So will that two(?) day panic following the Brexit vote become a footnote in financial history as the Bull takes it as a brief pause, and refreshed, resumes its charge higher?
The New Bear Stearns Moment
In his Trader Asks: “Remember The All Time Highs After Bear’s Subprime Funds Blew Up?” of July 8/16, Tyler Durden of Zero Hedge compares the recent Brexit vote/ dip /then run-up to the Bear Stearns panic of 2007.
In 2007, after Bear Stearns shuttered its two subprime funds there was the quaint theory that everyone should pile into simple stuff like the S&P 500 to avoid those misbehaving and suddenly not understood derivatives that had nothing to do with the broader economy. Remember the new all-time highs, or what happened after?
Durden speculates that nowadays, “investors don’t particularly care to seek safety. Why waste the effort when the central banks will be buying the dip if you don’t,” and that post-Brexit, investors, “realized that, at worst, rate hikes were off the table. And at best, the base-case scenario, even more extraordinary monetary policy is coming. Ten-year Italian BTPs look like a steal at 1.25%. Forget an imploding financial sector and political uncertainty, I hear Draghi’s a buyer.” (Read More)
So are we now making that final phantasmagorical S&P 500 high now just like in 2007? Let’s see what good economic news can support these prices.
Peeling back the U.S. June 2016 Unemployment Report
26 Million Americans Are Now “Too Poor To Shop” Study Finds “The study, performed by America’s Research Group, found that about 26 million Americans work on average two or three jobs at a time which, when added together, nets just shy of $30,000 in annual income. All while supporting anywhere from two to four children. … The chairman of ARG, Mr. Britt Beemer, … decided to analyze the data further and learned American’s are seeing increasing numbers of fellow citizens who are simply just too poor to shop.” Meanwhile consumer credit via student and auto loans are at an all-time high.
The Decline & Fall Of The Biggest Bond Market In The World Has Only One Inevitable Ending “Government bonds are themselves becoming more illiquid, most particularly, as CLSA’s Chris Wood notes, in a country like Japan where the Bank of Japan has been buying more than the net issuance. Monthly trading of JGBs by lenders and insurers has collapsed from a peak of ¥123tn in April 2012 to a record low of ¥15tn in May 2016.”
But unemployment just plummeted in the U.S, and so the economy must finally be picking up! Jobs Bounce Sends Stocks Soaring To Record High as Bond Yields hit Record Lows
Not so fast. For one thing, the previous month saw a precipitous rise in unemployment do largely to a strike, and when you average the two months together, no there is no plummeting of the unemployment rate. It is holding steady at the same meager figures we saw two months ago. Bill McBride at Calculated Risk comments, “Job growth only averaged 149,000 over the last two months, and 172,000 per month this year.”
And for another thing, from the above Jobs Bounce article, “Trannies rose most in 4 months today – having “death-crossed” on Wednesday…” Do we now see the “kiss of death” as the index kisses those levels goodbye? It is a typical pattern.
Jeffrey Snyder comments, in his Inside The June Payroll Report——-More Of The Same, And Not In A Good Way that “Even with that huge gain, the overall trend is still slowing. … Stock markets are up on payroll enthusiasm, but broader credit and funding markets aren’t buying it.”
Economic and Financial Weakness Worldwide
Then we have Germany, Japan, Italy, (and I left out China which is being described as facing a 1929-style crash as their incredibly huge debt bubble bursts).
German Output in May Unexpectedly Drops in Sign of Slowdown “Production, adjusted for seasonal swings, fell 1.3 percent from the previous month, when it rose a revised 0.5 percent, data from the Economy Ministry in Berlin showed on Thursday. Economists in a Bloomberg survey had predicted a 0.1 percent rise in the typically volatile gauge.”
Shoppers Tighten Purse Strings, Make Japan Retailers See Red “Japan’s discount-seeking shoppers drove some retailers into the red last quarter as an uncertain economic outlook persuaded consumers to tighten their purse strings.”
Italian Banks Could Spark Next Crisis In Europe (July 6, 2016) “The fact that Italian banks are carrying an alarming amount of non-performing loans on their books is not particularly new. However, Brexit exacerbates concerns related to future economic outcomes. … During a recent visit to EU Parliament, George Soros expressed concerns about Europe’s entire banking system, which is one of the reasons asset class behavior had a decidedly defensive bias during last week’s rally in risk assets.”
And of course there is that German bank. Shah Gilani has this to say in How The World’s Most Dangerous Bank Could Destroy the Global Economy :
Brexit was scary for markets around the world… but it was not a Lehman moment. It was, as I’ve said, a “Bear Stearns” moment, a terrible harbinger of impending financial disaster. Once again, it’s about the banks… Except this time, it’s not the big American banks …
On Wednesday, I told you that the next Lehman moment could be brought about by the irreparable insolvency of one or two big Italian banks, or even a few of the big British banks. Both the European Central Bank and the Bank of England have been scrambling to obfuscate just how dire things are in Western Europe. (But) the numbers just don’t add up.
But the more likely – and far more frightening scenario – is that the entire global financial system will be brought to its knees by a single bank.
Here’s what’s really going on…
The shares of European banks were getting pounded before the Brexit vote. Across the board their share prices were down about 20% from the start of 2016 to June 23, the voting date.
They’re down another 20% now.
The old story is that European banks didn’t repair their busted balance sheets after the 2008 financial crisis and the subsequent Great Recession. They kept a lot of bad loans on their books and managed to meet increasingly stringent capital requirements and regulatory pressures by juggling …
European banks, because they are all tied together in ways that will shock you, and coddled and protected by the European Central Bank, believed economic growth would eventually generate revenues and profits enough to offset write-downs of their hefty non-performing loans.
The continent never got the growth it needed and after the ECB fired every round in its bazooka, nothing changed for the better for any of the banks.
Things got a whole lot worse with Brexit. …
If the ECB doesn’t rescue teetering Italian banks (and) Italy isn’t allowed to throw an immediate $40 billion at them … Italian banks are going down, which will be a Lehman moment.
But it’s worse that you think. In fact it’s about 100 times worse, according to Italian Prime Minister Matteo Renzi. When he said that, though, he … was talking about Deutsche Bank AG (NYSE:DB), the most dangerous bank in the world. …
Deutsche Bank is for all intents and purposes probably technically insolvent. But of course it is “too big to fail,” … Forget about all that. It’s child’s play. Deutsche is sitting on about $49 trillion worth of derivatives trades. …
If Deutsche Bank isn’t propped up, and it has to unwind its derivatives trades, all its counter-parties to all those derivatives trades, all of them are going to crack one way or another.
And that would make the 2008 financial crisis look like a day at the beach. … (Read More)
Pause that refreshes? Me-thinks not.
It looks more like suspension over the abyss.