Have you heard the news coming out of Europe about Germany’s largest bank? Before we discuss the banking crisis in Europe, let me first update you on economic developments here…
As we approach the 4th Quarter of 2016, I can’t remember the last time the stock market has faced more ominous obstacles in the closing weeks of a largely Fed-engineered bull market. Not even in 2000 or 2007 did we have so much data standing in opposition to a market that just didn’t seem to want to face reality. You may recall that earlier this year three major brokerage firms called for a significant sell-off of “cataclysmic” proportions, exhorting their clients to “sell everything, except high quality bonds.” In my 27 years managing money, I’ve never seen even one similar warning issued by such firms.
Here is just a partial list of the economic and geopolitical obstacles currently facing this nearly 8 year-old bull market:
- According to FactSet the S&P 500’s earnings are falling at the fastest rate since The Great Recession, and the 2nd quarter marked the first time the index has seen five consecutive quarters of year-over-year declines since 2009.
- U.S. commercial bankruptcies are soaring, up 29% from a year ago, the 10th month in a row of increases, with August filings up 44% from September of last year.
- Factory orders have plunged for the 20th month in a row, the longest streak in U.S. history, and one which has always, without exception, coincided with a recession.
- In the last 60 years, the US economy has never suffered such a long contraction in core durable goods orders (also 20 months) without officially being in recession.
- Since 2014, the U.S. has added 520,000 waiters and bartenders, while losing 13,000 manufacturing workers.
- Geopolitically, the Eurozone is hurting more after Brexit than Britain is, with Italy warning that their banks have been struggling for months to unload €360 Billion of non-performing loans, roughly a third of the Eurozone total, an amount equal to one fifth of Italy’s GDP.
- The Euro Bank Crisis of 2016 continues, with share prices of many of Europe’s biggest banks down 20-60%, and shares of Monte dei Paschi Di Siena, a bank whose roots go back to 1472, down a whopping 90% now. Think about that: Of all of the economic events—wars, famine, conquests, etc.—of the last 544 years, none have had as devastating an impact on this bank as has the current banking climate in Europe.
- The GDP of 15 of the G-20 countries is currently showing average growth of only 0.47%, hovering just above recessionary levels. Even Germany, the largest and strongest economy of the Eurozone, has a GDP of only 0.4%.
- Existing home sales stumbled in August as inventory dwindled further. In key regions of the country, some homes have been on the market more than 200 days, usually a sign of a market anticipating further price reductions amid a slowing economy, and often a precursor to recession.
- Wall Street’s IPO (initial public offering) business is now the worst in 20 years, according to the Wall Street Journal, primarily due to low interest rates and cheaply available capital. As of last week only 68 companies have gone public this year compared to 138 in 2015, which was a drop of 62% from the same period the year prior.
- Billionaire investors are delivering dire warnings of a pending sell off with many saying, “the risks are so much more on the down side”, adding “we’ve never been in a world like this.” These include Ray Dalio, Paul Singer, Carl Icahn, Sam Zell, George Soros, Stanley Druckenmiller, Jefferey Gundlach and Robert Citrone.
Enter the woes of Deutsche Bank, Germany’s once-powerful lending institution. Their stock, already down over 60% this year, continues to drop amid various woes and challenges, beautifully articulated in this Telegraph piece by respected analyst Mathew Lynne, who writes, “…If Deutsche Bank went down, and the German Government didn’t step in with a rescue, that would be a huge blow to Europe’s largest economy—and the global financial system. …It would almost certainly land a fatal blow to the Italian banking system, and the French and Spanish banks would be next. Even worse, the euro-zone economy, with France and Italy already back at zero growth …is hardly in any shape to withstand a shock of that magnitude…”
Lynne concludes: “…Merkel is playing a very dangerous game with Deutsche—and one that could easily go badly wrong. If her refusal to sanction a bail-out is responsible for a Deutsche collapse that could easily end her Chancellorship. But if she rescues it, the euro might start to unravel. It is hardly surprising that the markets are watching the relentless decline in its share price with mounting horror.”
Finally, on this side of the pond fiddles our own Federal Reserve. At their most recent Open Market Committee meeting last week, three Fed presidents dissented from the others, believing that rates should be raised immediately, yet these were outvoted, making it all the more probable that a second 0.25% rate hike will finally be announced at their December meeting. If that hike is rued with the same intensity on Wall Street as was last December’s rate hike of the same amount, we’re looking at a potentially massive sell-off taking us officially into bear market territory.
When one considers that we are now well into the 8th year of a bull market largely of the Fed’s creation, when the average duration of a bull market is 3.7 years, it’s not hard to surmise what is coming. Add in the unknowns of the election in November, a possible EU exit vote by Italy before year end, this week’s dire concerns that Deutsche Bank could go the way of Lehman Bros., and the continued erosion of the economic data listed above, and any prudent investor/observer would be wise to be cautious, take profits, and prepare for the coming storm.
We’ve seen this dozens of times before, and the story always has the same ending, however some might delude themselves into believing “this time is different.”
Join us on Thursday, October 6th for "Striving & Thriving Amid the Coming Recession" at The Crowne Plaza, Nashua to learn how you can weather the storm. Registration begins at 5:15 pm and the seminar starts at 5:45 pm sharp. Dinner will be served after 7 pm. Click the button below to register and for additional details on this educational event.
Thomas K. Brueckner, CLTC
President & CEO, Senior Financial Resources, Inc.