Global Financial Meltdown?

Finally, we see a relief rally, with the S&P500 jumping a little over 2% last week, but not after tumbling to a new 2011 low of 1075.  This coincidentally was almost exactly 20% below the highs of late April, and thus the point at which a new bear market would officially begin.

Volume was strong, but much of that was also related to the strong intra-day sell-off that touched new lows.  Volatility fell, but it’s still uncomfortably high.

In macro news, the news was mixed, at best.  ISM manufacturing was not as bad as expected, but still uncomfortably close to falling below the deadly 50.0 mark.  Factory orders fell.  ISM services met expectations, but its employment component fell to the lowest point in 18 months. Initial jobless claims are stuck above 400,000 as usual.  Consumer credit collapsed, falling by almost $10 billion, when it was expected to rise by almost $10 billion.  September’s nonfarm payrolls came in slightly better than expected, but the beat was due to a one-time event.  Headline unemployment remained stuck at 9.1%, but the broader measure (U-6) shot up to 16.5%, which is higher than it was last September (2010).  What’s worse, the average duration of unemployment crept up to 40.5 weeks, which is another all time high.  And the employment-to-population ratio (perhaps the most important gauge of the US employment situation) remains stuck near multi-decade lows at 58.3%

Technically, on the weekly charts, the S&P500 is in a strong down trend that began in May.  A simple 2% bounce  did nothing to even come close to breaking this down trend. On the daily charts, the S&P is at a crossroad.  If it breaks back down next week, the recent bounce will break down and the larger down trend would resume.  But it’s also possible that the bounce continues for another week or two, before breaking down.

Last week, in an interview on the BBC, an advisor to the IMF, Robert Shapiro, blurted out a stunning bit of truth:

“If they can not address [the financial crisis] in a credible way I believe within perhaps 2 to 3 weeks we will have a meltdown in sovereign debt which will produce a meltdown across the European banking system. We are not just talking about a relatively small Belgian bank, we are talking about the largest banks in the world, the largest banks in Germany, the largest banks in France, that will spread to the United Kingdom, it will spread everywhere because the global financial system is so interconnected. All those banks are counter-parties to every significant bank in the United States, and in Britain, and in Japan, and around the world. This would be a crisis that would be in my view more serious than the crisis in 2008.”

Meltdown?  Check.

Global?  Check.

Worse than 2008?  Check.

And who is Robert Shapiro?  Well, aside from being an advisor to the IMF, he was formerly the US Undersecretary of Commerce.  He has a PhD in economics from Harvard.  He has overseen the US Census Bureau. He was a fellow at the Brookings Institute, Harvard, and the National Bureau of Economic Research.

Does he know what he’s talking about?  Check.

It’s coming folks.  Whether it’ll happen in 2 to 3 weeks, 2 to 3 months, or sometime after that.  There WILL be another global financial crisis, and it WILL be worse than 2008.

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