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Home > Blogs > Anthony Harrington > Great Depression mark II? The wailing begins…

Great Depression mark II? The wailing begins…

‘Flash crashes’ and EU Financial Crisis | Great Depression mark II? The wailing begins… Anthony Harrington

Stability seems to hang by the thinnest of thin threads these days. All it takes is a rush of blood to the head afflicting a few German politicians, causing Germany to unilaterally impose a short selling ban, and hey presto, the markets fall over in a faint. The next day the markets shrug their funk off for a few hours then collapse in terror again (these events are known as ‘flash crashes’). This of course causes once-bitten-twice-shy hedge fund managers to start dumping their positions and we’re off again.

So long as there remains a sufficient quorum of buyers willing and able to snap stocks up at a bargain, these market crashes find a floor fairly quickly and stocks bounce. However, there is a hoary old saying in the markets warning about the dangers of trying to catch falling knives, and our proximity to the last crash is more than close enough to blur the fine dividing line between courage and foolhardiness. It takes very little to make even hardened institutional managers flee equities and then sit on their hands, at least for a while, even in the midst of absolute bargain prices. The FTSE might be above 5000 today, but give it a bit of time and a few more market wobbles and it could be back down to 4,500 or below.

So are we really at the edge of the precipice again, or are the markets just suffering a bad case of the jitters brought on by an overdose of Greek tragedy? One of my favourite prophets of doom is Martin Weiss, of the Weiss Institute. Weiss and the team of analysts he has assembled have been hugely exercised by the scale of the US deficit and by Bernanke and the Fed’s “quantitative easing.” This, together with their sense that Europe has no real solutions and their analysis that the US housing and commercial real estates markets still have much bad news to vent, has led them to warn their audiences against believing that March’s market rallies signalled the start of a new long term bull market. Now the Weiss institute is shouting from the rooftops, warning that the ‘flash crashes’ could indicate an impending large scale crash. “Get out as fast as you can” is their message to investors.

“The Dow's 1000-point "flash crash" of two weeks ago was NOT a fluke! Nor is today's 376-point slide in the Dow! These events are lightning bolts that strike deep into the market's core ... and that help light up the path ahead for anyone willing to look." In his flash alert to Safe Money readers earlier today, Mike Larson (an analyst for Weiss) explains it this way:

"Some of the latest economic data has shown a cooling in global demand and a loss of investor confidence. Many early warning signs of credit stress are also flashing yellow. Volatility indices are on the rise ... financial institutions are charging each other more to borrow money in the interbank market ... and interest rate swap spreads are blowing out in the derivatives arena.

"These are the same kinds of indicators we saw go nuts before the 2008 crash. We're still nowhere near the widespread panic levels we reached back then, but the trend is what matters and it's very unsettling."

These signals all confirm what we've been telling you for the last 60 days:

  1. The great rally since March of 2009 is—or will soon be—over.
  2. Despite its impressive duration and magnitude, that rally was little more than a temporary interlude—an intermission between two phases of a greater bear market.
  3. The first phase came in the wake of the great Housing and Debt Crisis of 2008-2009, wiping out as much as HALF of America's stock values.
  4. The second phase has struck with the Great Sovereign Debt Crisis of 2010, and it's just now getting under way.

In case you think this is a lonely voice, here’s Edmund Conway, from the Telegraph, Friday May 21:

“Andrew Roberts, head of European rates strategy at RBS (LSE: RBS.L - news) , said "Great Depression II" could now be approaching, adding: "It now has potential to speed toward its conclusion; a European $1trn package which does little and political panic tells you we are about to reach the end of the road.”

Conway points to the fact too, that interbank lending rates and some CDS spreads are starting to move up sharply, in a manner that is very reminiscent of 2008. The one bit of good news is that so far company fundamentals have been way better than all this doom and gloom might suggest. But then, this was also true of the 2008 crash…

Further reading on markets and risk



Tags: financial crisis , GDP growth , Great Depression , Greece , short selling ban , sovereign debt
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