These Three Stock Markets Crashing;
Is Ours Far Behind?

I’ve recently written about and presented a graph in these pages on how the S&P 500 stock market index has been outperforming the rest of the world’s stock markets.

I have also written about the weak economic reports out of China key indicators and how are signaling that the Chinese economy could be weaker than many people think. (I actually think it is headed for a hard landing). Like the S&P 500, the Shanghai Composite Index is representative of most major corporations in China. Let’s look at what this key indicator is saying about the Chinese economy.

ssec stock market chart 1

Chart courtesy of www.StockCharts.com

As evidenced by the above chart, dear reader, even while the world economy was at the height of the recession in 2009, the Shanghai Stock Exchange was performing extremely well. Since then, this key indicator has corrected 35%!

Now this key indicator is at a three-year low, which means investors have little faith in a recovery in China, which does not bode well for world stock markets, including the S&P 500. Remember, China is the second-largest economy in the world after the U.S.

How about the third-largest economy, Japan? With its high debt levels and politicians fiercely debating how to deal with a weakening global economy, investors are also hesitant, as evidenced by this key indicator:

 

 nikk stock market chart 2

Chart courtesy of www.StockCharts.com

 The Nikkei represents the most important companies in Japan; similar to what the S&P 500 represents here in the U.S. It is bouncing around a three-year low and shows no faith in the Japanese economy rebounding from its slump. In the past three years, this key indicator has fallen 24%!

While Italy insists that it will not require a bailout and that it will be able to manage its economy, its stock exchange—a key indicator—is saying otherwise:

 

ine stock market chart

Chart courtesy of www.StockCharts.com

 Like the S&P 500 here in the U.S., this chart is evidence that investors believe companies in Italy will continue to struggle, which is reflective of the Italian economy experiencing its highest unemployment rate in over a decade. This key indicator is at a three-year low and shows little signs of improving. In the past three years, this key indicator has fallen 52%!

The major question that needs to be asked, dear reader, is: if the stock markets of the second- and third-largest economies are both trading at three-year lows, how does this bode for the number one economy, the U.S.?

How can the U.S. escape a global economic slowdown or a possible recession when the other major economic powers in the world are all signaling—through their key indicators—that things are not well?

With the Italian stock exchange joining Spain and Greece at a three-year low, investors are already voting that trouble will be ahead for Italy, which will not bode well for the world economy, including the U.S.

Be careful with the U.S. stock market, dear reader. Key indicators from around the world are putting pressure on the S&P 500 to the downside.

Michael’s Personal Notes:

For now, London is the center of the world’s attention for the next two weeks as it plays host to the 2012 Summer Olympic Games. Unfortunately, once the Olympic Torch is extinguished to signal the end of the games, everyone will be left with the reality of the British economy mired in its longest double-dip recession in 50 years.

Unemployed citizens may be asking why billions are being spent on the games, increasing government debt, when it could be spent on retraining people and/or creating jobs.

That is not the worst part. Citizens may be wondering about wanting to host the games at all when reports are that the original cost of the games—and so the addition to government debt—has ballooned from $3.64 billion to $14.5 billion, and that’s just for starters! (Source: Globe and Mail, July 30, 2012.)

With this worsening double-dip recession, Britain’s government debt is growing, as there is less tax revenue coming in and more going out to support the unemployed. As if this additional burden of government debt wasn’t enough, the deficit for the Olympics of $10.86 billion ($14.5 billion – $3.64 billion) not only adds to government debt, but also does not include other costs like the Olympic Park land, legacy programs, and government operations for the Olympics, which add another roughly $4.0 billion to government debt.(Source, The Telegraph, July 30, 2012.

Not to worry. With Britain’s government debt already growing quickly due to a double-dip recession in the country, it can just print money (like it has thus far to support the economy) to support the Olympic Games.

The government believes this is an unfair assessment, because a lot of the cost—government debt—is for the future benefit of the British economy. East London, prior to its facelift for the Olympic Games, was considered a seedy, abandoned part of London. Now that it has been completely revamped, it is the hope of the British government that this additional government debt will serve to bring business into the area, which will create jobs and prove that this was an investment in London’s future that will pay dividends for decades to come.

One problem, dear reader, is that the British economy is in a double-dip recession. Businesses are not spending and, were it not for the Olympics, would the government have gotten deeper into government debt to fix East London?

East London will be to the British government what the empty cities are to China: empty infrastructure that will pay no dividends if economic growth does not resume. Usually it is business investment that improves an area and causes workers to migrate to a city, which causes the city—now with extra government revenue—to justify the expense of modernizing it.

Maybe this extra government debt could have been spent elsewhere, especially considering the terrible double-dip recession Britain is stuck in. Its reasoning for revamping East London seems counterintuitive; much like China’s empty cities. Certainly spending money to build out infrastructure is better than throwing the money at big banks or other temporary programs; but wouldn’t it have been better to try to fix the economy first and create jobs so that the influx of people into East London would justify the government debt?

Now that the British government has built it, with this double-dip recession, who will come to occupy East London? Worse still, the bill for all this government debt caused by the Olympic Games will soon be due, which means that if the government doesn’t have the money, it will have to print it!

Where the Market Stands; Where it’s Headed:

Investors and economists are finally figuring out that the weakest post-recession economic recovery might not be a recovery at all. Maybe we’re just sinking back into recession…just like Europe.

I said it back in 2008 and I will say it again today: throwing trillions of dollars at the economy in the form of record government debt and money printing to “save the economy” will not work. It will simply delay the inevitable (a “washout” of the system) and leave us paralyzed in too much debt and too many dollars.

Now the stock market waits for more of the same…for the Fed to come to the rescue again…all in vain.

What He Said:

“A low savings rate was eventually blamed for the length of the Great Depression. Consumers just didn’t have enough money to spend their way of the Depression. With today’s savings rate being so low, a recession could have a profoundly negative effect on overextended consumers.” Michael Lombardi in Profit Confidential, March 26, 2006. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.