would expect the US stock markets to plunge again, perhaps as they did in 2008. And this could happen at any time.
Folks, I have been reading Stratfor for over a decade, I know its founder Dr. George Friedman personally, and I can tell you that this is one of the most alarming analyses I have ever seen from them. They are openly predicting the end of the Euro most likely, and that is a very strong statement coming from a very high profile group like Stratfor.
Quite simply, all hell is about to break loose in Europe, if it hasn’t already!
We all know what has happened since then. Everything in Europe has gotten worse. As I warned, even Italy and Spain have experienced their own credit crises, and the European Central Bank has been forced to purchase tens of billions of their debt to keep these governments and their banks from afloat.
In the process, equity markets around the world have been hammered, and it certainly doesn’t feel like it’s over yet. Wednesday and Thursday are prime examples. The Fed policy statement on Wednesday was exactly what the advance consensus expected, yet the equity markets plunged as soon as it was released.
Wednesday’s loss was followed by a gut-wrenching day yesterday when the Dow plunged 537 points at the low and closed down almost 400 points in that one day. As I feared, this feels just like 2008, and I doubt we’re done yet. Next week should prove to be another wild one. The chart above illustrates where we are in comparison to the 2008 bear market.
Hopefully, US stocks are not on course to repeat the bear market of late 2007 to early 2009, but that remains to be seen. There are several key economic reports next week, including the final report on 2Q GDP next Thursday. The pre-report consensus calls for a modest rise from 1.0% to 1.2% (annual rate). That might be encouraging to the equity markets. Let’s hope it does not disappoint. We certainly don’t need another week like this one!
Have a great weekend everyone, and thanks for following my blog.
If the EFSF bailout fund is indreased and the if European banks recapitalzied sufficiently to prevent a default by Greece save the Euro, what would be the effect on the price of gold in dollars?
If the opposite happens and Greece defaults in a disorderly manner, what would be the effect on the price of gold in dollars?
Thank you.
In the first scenario, I would expect gold to go down. In the second scenario, I would expect gold to go up. However, at these stratospheric levels, I wouldn’t bet on gold either way. Keep in mind that the European bailout, assuming it happens, is just that – a bailout. It doesn’t really fix anything, just kicks the can down the road. Hope this helps.