The credit crisis in the eurozone has already created enough troubles in the global economy, but it is threatening to trigger more. Here is what Fed Chairman Ben Bernanke said last week, “…the elevated levels of stress in European economies and uncertainty about how the problems there will be resolved are adding to the risks that U.S. financial institutions, businesses, and households must consider when making lending and investment decisions.” (Source: ‘The Economic Recovery and Economic Policy,” Federal Reserve, November 20, 2012.)
Not many in the media picked this up, but it was very important. Bernanke, regardless of what you think of his policies, is the head of the most important central bank in the world…and a very intelligent man. He knows exactly what he and the Fed are doing. It’s unprecedented to have the head of the Fed warning Americans about a crisis in countries so far away.
It doesn’t take a rocket scientist to figure out now that growth in the global economy has stalled because of the eurozone crisis. (I started writing in January of this year that the eurozone would fall back into recession in 2012 and that it would caused economic problems for the U.S.) The eurozone credit crisis is far from over—one country after another in that area is falling into a recession and this in turn is causing the global economy to deteriorate further.
The region is now experiencing an economic slowdown the likes of which was last seen in 2009. Even the strongest nations in the eurozone region are starting to struggle as they face the reality of writing off loans they made to Greece. On Sunday, German Chancellor Angela Merkel told German newspaper Bild that the eurozone should consider writing off loans they made to Greece—an idea Germany previously venomously opposed. (Source: Bild, December 2, 2012.)
France’s debt has been downgraded by Moody’s Investor Services. The credit rating of the second biggest eurozone country was slashed one notch lower to AA1—down to a “high” grade investment rating from a “prime” grade investment rating. The credit rating agency believes France’s growth outlook is worsening. (Source: Moody’s Investor Services web site, last accessed December 3, 2012.)
Similarly, Germany has been experiencing hardships, and although there’s no credit rating downgrade yet for this country, it won’t be surprising to see rating agencies soon provide a negative outlook on the biggest eurozone economy. Germany’s output has fallen for seven consecutive months.
According to the Markit Flash Germany Composite Output Index, the readings have been below 50—representing economic contraction. At the same time, the private sector in Germany is witnessing a decline in new business volume and new export orders. (Source: Markit, November 22, 2012.)
This time around, when we have already witnessed how the global economy reacted to the troubles in Ireland, Greece, Spain, Italy, and Portugal, it doesn’t require a lot of research to figure out that the slowing economies in France and Germany will add to the misery. The ultimate cure for the slowing global economy consists of better conditions in the eurozone, but I don’t see that happening anytime soon. The economic chaos in eurozone will continue and the global economy will suffer because of it. Can you say “global recession in 2013?”
I’d like to turn the keyboard today over to my colleague Anthony Jasansky, P. Eng. He’s been a 30-plus-year student of the Dow Jones Industrial Average, and I agree with what he says below in his analysis of the where the market is headed between now and the end of 2012.
As Anthony says below, as traders increase or lower their positions over the next four weeks; I see the uneducated popular media blaming the on/off “fiscal cliff” for the market’s gyrations. But the bottom line is clear: each year since 2009, the yearly increase in the Dow Jones Industrial Average has been getting weaker and weaker.
Look at the annual increase in the Dow Jones Industrial Average since 2009:
Market Insider Bulletin, December 2012
2009: Dow Jones Industrial Average increases 18.8% over 2008
2010: Dow Jones Industrial Average increases 11.0% over 2009
2011: Dow Jones Industrial Average increases 5.5% over 2010
The common denominator in the above chart? In each year since the Great Recession, the Dow Jones Industrial Average has logged a gain of only 50% to 60% of the previous year’s gain.
If today was the last trading day of the year, the Dow Jones Industrial Average would be up 6.6% for the year. In keeping with the three-year trend, the Dow Jones Industrial Average would have to fall about 400 points between now and year-end. I see this move on the downside as being more of a reality than an upside move.
Here are Anthony’s comments as promised:
“The quandary with the Fed’s monetary magic is that it no longer gives the Dow Jones Industrial Average the same boost that it did back in 2009 and 2010. The chart below shows that each of QE1, QE2 and QE3 was followed by progressively smaller stock market gains. To keep the economic recovery alive, the Fed has been capable of inventing newer, never-seen-before, monetary tools.
“Actually, for months now, investors have been more focused on the haggling between the White House and the Congress over solutions to the ‘fiscal cliff’ than on the Fed. The latest statements issued by the two sides are now media fodder and a convenient explanation for short-term market swings.
“High frequency traders probably thrive in this market, while public investors keep on reducing their equity investments.
“The technical group of indicators I follow has turned mildly negative. The recent Dow Theory sell signal, based on the divergence between the Dow Jones Industrial Average and the Dow Jones Transports, is the most bearish component. Insider trading is very bearish. The other bearish component is the fear index VIX, back on the edge of the danger zone below 15. In summary, beyond the erratic swings caused by the Washington bazaar, I expect no major market shifts for the rest of 2012.”
What He Said:
“Even the most novice investor can now read the chart of the Dow Jones U.S. Home Construction Index and see that it is trading at its lowest level in five years. If, like me, you believe that stocks are an indication of what lies ahead, this important index is telling us housing prices are headed to 2002 levels! What would that do to the economy? Such an event would devastate the U.S.” Michael Lombardi in Profit Confidential, December 4, 2007. This devastation started happening the first quarter of 2008.