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Sniffing a Crisis ??

Let’s take a look at economic data released in the last few weeks:

1.  Consumer confidence rose again in May.
2.  The increased gas prices are not expected to be impact consumer disposable income significantly,
3.  Existing home sales dropped 2.5% due to lack of homes to sell, which is a good problem.
4.  Home prices have risen 6.5% since April of last year and show no sign of slowing.
5.  Transportation orders are up 12.5% year-to-date.
6.  Other durable goods orders are up 7.3% YTD.
7.  Unemployment (U-4) is at a sixteen year low.

There is nothing in that data suggesting an economic recession is on the horizon, even though people worry about it constantly.  That is a waste of perfectly good worry!

If you must worry, then worry about another financial crisis, which is different than a recession.  They happen more quickly and do more damage than a recession (although recessions can be triggered by a financial crisis).

A plausible scenario leading to a financial crisis might, for example, involve a heavily-indebted, poorly run country, like Italy, for example?  The debt or bonds of that country is largely owned by banks.  Whenever repayment is in question, the value of those bonds go down. Since that is a direct charge against either earnings or capital, those banks then reduce lending.  Not by coincidence, that’s what’s happening right now to banks, especially in Europe but also in money-center U.S. banks.  Because bank stocks are a major component of the U.S. stock market and an even larger component of the European stock markets, those bank stocks can easily crush the whole market.

The “nice” thing about a financial crisis is that there are usually many false alarms.  I think today’s Italy scare is just another false alarm, for several reasons, but it must be watched carefully.  If you read that a few derivatives, such as credit default swaps, actually default, then call your financial advisor immediately . . . as well as your priest, preacher, rabbi or whomever . . .