Ten reasons for a stock market crash?

Note: I am not an investment advisor and nothing I state should be taken as investment advice. Please consult your own private professional financial advisor for help in making investment decisions.

The stock market has taken a dive the past two days. Will that trend continue? I don't know.

What I do know is that on September 24th, SeekingAlpha published an article written by Robert Baggio entitled "Ten Reasons for an Imminent Stock Market Crash." Was Mr. Baggio prescient with his article? Only time will tell but its definitely worth a read.

What are his ten reasons? Well, I encourage you to go over to SeekingAlpha and read the article for yourself but I'll give you a taste here. In my own words, his ten reasons are:

1. Rampant insider selling.

2. Much of the current rally has been (a.) based on trading in bankrupt companies (Fannie Mae, Freddie Mac, Lehman Brothers, etc) (b.) made up of investors trying to cover their shorts and (c.) of a low volume.

3. Most investors are short-term bullish and long-term bearish. Furthermore, market psychology does not currently correlate with the economic fundamentals.

4. A lot of the market is short on the U.S. Dollar and long on ... "everything else."

5. Household incomes are going down while the number of people living in poverty is growing. "Income dispersion" is growing.

6. There is a Chinese commodities bubble. The rise in commodities prices isn't because the Chinese economy is really growing as fast as it appears to be, its the result of the Chinese investing in commodities so as to avoid the U.S. Dollar. The Chinese business model is just as flawed as the American one.

7. Under President Obama we have more government intervention into the economy, there is increased protectionist sentiment and there are "socialist tones" to our political rhetoric.

8. The money supply and credit continue to contract at alarming rates.

9. The market is very complacent and everyone is (falsely) assuming that everything is okay.

10. The European economy is still in shambles despite proclamations from European political leaders that "the recession is over" there. To quote Baggio:
"What happened to Latvia’s currency crisis or the Swedish Banks? Are Hungary and Poland ok? Has the Austrian Banks’ exposure to Eastern Europe disappeared? Is Spain back on its feet? Is the UK solvent again? Are Irish banks lending like there is no tomorrow? How about Germany’s manufacturing base—is it solid with a EUR at 1.48 and the US consumer missing-in-action? Is Deutsche Bank’s $3 trillion balance sheet made up of only physical Gold? Are German banks profitable and healthy again? I guess somebody waved a magic wand and fixed all Europe’s problems overnight!"

This is just a very basic summary of Mr. Baggio's article. This summary doesn't do it justice so I encourage you to go over to the actual article and read it in-depthly.

So there you have it. Are you convinced? What are your thoughts on the future of the stock market?

Source: http://seekingalpha.com/article/163213-ten-reasons-for-an-imminent-stock-market-crash

Is the Recession Over in Europe?

The recession is over in Europe. That's what much of the American and European financial media is declaring. Unlike most industrialized nations in the world, Germany and France actually experienced economic growth during the last financial quarter. That fact, combined with the announcement last week by Eurostat that the Eurozone economies only declined by 0.1% quarter-to-quarter, has many feeling that the recession is on its way out and a recovery is here for Europe.

Are they right? Writer Ulrich Rippert of the World Socialist Web Site says 'no.'

I'll begin with this interesting tidbit:

At the same time there are voices warning of undue optimism about an economic recovery. In its latest edition, the weekly Die Zeit writes: “‘Recovery at last! Investment bankers establish upward trend,’ reads the New York Times. ‘Further progress in the business world,’ reports the Wall Street Journal. ‘Economists see signs of a recovery.’ ‘Powerful rise on the stock markets,’ report others... The headlines appear to come from August 2009. In fact, they are from the year 1931. They were published in the midst of the Great Depression in the US, i.e., in the blackest economic epoch of the 20th century.

This echoes something I've said before: prolonged recessions/Depressions bring about extreme market volatility. The Great Depression bore witness to some of the biggest stock rallies in history. A growth in stock prices, especially an extremely rapid one, does not necessarily indicate that the economy is actually in recovery. It might indicate such a thing, but it is not a given, yet the media is treating it as a given. The reality is that this kind of historical precedent (the experience of the Great Depression) is pretty much impossible to factor into the statistical models that today's investors, analysts and economists employ. Their field of vision is much more narrow. And that's the problem ... understanding the historic point in economic history we're at right now requires a panoramic lens, so to speak.

Rippert continues:

In these declarations there is a combination of self-delusion and calculation. The politicians and financial players have a vested interest in promoting a mood of euphoria to sustain the heady rally on global stock markets. However, there is little in the actual economic situation in Europe and internationally to justify such optimism.

The minimal economic growth reflected in the latest data should come as no surprise, given the manner in which governments across Europe have opened up their treasuries to bail out the banks. Hundreds of billions of euros in public funds have been placed at the disposal of the major financial institutions, without any demands being placed on the banks or a single one of the bankers responsible for the crisis being held accountable.

Not only have the banks dictated their own rescue packages to their respective governments, they have profited handsomely from the process. The billions turned over to the banks are being used as a pool for further speculation, while bailed-out banks impose high interest rates and fees on governments seeking loans to cover their ballooning debts.

The financial elite regards the crisis as an opportunity to dismantle, with the collaboration of the trade unions, all that remains of the social gains won in the course of decades of struggle by the working class.

Nothing surprising here. Europe mirrors the U.S. in a lot of regards. Its interesting to see a self-declared socialist web site criticize trade unions. In the U.S., I disagree that the trade unions are serving to "dismantle" the position of the working class. First off, most blue collar workers are no longer in unions to begin with. Secondly, the trade unions were actually the primary opponents of Governor Schwarzenegger's budget in California. With that being said, I would agree that the unions aren't really playing much of a big political role or offering up anything new in terms of where the economy should go. That's a big difference from the 1930s.

