Real e Finance means business
The 'Helicopter
Economics Investing
Guide' is meant to help
educate people on
how investing choices
in the current
economic
environment. We have
coined this term to
describe the current
monetary and fiscal
policies of the U.S.
government, which
involve unprecedented
money printing. This is
the official blog of the
New York Investing
meetup.
Economics Investing
Guide' is meant to help
educate people on
how investing choices
in the current
economic
environment. We have
coined this term to
describe the current
monetary and fiscal
policies of the U.S.
government, which
involve unprecedented
money printing. This is
the official blog of the
New York Investing
meetup.
____________________________________
____________________________________
________________________________________________________________
The truth and nothing but...
CREDIT
CRISIS
FOLLOW
CERTAIN
PATTERNS
CRISIS
FOLLOW
CERTAIN
PATTERNS
This alternating news flow is repeating over and over again.
Investors should pay attention to the big picture however and not the noise
of the day. The important thing to realize is that we are in a second global
credit crisis.
Credit crises follow certain patterns, which include: recognition of
overpriced financial assets, money flowing into safe havens, increased
market volatility, rising costs for financial insurance, and various forms of
government action to stop the problem. The specifics of the current credit
crisis are below.
1. Government debt is being downgraded. This happened in Italy
yesterday, the U.S. in early August and many times in Greece.
This is the upfront recognition of the problem, which is almost always
widespread public knowledge by the time it happens. In 2008,
securitized debt containing subprime real estate loans was downgraded
in mass, frequently from the triple A ratings that had previously been given.
2. Global money is flowing into safe haven U.S. treasuries. When yields hit
lower levels than a previous credit crisis or all-time lows, this indicates this
is happening on a mass scale. U.S. government two-year notes had a yield
below 0.15% at one point this September 19th. During 2008, the two-year
held above 0.60%. The ten-year yield has fallen below the 2.04% low in
2008 and below the all-time low of 1.95% in 1941.
3. Global money is flowing into safe haven currencies. In 2008, this was the
U.S. dollar and the Japanese yen. In 2010, this is the Japanese yen, the
Swiss franc, and gold (which needs to be thought of as a currency if it is to
be analyzed correctly). The Swiss franc rallied so much that the Swiss
stopped it from trading freely. The Japanese have also taken action to try
to lower the value of the yen.
4. Stock market volatility has increased enormously. In 2008, there were a
significant number of mini-crashes (a drop of 5% or more in one day).
These were more common in the U.S. back then. Now they are more
common in Germany, but they have been happening here as well. The flip
side of mini-crashes is sudden sharp moves up in the market. These are
also occurring.
5. Bank stocks are the focus of the big moves up and down in the stock
market. U.S. banks and other financial stocks really got hit in 2008 -- a
number of the companies themselves went under. This time it's European
banks falling the hardest. One-day drops for some major EU and UK banks
have been as high as 10%. Bank stocks aren't dropping that much in the
U.S., but they are underperforming other sectors like technology.
6. Credit default swaps have hit record levels. Credit default swaps (CDSs)
are bond insurance and they became a big news item in 2008 when they
rose to unprecedented levels. While CDS rates for Greek sovereign debt
have hit records and are rising for the other highly indebted EU countries,
they have also hit records for some UK and EU banks in 2011 indicating a
worse crisis than in 2008.
7. Major and ongoing bailouts are taking place. The EU had to bail out
Greece in the spring of 2010 and then Ireland and Portugal. A second
bailout for Greece had to be arranged this July, even though the first
bailout was supposed to have taken care of Greece's debt problem. In
2008, the U.S. had TARP and arranged for failing banks to be taken over by
stronger banks (Bank America is now in trouble again because of the
legacy loans from the banks it absorbed during this period). Fannie Mae
and Freddie Mac had to be nationalized.
8. Central banks are buying bonds in the open market. The EU has been
buying up Italian, Spanish, Irish and Portuguese bonds in order to hold
down interest rates in those countries. As long as it has an infinite access to
funds, this strategy will work. The Fed began buying U.S. debt instruments in
the fall of 2008 during the Credit Crisis.
9. Global coordinated central bank intervention took place last week. The
need for global action is a consequence of the interconnectedness of the
world financial system. A major problem in one region (in 2011 this is
Europe, in 2008 it was the U.S.) will invariably spread everywhere. Central
banks coordinate their activity to try to control the contagion.
