Budget Basics
Families living on borrowed time
We reported previously that a highly regarded analyst to the investment industry, Lowrys, said that recent stock market volatility is greater than at any time for 55 years. Also, David Schwartz, the renowned stock market historian, said that bear markets have always followed, if in May for a protracted period, stock markets have fallen significantly, which is exactly what happened this year. Declines in such a developing bear market, he says, are likely to be significant, at least 27%.
There is a growing consensus that 2007 will be a period of recession in the United States. If that turns out to be so, then the time to be worrying about investment markets is right now because recessions are lagging indicators of future stock market action.
Bear market warning signs: technical watch
Recently, we also highlighted some technical levels to watch which collectively
would in our view, confirm the very worst (Four bear market signs to watch out for).
A review of these follows:
a. FTSE 100 to fall below 5,500.
b. The Dow Jones Industrial Average to fall below 11,000.
c. The Philadelphia Housing Index to fall below 225.
d. Volatility Index (VIX) the level of 25.6 was never reached
Bear market warning signs: debt crisis concerns
Recent action by Deloittes to set up a company doctor service for debt crisis indicates quite clearly that informed market observers are moving into positions to benefit from what they and we fear is to come. Ian Lynman, of Deloittes said:
“There are clear signs that we are nearing a turn in the credit cycle. We are not going to attempt to call a top of the cycle, as that’s fairly pointless. But the level of debt that companies have taken on suggests that there will be problems down the line perhaps by Christmas that will become apparent, perhaps in the New Year, but we are certainly getting closer to a turn in the cycle.”
The Bank of England has also warned of the risk that exists in the very high level of corporate debt levels. The Daily Telegraph, in its Business section, on 12th July went as far as to produce the headline: City faces meltdown if debt crisis hits.
Whether or not the debt crisis hits companies remains to be seen but certainly the heat is rising on both sides of the Atlantic for consumers.
Bear market warning signs: US economic growth slows
Stock market declines tend to commence when economic growth is high but fears of weakening start to build. Once recession has arrived, asset prices are already much lower. Necessarily, the future of the bear market, should we be right, will largely be centred upon what happens in the US. A recent survey of 56 American forecasters, concluded that growth looked set to slow, inflation to rise (we don’t necessarily agree with that) and some fear that Fed tightening will overshoot – it may already have done so.
As much as 70% of GDP is down to the good old consumer who, having no savings, can only continue by increasing his debt levels. On that point it is worth picking up on GaveKal’s recent report, they have calculated that in the 1980s, US consumer debt grew at 2.5 times GDP, in the 1990s at 3 times GDP. In order to sustain the asset bull market, it needs to accelerate to 4 times GDP ad nauseam, what can’t continue must end. It has been reported that retail sales growth in the US has stalled.
Also, reported by Associated Press, is that consumers face challenges in handling debt, we quote “rising interest rates and higher gasoline prices are putting the squeeze on consumers’ budgets, and many are finding it harder to keep up with their bills."
Credit counselling agencies say that "consumers are coming in droves seeking help". Howard Dvorkin, president of the non-profit making Consolidated Credit Counselling Services Inc., in Fort Laudedale, Florida, said that:: “consumers are carrying an inordinate amount of debt, they don’t have any savings to fall back on if things don’t go right.”
The world is hoping for an orderly unwinding but that, we suspect, is unlikely because
people who lend money tend not to be kind to those who default, and default they
surely must unless asset prices rise indefinitely. We read recently in the
Daily Reckoning that consumers now depend on new debt for 90% of their cash flow.
Historically, household incomes were sufficient to generate a cash surplus after
consumption and debt services; that, in the US, is no longer true and the same applies
to many consumers in the UK.
