Are we heading for a repeat of the 2008 crash?
By
Dominic Frisby May 12, 2010
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Finally, the UK has a new CEO. And we'll be looking at what this - and the Con-Lib coalition means - later in the week as the post-election dust settles.
But today, Dominic Frisby shares his fears about the markets and explains what you should do next...
You take a quick walk to the shops. You come back and the Dow's down 1,000 points.
The volatility of the past week has been breathtaking. Last week, in an event now known as the 'flash crash', the Dow saw the biggest intra-day fall in its history.
Then on Monday, global stock markets enjoyed one of their biggest ever gains.
It's all eerily reminiscent of late summer 2008, if you ask me. And we all know what happened next...
Remember Ben Bernanke's rate cut of 18 September, 2008? The communal sense of the jitters that gripped the financial world was morphing into a full scale panic. Stock markets were sliding, though not yet crashing.
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Behind the scenes at a conference table in the offices of House Speaker Nancy Pelosi, congressional leaders were told they were "literally maybe (sic) days away from a complete meltdown of our financial system, with all the implications here at home and globally."
Then Bernanke cut the Federal Reserve's benchmark interest rate by a larger-than-expected half percentage point. The Dow enjoyed a 1,000-point surge over two days, from just below 10,500 to just below 11,500, as a trigger of stops among the short-sellers was hit. Wall Street was described by the New York Times as 'jubilant'.
Are we headed for a repeat of 2008's crash?
Whether it's volcanoes, general elections, oil spills, rogue traders with fat fingers, Greece, Spain, Italy or Portugal, all is clearly not well with the world. But this time the panic is in Europe. It now faces 'a complete meltdown of its own financial system', or its currency at least.
Since 25 April, as fears mounted over the Greek debt panic spreading to Portugal, Spain and Italy, markets had been sliding. Then the European Central Bank (ECB) and the IMF announced over the weekend that the 16 euro nations will offer financial assistance worth as much as €750bn.
Once again stock markets were 'jubilant'. On Monday, the FTSE 100 was up more than 200 points, the Dow over 400. But was this a genuine recovery, based on a fundamental change in the economic outlook? Or was it nothing more than a short squeeze, where those betting the market would fall were stopped out of their positions?
"The problems," as Mike Shedlock of Global Economic Analysis writes, "are too much debt, too much government spending, and a massively unbalanced global economy. None of these actions [those taken by the ECB over the weekend] address any of the fundamental issues". Like me, Mike sees this as nothing more than a temporary halt in the slide. That is all any such intervention can achieve.
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There is a growing sense of panic and uncertainty in the air. Is this really an environment to be putting new money to work in the stock market? Or is it a time to sell those overvalued assets and take profits on what has been a bonanza 12 months, while you still have them?
The bailout splits Germany and France
It seems that the German people are not so keen on this European bail-out package. Chancellor Angela Merkel's CDU-FDP coalition party lost control of Germany's most populous state - North Rhine-Westphalia - in a regional election last week, scoring its worst result ever in the region, losing 10.2% of the vote. No doubt memories of the 1920s still linger for the Germans, while they must also feel that Greece's problems are not theirs. The French, however, have been lobbying hard for the bail-out. Could it be because Italy owes France $511bn (20% of French GDP), while Spain owes her another $220bn? Do they want a bail-out precedent to be set?
Meanwhile, French president Nicolas Sarkozy declared he had plans to "confront speculators mercilessly" over the fall in the euro. But how is a slide in the euro the fault of speculators? Surely, the best thing the ECB can do to defend the euro is not print more of them? Sarkozy did not give details of this plan on the basis that doing so could undermine its effectiveness. But, whatever it was, it didn't work. The euro spiked against the dollar on Monday morning, but then worked its way back down and ended the day more or less flat.
How should investors react?
As you've probably gathered, I do not think these are markets to be involved in. I would recommend being heavily in cash, with the US dollar for now looking the best bet of a bad bunch. For traders, I would be inclined towards the short side. Government intervention, as we saw in 2008 with the ban on short-sales of financial stocks, and the numerous cuts in interest rates, will only change things temporarily. The markets will go where they want to go.
The run in commodities looks like it's over. As for gold, if you'd asked me 24 hours ago I would have said it was on a knife-edge and could go either way. But yesterday it broke out to all-time highs in after-hours trading - ironically, on the day that Gordon Brown, whose sale of our gold in 1999 marked a 30-year low, stepped down. Gold has finally become the safe haven that everyone flies to. Technically, there is now no overhead resistance, so there is no telling how high it could go. It's very exciting. Enjoy the ride. But let's get a weekly close above 1,224 before we start sounding the trumpets and ringing the bells.
Finally, you know I always like to paste a chart in these Money Mornings, so here's one I drew up yesterday. It's slightly off-topic, but it's tells such a good story that I figured it was well worth attaching. Here's how our currency has fared under Gordon Brown's leadership.
Not very impressive, is it? It'll be interesting to see how it does under the next lot.
Our recommended article for today
The West's financial system is in trouble. While it will doubtless survive in the long run, its problems aren't going away any time soon. That means there's more mileage in gold - and the best may yet be to come, says Bengt Saelensminde.
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