Well, it’s official. U.S. stock prices have fallen for six weeks in a row. So will next week make it seven? The last time stocks declined for seven weeks in a row was back in May 2001 when the “dot-com” bubble was bursting. At this point, the Dow has declined by approximately 5 percent since the beginning of June. Things don’t look good. So exactly what is going on here? Well, it is undeniable that the recent mini-bubble in stocks has been too good to be true. The S&P 500 had surged nearly 30 percent since last September. Much of this has been fueled by the Federal Reserve’s latest round of quantitative easing, but now that is coming to an end in a few weeks and investors are a bit spooked. Meanwhile, wars and revolutions are sweeping the Middle East, Japan is dealing with the damage caused by the tsunami and by Fukushima, Europe is trying to figure out how to bail out Greece again and the U.S. debt crisis is continually getting worse. In addition, wave after wave of bad economic news is certainly not helping the mood on Wall Street. In many ways, a “perfect storm” is developing and many are now extremely concerned about what the rest of 2011 is going to bring for Wall Street.
QE2 is slated to conclude at the end of June, and many investors are deeply disappointed that it does not appear that we are not going to see QE3 right away. Many fear that the end of quantitative easing will pop the current mini-bubble in stocks and commodities. At the moment, financial markets are more jittery than they have been in a long time.
Frank Davis, director of sales and trading with LEK Securities, says that there is a lot of pessimism on Wall Street right now….
“There’s a lot of emotion in this market at the moment, and the conversations among traders are nearly all leaning toward the bear side”
So what are some of the signs that this downturn on Wall Street may turn into a full-blown crash?
Well, according to the Wall Street Journal, junk bonds are being sold off at an alarming rate right now. Does the following quote from the Journal remind anyone of 2008 at least a little bit?….
A steep decline in prices of bonds backed by subprime mortgages has spread through the riskiest segments of the credit markets, ending rallies in high-yield corporate bonds and commercial real-estate debt.
Also, many of the big Wall Street banks are already laying off workers. In a previous article I wrote about the potential for Wall Street to go into “panic mode“, I noted that Goldman Sachs, Bank of America, JPMorgan Chase and Morgan Stanley are all laying people off or are considering staff cuts.
The truth is that the big banks on Wall Street are not nearly as stable as most people think that they are. Moody’s recently warned that it may downgrade the debt ratings of Bank of America, Citigroup and Wells Fargo.
Another major story on Wall Street right now is oil. OPEC recently announced that oil production levels will not be raised, even though the price of oil has been hovering around $100 a barrel.
World oil supplies are very tight right now. In fact, the globe actually consumed 5 million barrels per day more oil than it produced during 2010. This was possible because the difference was apparently made up by drawing down reserves.
But if oil supplies are this tight already, what is going to happen if a major war (as opposed to all of the minor wars that are already happening) erupts in the Middle East?
The world is sitting on the edge of a financial disaster.
It is important to keep in mind that Europe is also in far worse financial condition than it was just prior to the financial collapse of 2008.
It is being reported that German finance minister Wolfgang Schaeuble is convinced that a “full-blown” financial meltdown by Greece is a very real possibility. The cost of insuring Greek debt has soared to a brand new record high, and officials all over Europe are in panic mode.
But financial problems are not just happening in Greece. The largest bank in France has just cut in half the amount of cash that customers can withdraw from ATMs each week.
Most Americans don’t spend much time thinking about the financial condition of Europe, but the truth is that what happens in Europe is going to play a major role in the months and years ahead.
Of course most Americans already know that the U.S. government is a financial mess.
As the “debt ceiling deadline” of August 2nd draws closer, the U.S. government has been raiding retirement funds in order to stay under the debt limit.
Many investors are quite nervous about what may happen if the U.S. government actually does start defaulting on debt on August 2nd.
Others claim that the U.S. government is already in default.
The only Chinese agency that gives credit ratings on sovereign debt says that the U.S. government “has already been defaulting” and the Chinese government has been repeatedly warning that the U.S. needs to get its finances in order.
In any event, this debt ceiling drama will get resolved one way or another.
The bigger question is this….
How is the U.S. government going to respond when the next financial crash happens?
Back in 2008, the Federal Reserve and the U.S. government took unprecedented steps to prop up Wall Street.
But can they really do that again if we see another major crash in 2011 or 2012?
Many believe that things will be totally different this time around. Just check out what Jim Rogers recently told CNBC….
“The debts that are in this country are skyrocketing,” he said. “In the last three years the government has spent staggering amounts of money and the Federal Reserve is taking on staggering amounts of debt.
“When the problems arise next time…what are they going to do? They can’t quadruple the debt again. They cannot print that much more money. It’s gonna be worse the next time around.”
Jim Rogers is right about that.
The next time we see a collapse on the scale of 2008 it is going to be a much bigger mess.
Global financial markets are extremely vulnerable right now and there are a whole host of potential “tipping points” which could push them over the edge.
The Federal Reserve and the U.S. government more or less used up all of their ammunition on the 2008 crisis.
If we see another collapse in 2011 or 2012 there is not going to be much of a safety net available.
The entire world financial system is simply swamped with way too much debt. The world has never seen anything even remotely close to the gigantic mountains of debt that have been accumulated around the world today.
The current global financial system is not sustainable. More crashes are inevitable. A lot of people are going to get steamrolled.
Hopefully you will not be one of them.