High Likelihood of a Market Crash

This past week, the Royal Bank of Scotland credit strategist Bob Janjuah warned of a full-fledged crash in global stock and credit markets. He anticipates a 300 point drop within the next three months. Janjuah as a lot of credibility because his warnings of credit troubles last year, came to fruition this year. The whole setup reminds me a bit of Elaine Garzarelli in 1987. Garzarelli was a relatively unknown quant analyst and money manager at Shearson Lehman in 1987. In the weeks before October 19th, she made brief appear on FNN, the precursor to CNBC, saying there was a high likelihood that the market could crash. That sealed her place in history. A lot of other warning signs indicate that the Bank of Scotland isn't that crazy in predicting the unpredictable. First, the past month generated an Hindenburg Omen. The Omen is a measure of internal divergences in the market and is signaled on June 6th. While the Omen doesn't necessarily mean the market will crash, no crash has ever occurred without a signal in the prior 40 days. For instance, an Hindenburg Omen signal occurred on September 19th, 1987 about one month before the market collapsed.

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  thanks to Politics in the Zeros

The Game is Over. There Won't be a Rebound
An Interview with Michael Hudson on the Economy

Mike Whitney: Many of the TV financial gurus --as well as Henry Paulson--keep assuring us that the worst is behind us, but I don't see it. Foreclosures are increasing, the dollar is falling, unemployment is rising, manufacturing is sluggish, food and fuel are soaring, and consumers are backed up on their credit cards, student loans and house payments. Where would you say we are in the present cycle? What will it take to rebound from the current slump? Will the stock market take a beating before all this is over? What do you think the greatest problem facing the economy is; inflation or deflation? Michael Hudson: The idea that we’re even in a business “cycle” is whistling in the dark. If we’re in a cycle, then that implies there’s an automatic recovery in store. This happy free-market idea was developed at the National Bureau of Economic Research by opponents of government regulatory policy. But the economy doesn’t move by a sine curve. There is a slow buildup, and a sudden plunge, so the shape is ratchet-shaped. This is why 19th-century writers didn’t speak of economic cycles, but rather of periodic financial crises. Today’s plunging real estate and stock market prices are not a self-correcting ebb and flow in which downturns set in motion automatic stabilizers that produce recovery. Each U.S. recovery since World War II has started out from a higher level of debt. The result is like driving a car with the brakes pressed more and more tightly. Alan Greenspan at the Federal Reserve flooded the banking system with enough credit to enable debts to be carried by borrowing against the rising price of homes and office buildings, corporate stocks and bonds. In effect, the interest charge was simply added onto the debt balance. But today, the prospects are dim for paying off debts out of further price gains for homes and real estate. Speculators have pulled out of the market – and as late as 2006 they accounted for about a sixth of new purchases. Asset-price inflation fueled by the Federal Reserve – is giving way to debt deflation. The United States and other countries have reached a limit in which scheduled interest and amortization absorb the entire economic surplus of so many individuals, companies and government bodies that new construction, investment and employment are grinding to a halt. Families, real estate investors and companies are obliged to use their entire disposable income to pay their creditors or face bankruptcy. This leaves them without enough money to sustain the living standards of recent years. This means that there won’t be a rebound, and it will take longer than 2009 to recover.

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