World Crises Can Lead To Stock Market Crash


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Alex Christensen of Global Risk Insights offers a warning to global investors dealing with the global turmoil and U.S. stock markets.  Developments in Ukraine and the Middle East can prove harmful to the U.S. stock market.  With the unfortunate Malaysian Airlines crash being a result of actions of Russian-tied rebel factions, there is increased pressure on the European Union to impose economic sanctions on Russia.  Even though the U.S. will likely press for crippling actions on the Kremlin, Europe had a lower appetite for this move because their economic prosperity is tied to access to plentiful Russian energy sources.  Now with this distasteful event, Europe will face more outward pressure to respond to their neighboring menace even if it contributes to a recession for them.

Then there are rising tensions in the Middle East where ISIS are gaining ground in Syria and Iraq, while Israel is expanding operations in rooting out Hamas in Gaza.  This is also spooking global investors that are concerned about about free flowing oil.  If access to oil is compromised by these developments, then that can dampen economic growth because businesses and consumers rely on crude oil to keep their energy prices low.  If crude oil becomes scarce, then that will drive up the cost of gasoline and causes both consumers and businesses to downsize.

Global investors are aware of the risks associated with Eastern Europe and the Middle East and have sent their funds to safe U.S. Treasury securities.  Even though Standard and Poor’s have reaffirmed the U.S. credit rating at AA+ due to high budget deficits and Congressional gridlock, they still remain a safe haven for investors seeking safety.  When investors start buying bonds, this drives down their yields and thus bring down other interest rates associated with it, such as the prime interest rate and the mortgage rate.

With interest rates remaining low, there is enhanced risk of asset bubbles. As implied by Christensen, the Fed has been trying to normalize interest rates, which have been artificially lowered by Fed policy aimed at boosting employment.  Even though the Fed actions have undoubtedly improved labor markets with U.S. unemployment rate on the decline, it has roiled foreign markets, who are struggling to tamp down inflation and prevent asset bubbles themselves.  Eventually, these same symptoms could be felt in the U.S., especially if signs of a more robust recovery becomes more consistent.  Stronger labor markets will provide U.S. consumers with more security and income, thus resulting in more savings.  If U.S. consumers decide to shift their increased savings to the U.S. stock market, then there is concerned that this could push equity prices to unsustainable levels and cause a market crash.

All of these events can compromise Fed policy and end up swallowing wealth in the long-run.

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If Bernanke’s Superman, Then…


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The U.S. economy is his kryptonite.  Al Lewis of MarketWatch offers a satirical comparison of Federal Reserve chairman Ben Bernanke to the “Man of Steel”.  Both Lewis and my comment could be described as cheap shots to him.  However, being fair to Bernanke, his tools are limited in turning around the economy and unemployment.

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Still, if it was up to me to grade Bernanke’s performance, it would rate from a C- to C.  His best work was preventing a huge collapse of our financial system in 2008.  Even though some of his actions might have been questionable, many people do not realize how close the U.S. was to experiencing a depression.  Through creative monetary policy, he was able to create liquidity within the financial system without spurring significant inflation and for that he deserves credit.

While Bernanke’s critics have predicted that his aggressive monetary policy would result in high inflation, it has been four years now and inflation remains moderate.

Having said that, we cannot say that his efforts have not caused any negative consequences.  Some of the global instability, such as high food prices in the Middle East, Africa, and other developing nations, can be attributed to the U.S. and their efforts to keeping the value of the dollar low in order to kick-start the economy.  With U.S. dollars serving as the primary financial vehicle in the global economy, a cheaper dollar made credit more accessible not only in the U.S., but throughout the world.

On the surface, that sounds good.  When developing countries are able to access more credit, then that will lead to more investment and consumer spending.  However, the downside is that it can lead to over-investment and cause asset bubbles.  It is similar to U.S. households, who cannot resist low interest rate offers, and get into trouble by increasing their debt levels.  Even though it will enhance their standard of living in the short-run, it can result in devastating outcomes when economic conditions change.

We have seen potential asset bubbles start to emerge in China, India, Brazil and other emerging countries.  With this occurring, inflation has started to rise in all of those countries and there is concern that their economy will suffer severely as a result.  Even though that has not happened yet, its threat remains and the U.S. should bear some of that blame.

Referring back to U.S. performance, it is true that the U.S. has grown steadily since its collapse during the end of the Bush administration when our economy contracted by a staggering rate of -8.9% during the 4th quarter of 2008.  Since that time, we have shown steady improvement, but it has been very slow.  Subsequently, our economy would shrink further the next two quarters, but at a much slower rate.  But since then, our economy has grown consistently, albeit modestly.  Historically, we want to see economic growth of at least 3%.  In over four years, we have only exceeded that benchmark three times out of seventeen quarters.

When looking at unemployment, the figures are even worse.  Historically, an economy is performing at capacity when the unemployment rate is between 5-6%.  The last time that the unemployment rate fell below the 6% mark was July 2008.  While we should be encouraged by the drop in the unemployment rate from 10% in October 2010 to its current rate of 7.6%, that is still a very high number.  Another disturbing measure is long-term unemployment, which continues to be a problem.  Pew Fiscal Studies showed that 9.5% of the unemployed were searching for work for at least a year in the first quarter of 2008 and that has jumped up dramatically to 29.5% in the first quarter of 2012.  These high rates have never been close to being matched in past history.

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The economic evidence is clear.  Bernanke is no Superman.