What is the underlying economic reality? Compared to one year ago, the German economy has declined by no less than 7 percent. In a few months, the German “cash for clunkers” scheme will expire, accelerating the decline of the country’s auto and auto-supply industry. The consequences for the German steel, engineering and chemical industries have already been felt.

Up to now, mass redundancies in Germany have been avoided by means of a reduced work-hours scheme, which has been renewed several times. When the 1.4 million employees on short-time work eventually join the ranks of the unemployed, the official unemployment level will rise to 5 million.

...

The constitutional “brake on debt” which was recently passed by the German parliament means that the first priority of any future government will be drastic budget cuts. The promises being made by all of the parties taking part in the national election campaign will be consigned to the waste bin as soon as the votes have been counted on September 27.

...

A glimpse of what is to come was provided by the so-called “Guttenberg Paper,” which was made public just a few days ago. The document, bearing the title “Proposals for a Sustainable Industrial Policy,” was commissioned by German Economics Minister Karl-Theodor zu Guttenberg and lists some of the savage measures which business lobbies are demanding in response to the crisis. Similar measures to those outlined in the “Guttenberg Paper” are already been prepared by the appropriate ministries, but there is an agreement amongst the various political parties that no one raise such themes in the course of the election campaign.

The Frankfurter Rundschau reports that the 52-page document calls for “tax relief for businesses,” “the reduction of supplementary wage costs,” and “increased flexibility in the labour market.” The document urges a weakening of job protection provisions, limits to sick pay and the scrapping of proposals for a guaranteed minimum wage.

Interesting. In short, the German state is basically expending all of its resources to hold up the economy. Even then, the economy is barely above water. It appears that Germany is already on track to experience what California is already facing today ... massive government budget cuts and an end to the various subsidies and measures by which the state propped up the economy. Last week I commented on what awaits places like California and Ireland where the government sector and state welfare policies have been drastically reduced ... and the picture ain't pretty.

I haven't really explored the World Socialist Web Site very much, but I thought this was a pretty good article. It certainly offered one of the best rebuttals to the claim that its all smooth sailing for the European economies from here. In actuality, we can see that they still face a lot of hardship.

Government Sector in Big Trouble

Over the past few years, three of the economic sectors with the most growth were health care, education and government. Of course, health care and education are often intimately tied in with the government. A lot of people strongly believed that these sectors were "recession-proof" and safe places to develop a career. It appears they might be wrong. Very wrong.

A few days ago the Washington Post published this story:

As states across the country grapple with the worst economy in decades, most have cut services, forced workers to take unpaid days off, shut offices several days a month and scrambled to find new sources of revenue.

The good news is that much of the pain this year has been cushioned by billions of dollars of federal stimulus money, which has allowed states and localities to avoid laying off teachers, prison guards, police officers and firefighters.

The bad news is that for the next fiscal year, beginning in July, the picture looks even bleaker. Revenue is expected to remain depressed, even if the national economy improves. There will be only half as much federal stimulus aid available, and many states have already used up their emergency reserves.

The bold emphasis was added by me. California is the prototypical example of this. The budget recently passed is slated to cut a lot of state jobs. As the recession deepens in 2010, we can probably expect further cuts. That means higher unemployment. The cuts to government services will also surely have a negative effect on consumption.

In California, a great number of teachers have been laid off by the new budget. That means both the "government" and "education" sectors, which were supposedly "recession proof," are going to take a massive hit in 2010. As this article indicates, this isn't just a California problem, we're going to see this kind of thing across the U.S.

Here's a report out of Europe, from Ambrose Evans-Pritchard. I'm not usually a big fan of Mr. Evans-Pritchard but I definitely stand up and take notice when he titles one of his articles 'Fiscal ruin of the Western world beckons.' Quite alarming.

Concerning Ireland:

A further 17,000 state jobs must go (equal to 1.25m in the US), though unemployment is already 12pc and heading for 16pc next year.

Education must be cut 8pc. Scores of rural schools must close, and 6,900 teachers must go. "The attacks outlined in this report would represent an education disaster and light a short fuse on a social timebomb", said the Teachers Union of Ireland.

He continues:

But the deeper truth is that Britain, Spain, France, Germany, Italy, the US, and Japan are in varying states of fiscal ruin, and those tipping into demographic decline (unlike young Ireland) have an underlying cancer that is even more deadly. The West cannot support its gold-plated state structures from an aging workforce and depleted tax base.

He warns:

While I agree with Nomura's Richard Koo that the US, Britain, and Europe risk a deflationary slump along the lines of Japan's Lost Decade (two decades really), I am ever more wary of his calls for Keynesian spending a l'outrance.

Such policies have crippled Japan. A string of make-work stimulus plans - famously building bridges to nowhere in Hokkaido - has ensured that the day of reckoning will be worse, when it comes. The IMF says Japan's gross public debt will reach 240pc of GDP by 2014 - beyond the point of recovery for a nation with a contracting workforce. Sooner or later, Japan's bond market will blow up.

No-brainer here. We should already be suspect of spending as a strategy towards solving a debt-crisis, but pointless spending that does nothing to create a more productive future is obviously futile and probably makes the problem worse.

Go over there and check out his article. It will surely make you think, even if you don't agree with his prescriptions.

Ultimately, this is setting up to be a major blow to the American and European economies, especially in 2010. The mainstream media isn't talking about this very much though, choosing to focus on hyping up a supposed "jobless recovery" and encouraging spending, although it doesn't appear to be working very well.