The BIGGER Crash coming? Soon?! Is 2011 potentially much worse than 2008?


Peter Atwater in June 2011’s MarketWatch:

“… As in 2008, though, the more global leaders attempt to delay the consequences in an effort to stem the tide one institution at a time, the more they raise the risk of outright contagion. Time is no substitute for capital. And as we saw in 2008, markets wait for no one.” … “In contrast, 2011 is a developed-nation sovereign debt crisis with pronounced global implications …”
— Peter Atwater, President and CEO of Financial Insyghts LLC.

Economics is not an incredibly accurate mathematical model. It lives off of indicators and trends and gut reactions and economic modeling theory based often upon our own biases and desire for certain outcomes.

Admittedly, economics is slightly more accurate than the weather predictors. Sometimes. Maybe.

There are however no shortage of industry warnings on our financial institutions remaining engaged in high risk ventures, and that the risk factor is undoubtedly higher than it was even before the 2008 crash.

Nouriel Roubini is one economist given a good amount of credit for being mostly right and try to warn about 2008’s crash:

“The US and global financial crisis is becoming much more severe in spite of the Treasury rescue plan. The risk of a total systemic meltdown is now as high as ever.” — Roubini, September 2008

So what does Roubini see now?

“Optimists argue that the global economy has merely hit a “soft patch.” Firms and consumers reacted to this year’s shocks by “temporarily” slowing consumption, capital spending, and job creation. As long as the shocks don’t worsen (and as some become less acute), confidence and growth will recover in the second half of the year, and stock markets will rally again.”

” …unlike in 2007-2010, when every negative shock and market downturn was countered by more policy action by governments, this time around policymakers are running out of ammunition, and thus may be unable to trigger more asset reflation and jump-start the real economy.  … This lack of policy bullets is reflected in most advanced economies’ embrace of some form of austerity, in order to avoid a fiscal train wreck down the line.”

My interpretation of Roubini’s 2011 outlook: We used every trick in the book to stabilize the economy from 2007-2010. We somewhat achieved that. We’ve unfortunately used every know trick and gimmick and the only thing that we can do now is to tighten our seat belts as we just don’t know what will happen next … but positive outcomes while possible are not probable.

Some would dismiss all of this as just creating a self-fulfilling prophecy. Talk gloom and you get gloom.

Maybe. Maybe not.

As one of my best buds Al Alborn says: It is a math problem and just don’t understand the math. … Yes, no doubt. Yet the essential of understanding can be roughly calculated and there are few positive options available to us. Or am I missing something.

I know that many of my Austrian School friends believe that we are exactly where we should be, and that some doom and gloom without government interference, which is what the Federal Reserve is promising with no QE3 announced.

Gloom we can probably survive. Doom … how much?

There are many other financial factors weighing on our economy: Just last week, or the week before, our international credit rating was dropped to AA in Europe. Moodys and our own S&P have warned that our credit rating may drop to AA by the end of July.

>> The dropping of our credit rating could result in us having to pay 2-4% to borrow money on international markets. Our national debt interest payments in 2010 were $438 billion and that was just on 1-2% bonds.

>> Our financial markets are already showing stress. As of this month (June) $1.2 trillion has disappeared from our markets liquidity. The Russians cashed in $600+ billion in U.S. Treasury notes and the ending of the Fed’s QE2 means that they will start collecting back the almost $600 billion that was pumped into the economy.

Happy talk cannot create jobs. We are way beyond happy talk and ‘change we can believe in’ fixing anything — although there were some good starts in change that we can believe in such as banking and credit card reform. The consumer finance oversight of Elizabeth Warren would be good change too if it ever makes it off the ground.

The ‘consumer confidence index’ and the ‘misery index’ are well beyond norms and historical highs since the 1970s. These are no public opinion polls but a mathematical calculation as to how bad things are everyday Americans.

So what does it all mean? Cryptically it means a storm on the horizon.

My belief is that the storm arrives in August or September and lasts several years. Of course, I also believe that the U.S. economy will not recover 2007 employment rates until 2017 at the earliest and possbily not until 2024.

But don’t trust me. We DogCatchers run from lightning. We are naturally skittish when holding nets on the end of a metal pole and see dark clouds on the horizon … and remember the last time that we just stood there … out in the open.

=============

>> Consumer Confidence Index: a calculation designed to measure consumer confidence, which is defined as the degree of optimism on the state of the economy that consumers are expressing through their activities of savings and spending.

>> Misery Index: a calculation adding the unemployment rate to the inflation rate. It is assumed that both a higher rate of unemployment and a worsening of inflation create economic and social costs for a country. While the misery index is higher than at any time since 1979, there are lessons to be learned from both the Nixon and Carter administrations: the higher the index goes often the more conservative and right is the direction that Americans turn towards.

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3 Comments

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3 responses to “The BIGGER Crash coming? Soon?! Is 2011 potentially much worse than 2008?

  1. You know, Bill… if you predict enough crashes, sooner or later one will happen. As you know, I’m also into “self fulfilling prophecies”. If enough people believe in your prediction, they will “create that crash” by moving their money out of the market. When people like Peter Atwater,( President and CEO of Financial Insyghts LLC) make a prediction, for example, I wonder if they are actually “predicting” or attempting to influence our behavior to fulfill a prediction of their creation for their benefit. I trust people in the financial industry least of all (with a few exceptions)… because I understand their self-interest.

