It Is Beginning To Look Like 2008

European stock markets as measured by the Vanguard European Stock Index F (Symbol VEURX, NASDAQ Stock Exchange, United States) are down more than 20 per cent in the past three months while US stocks as measured by the Standard and Poor’s 500 index (SnP500) has lost more than 16 per cent since early May. These results qualify the statement that we are in a bear market, one in which a significant correction is underway. The SnP500 precisely followed the pattern we laid out in our previously published analysis by rising to 1230, a level between two resistance levels at 1220 and 1243. It fell back through 1220 shortly thereafter indicating a continuation of the downtrend.

In 2008, the collapse of Lehmann Brothers and other investment houses created the crisis felt around the world. This time it’s the debt and toxic assets sold by Wall Street to sovereign governments such as the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) and their national banks that is causing the problem. And, this time the problem is more serious because it is difficult for these governments to pass the problem on. While investment banks got governments to bail them out of trouble during the 2008 crisis, governments are now having to rely on other governments and their central banks to bail them out.

As one could imagine, it is difficult for German citizens to understand why they should be required to shoulder debts in order that Greek workers can retire as promised at 50 years of age when they can’t do that themselves. Central banks have attempted to be creative in this respect. The Federal Reserve Bank of the United States lent out 16 trillion dollars, yes that is trillion, to banks including 3.1trn to foreign banks. Most Americans are unaware of this at this point because the media outlets that they rely on have not discussed this development. The International Monetary Fund (IMF) is, according to Dow Jones News service, “expected to soon activate a special funding pool that will boost the fund's ability to prevent or resolve economic crises.”

According to Dow Jones the "International Monetary Fund will likely re-activate a $580 billion resource pool in coming weeks to ensure it has funds to help cover Europe's worsening sovereign-debt crisis, according to several people close to the matter." The United States is the prime funding source of the IMF as well as other European nations, and therefore, we can see that this represents yet another opportunity to supply credit in a way that will escape the eyes of the victims who will be required to pay the bill.

As for now we believe that there will be accommodations to prevent bank failures and contagion leading to a dominos style chains of bank collapses. This will happen but not just yet. We believe that the monetary authorities will be successful one more time in kicking the can down the road. By this we mean that they will postpone the inevitable a while longer. We believe that at some point in September or perhaps October we will see a retest of the 2009 lows. Gold should strengthen into the end of September and early October. If there is any further weakness it should be over by October 30.

* With contribution from Bruce H. Pugesek, President of Voyageur Research

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