10. The global economy is turning down. Problems in the financial system
impact the real economy and they can turn a shallow downturn into a
major one as has happened in 2008. Economic figures throughout the
world have flattened and there are some warnings of a bigger drop to
come (extremely low consumer confidence numbers for instance). GDP
contraction in a number of regions will be the final confirmation that
another global credit crisis has occurred.
Disclosure: None
Investors should pay attention to the big picture however and not the noise
of the day. The important thing to realize is that we are in a second global
credit crisis.
Credit crises follow certain patterns, which include: recognition of
overpriced financial assets, money flowing into safe havens, increased
market volatility, rising costs for financial insurance, and various forms of
government action to stop the problem. The specifics of the current credit
crisis are below.
1. Government debt is being downgraded. This happened in Italy
yesterday, the U.S. in early August and many times in Greece.
This is the upfront recognition of the problem, which is almost always
widespread public knowledge by the time it happens. In 2008,
securitized debt containing subprime real estate loans was downgraded
in mass, frequently from the triple A ratings that had previously been given.
2. Global money is flowing into safe haven U.S. treasuries. When yields hit
lower levels than a previous credit crisis or all-time lows, this indicates this
is happening on a mass scale. U.S. government two-year notes had a yield
below 0.15% at one point this September 19th. During 2008, the two-year
held above 0.60%. The ten-year yield has fallen below the 2.04% low in
2008 and below the all-time low of 1.95% in 1941.
3. Global money is flowing into safe haven currencies. In 2008, this was the
U.S. dollar and the Japanese yen. In 2010, this is the Japanese yen, the
Swiss franc, and gold (which needs to be thought of as a currency if it is to
be analyzed correctly). The Swiss franc rallied so much that the Swiss
stopped it from trading freely. The Japanese have also taken action to try
to lower the value of the yen.
4. Stock market volatility has increased enormously. In 2008, there were a
significant number of mini-crashes (a drop of 5% or more in one day).
These were more common in the U.S. back then. Now they are more
common in Germany, but they have been happening here as well. The flip
side of mini-crashes is sudden sharp moves up in the market. These are
also occurring.
5. Bank stocks are the focus of the big moves up and down in the stock
market. U.S. banks and other financial stocks really got hit in 2008 -- a
number of the companies themselves went under. This time it's European
banks falling the hardest. One-day drops for some major EU and UK banks
have been as high as 10%. Bank stocks aren't dropping that much in the
U.S., but they are underperforming other sectors like technology.
6. Credit default swaps have hit record levels. Credit default swaps (CDSs)
are bond insurance and they became a big news item in 2008 when they
rose to unprecedented levels. While CDS rates for Greek sovereign debt
have hit records and are rising for the other highly indebted EU countries,
they have also hit records for some UK and EU banks in 2011 indicating a
worse crisis than in 2008.
7. Major and ongoing bailouts are taking place. The EU had to bail out
Greece in the spring of 2010 and then Ireland and Portugal. A second
bailout for Greece had to be arranged this July, even though the first
bailout was supposed to have taken care of Greece's debt problem. In
2008, the U.S. had TARP and arranged for failing banks to be taken over by
stronger banks (Bank America is now in trouble again because of the
legacy loans from the banks it absorbed during this period). Fannie Mae
and Freddie Mac had to be nationalized.
8. Central banks are buying bonds in the open market. The EU has been
buying up Italian, Spanish, Irish and Portuguese bonds in order to hold
down interest rates in those countries. As long as it has an infinite access to
funds, this strategy will work. The Fed began buying U.S. debt instruments in
the fall of 2008 during the Credit Crisis.
9. Global coordinated central bank intervention took place last week. The
need for global action is a consequence of the interconnectedness of the
world financial system. A major problem in one region (in 2011 this is
Europe, in 2008 it was the U.S.) will invariably spread everywhere. Central
banks coordinate their activity to try to control the contagion.
10. The global economy is turning down. Problems in the financial system
impact the real economy and they can turn a shallow downturn into a
major one as has happened in 2008. Economic figures throughout the
world have flattened and there are some warnings of a bigger drop to
come (extremely low consumer confidence numbers for instance). GDP
contraction in a number of regions will be the final confirmation that
another global credit crisis has occurred.
Disclosure: None
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