    You summed it up best when you said, “Economics is not an incredibly accurate mathematical model.” Actually, that’s too high praise… if anyone even had a “clue,” there would be no such things as “crashes” in the first place.

    I’ll continue to count on luck… and a diversified portfolio… and ignore the pundits.

  2. George S. Harris

    The crash may come and it surely will if we continue to believe and act like it will. Banks will hold onto their funds, afraid to make loans for feat they won’t be repayed. Companies who need the funds can’t get them and thus won’t hire people to make things for folks to buy because the folks who would buy have no money because they have no jobs because companies aren’t hiring. And so we will keep turning in ever decreasing concentric circles until we disappear.

    Here is a Tibetan tale:

    At a long distant period there stood on the shore of a lake a vilva forest. In this forest dwelt six hares. Now a vilva tree in that forest fell into the lake, thereby producing a great noise. When the six hares heard this noise, they began, as they had but small bodies, to run away full of fear.
    The jackals saw them running, and asked, “O honored ones, wherefore do ye run?”

    The hares replied, “There was a great noise.” Thereupon the jackals also took to flight.

    When the monkeys saw them running they asked, “0 honored ones, wherefore do ye run?”

    The jackals replied, “There was a great noise.” Thereupon the monkeys also took to flight.

    When the gazelles saw them running they asked, “0 honored ones, wherefore do ye run?”

    The monkeys replied, “There was a great noise.” Thereupon the gazelles also took to flight.

    When the boars saw them running they asked, “0 honored ones, wherefore do ye run?”

    The gazelles replied, “There was a noise.” Thereupon the boars also took to flight.

    When the buffaloes saw them running they asked, “O honored ones, wherefore do ye run? ”

    The boars replied, “There was a noise.” Thereupon the buffaloes also took to flight.

    When the rhinoceroses saw them running they asked, “O honored ones, wherefore do ye run?”

    The buffaloes replied, “There was a noise.” Thereupon the rhinoceroses also took to flight.

    When the elephants saw them running they asked, “O honored ones, wherefore do ye run?”

    The rhinoceroses replied, “There was a noise.” Thereupon the elephants also took to flight.

    When the bears saw them running they asked, “O honored ones, wherefore do ye run?”

    The elephants replied, “There was a noise.” Thereupon the bears also took to flight.

    When the hyenas saw them running they asked, “O honored ones, wherefore do ye run?”

    The bears replied, “There was a noise.” Thereupon the hyenas also took to flight.

    When the panthers saw them running they asked, “O honored ones, wherefore do ye run?”

    The hyenas replied, “There was a noise.” Thereupon the panthers also took to flight.

    When the tigers saw them running they asked, “O honored ones, wherefore do ye run?”

    The panthers replied, “There was a noise.” Thereupon the tigers also took to flight.

    When the lions saw them running they asked, “O honored ones, wherefore do ye run?”

    The tigers replied, “There was a loud noise.” Thereupon the lions also took to flight.

    At the foot of the mountain there dwelt a maned lion, which likewise seemed to wear a diadem. When it saw the lions running it asked, “O honored ones, wherefore do ye all run, although each of you is strong in claws and strong in teeth?”

    The lions replied, “There was a loud noise.”

    “O honored ones, whence did the noise come?” it asked.

    “We do not know,” they replied.

    Then said that lion, “O honored ones, do not run. Inquiry must be made as to where the noise came from.”

    It asked the tigers, “Who told you about it?”

    The tigers replied, “The panthers.”

    It asked the panthers, “Who was it told you?”

    The panthers replied, “The hyenas.”

    It asked the hyenas, “Who was it told you?”

    The hyenas replied, “The bears.”

    It asked the bears, “Who was it told you?”

    The bears replied, “The elephants.”

    It asked the elephants, “Who was it told you ?”

    The elephants replied, “The rhinoceroses.”

    It asked the rhinoceroses, “Who was it told you?”

    The rhinoceroses replied, “The buffaloes.”

    It asked the buffaloes, “Who was it told you?”

    The buffaloes replied, “The boars.”

    It asked the boars, “Who was it told you?”

    The boars replied, “The gazelles.”

    It asked the gazelles, “Who was it told you?”

    The gazelles replied, “The monkeys.”

    It asked the monkeys, “Who was it told you?”

    The monkeys replied, “The jackals.”

    It asked the jackals, “Who was it told you?”

    The jackals replied, “The hares.”

    It asked the hares, “Who was it told you?”

    The hares replied, “We saw the terrible thing with our own eyes. Come, we will show you whence the noise came.” So they guided the lion, and showed it the vilva forest, saying, “That is where the noise came from.”

    Inasmuch as the noise was caused by the fall of a vilva tree out of that forest into the lake, the lion said, “O honored ones, be not afraid, for that was only an empty sound.”

    Consequently they were all tranquillized. And a deity uttered this verse, “Let not men believe in words. They ought to see everything for themselves. Observe how, through the fall of a vilva, the forest lost its beasts.”

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