2011-OCT-13
I do not toss around the idea of a market crash lightly. If you've been following me long enough, you know that only in very rare instances do I issue a cautionary Alert (I've only issued four since my website launched in 2008), and I am generally not given to hyperbole.
Let's be clear: I'm not issuing an Alert at this time. But I am concerned that a materially adverse disruption to the financial markets is increasingly likely in the near future.
Perhaps a definition will be helpful as we begin. A 'market crash' is an event where there are no bids to meet a wall of selling. The actual amount of the percentage decline is less important to note than the amount of chaos, or loss of control, that a given market experiences. Some like to say that a market downdraft requires a decline of 10%, or maybe even 15% or 20% (or more), in order to qualify as a 'crash.' For me, the key factor is not so much the amount of the decline, but the pace of the decline.
With perhaps a quadrillion US dollars of hyper-interconnected derivatives outstanding – that's the notional value, but who really knows what the real number is? – an orderly market is essential for knowing whether or not the counterparty to one's trade is solvent. During periods of intense price swings in the market, such things are simply not knowable, and spawn the fear and paralysis that really define a market crash.
The Next Market Crash
Like everybody, I have no idea when the next market crash will occur, but I do happen to hold the view that a market crash is on the way. In fact, my view is that the entire future from here onward will be marked by sharp plunges (both crashes and regular market declines), followed by periods of stability, if not apparent recovery.What I track instead are imbalances and risks. Sort of like being a fire marshal who takes note of an outlet with fifteen things plugged into it, some with frayed cords, located near a pile of old cleaning rags. I can't tell you for sure that a fire will result, only that the odds are elevated. A prudent person will take steps to remedy the situation or at least prepare for the possibility of a fire.
Here's one view of the possible trigger for the next meltdown from Dr. Robert Shapiro, advisor to Presidents Clinton and Obama, and now the IMF, as offered on BBC Newsnight on October 5, 2011:
"If they cannot address this [the sovereign debt crisis in Europe] in a credible way, I believe within perhaps two to three weeks, we will have a meltdown in sovereign debt which will produce a meltdown across the European banking system.What he's warning about here are two main things. The first is the risk of contagion, where problems in one area spread to another because everything is so intertwine. The second is that you can count on the rot spreading from the weaker periphery to the stronger core. Crisis always progresses from the outside in.
We're not just talking about a relatively small Belgian bank, we're talking about the largest banks in the world. The largest banks in Germany, the largest banks in France that will spread to the UK in part through the sovereign debt problems in Ireland.
It will spread everywhere because the global financial system is so interconnected, all those banks are counterparties to every significant bank in the US and in Britain, and in Japan and around the world. This would be a crisis, in my view, more serious than the crisis in 2008."
(Source)
That dynamic has been playing out for months, and it should be obvious to the most casual of observers that the Greece situation has not been improved one iota by any of the steps yet taken.
The stakes could not be higher. Normally staid politicians are letting their guard down and saying previously unthinkable things. For example, this shocker recently came from the Polish finance minister:
Poland warns of war 'in 10 years' as EU leaders scramble to contain panic
Oct 14, 2011
Speaking to MEPs in Strasbourg on Wednesday morning (14 Sept) [the Polish finance minister] warned of the need to act rapidly to prevent grave danger for the EU. Making reference to a recent report entitled 'Euro Break Up - The Consequences' by Swiss financial giant UBS, he declared: "There is no doubt we are in danger. Europe is in danger".
The paper by UBS, normally known for its highly sober analysis, warned that historically, monetary unions do not break up without civil war or some other form of authoritarian reaction. "The risk of civil disorder questions the rule of law, and as such basic issues such as property rights. Even those countries that avoid internal strife and divisions will likely have to use administrative controls to avoid extreme positions in their markets", it said.
The Polish minister went on to warn of a doubling of unemployment within two years "even in the rich countries".
He concluded his comments by recollecting a recent conversation he had with an old friend who is now head of a major bank: "We were talking about the crisis in eurozone. He told me 'You know, after all these political shocks, economic shocks, it is very rare indeed that in the next 10 years we could avoid a war'. A war ladies and gentlemen. I am really thinking about obtaining a green card for my kids in the United States".I'm not sure whether the US will be a much better place to ride out the storm if the European banking system collapses, as it will be only a matter of time before the US is exposed as being just as financially and fiscally ruined as the EU.... read more>>
