GLOBAL ECONOMIC MELTDOWN: Precursors To A Global Financial Collapse – U.S. Stocks Collapse, Nasdaq Plunges 3%, Worst Day Since 2011; Marc Faber Predicts That The 2014 Crash Will Be Worse Than 1987; Top Economists Warn Germany That EMU Crisis As Dangerous As Ever; And The IMF Warns Europe’s Banking System Poses Threat To Global Financial Stability!

April 10, 2014 – GLOBAL ECONOMY U.S. stocks were slammed on Thursday, with high-flying technology and biotech shares leading the declines that had the Nasdaq Composite posting its worst session in more than two years.

“The market is coming to its senses in some of the high-flying tech names; it looked like there were some pretty hefty amounts being paid for the prospect of eventual earnings. Any of us in the market more than 15 years feels the hot breath on the backs of our necks when we see such high prices being paid for tech stocks,” said Jerry Webman, chief economist at Oppenheimer Funds.

“One of the interesting ironies is when you see a shift towards stocks with pretty low prices and away from momentum that tends to happen when the underlying economy is still growing,” Webman added.

The Nasdaq Composite declined as much as 141 points, and ended down 129.79 points, or 3.1 percent, at 4,054.11, its hardest hit since November of 2011.

Momentum stocks including Tesla Motors, Facebook, Google, Priceline Group and Amazon.com declined, along with biotechnology companies, with Pacific Biosciences of California, Zogenix and ChemoCentryx among those hit.

“Clearly investors are nervous about high-flying momentum stocks. There is a rethink on whether better earnings and economic data will support a resumption of the momentum that was driving biotechnology and higher-flying technology stocks earlier in the year,” said Kate Warne, investment strategist at Edward Jones.

“We’re back to a valuation focus; investors are gravitating towards something tangible, like earnings and revenue,” said Jack Ablin, chief investment officer at BMO Private Bank.

“We’re entering earnings season and they are not going to have much to show. Investors want to see earnings and cash flow,” said Ablin of new technology and biotech firms that have seen their shares run-up on bets for future performance.

EBay fell after reaching an accord with activist investor Carl Icahn to halt his proxy battle by saying it would appoint, at Icahn’s urging, an independent director to its board. Family Dollar Stores slid after saying it would cut jobs and close hundreds of stores as the discount retailer struggles to reverse declining sales.

Rite Aid gained after the drugstore chain projected full-year revenue that beat expectations; Bed Bath & Beyond declined after forecasting quarterly profit beneath estimates. Shares of Ally Financial fell as the former financing arm of General Motors made its market debut.

After a 283-point plunge, the Dow Jones Industrial Average shed 266.96 points, or 1.6 percent, to 16,170.22, with American Express leading losses that extended to all but two of its 30 components.

The S&P 500 declined 39.10 points, or 2.1 percent, to 1,833.08, with health care and technology pacing losses that extended to all 10 of its major industry sectors.

The CBOE Volatility Index, a gauge of investor uncertainty, jumped 15 percent to 15.89.

For every stock rising, roughly four declined on the New York Stock Exchange, where 802 million shares traded. Composite volume cleared 3.7 billion.

Equities began the day little changed, with upbeat economic data on the U.S. labor market offsetting disappointing export data from China. – CNBC.

Marc Faber Predicts That The 2014 Crash Will Be Worse Than 1987

Marc Faber says the stock market is setting up for a decline more painful than the sudden crash of 1987.

“I think it’s very likely that we’re seeing, in the next 12 months, an ’87-type of crash,” Faber said with a devious chuckle on Thursday’s episode of “Futures Now.” “And I suspect it will be even worse.”

Faber, the editor and publisher of the Gloom, Boom & Doom Report, has recently called for growth stocks to decline. And he says the pain in the Internet and biotech sectors is just getting started.

“I think there are some groups of stocks that are highly vulnerable because they’re in cuckoo land in terms of valuations,” Faber said. “They have no earnings. They’re valued at price-to-sales. And this is not a good metric in the long run.”

WATCH: Marc Faber – Coming crash will be worse than 1987.

To be sure, there are prominent investors that disagree with Faber, among them legendary stockpicker Bill Miller, who said this week that conditions for a bad market simply don’t exist.

But it’s not just momentum stocks that Faber is wary of. He says that investors are coming to a stark realization.

“I believe that the market is slowly waking up to the fact that the Federal Reserve is a clueless organization,” Faber said. “They have no idea what they’re doing. And so the confidence level of investors is diminishing, in my view.”

As investors adjust to this fact, and valuations shrink, he predicts a massive decline in the market.

“This year, for sure—maybe from a higher diving board—the S&P will drop 20 percent,” Faber said, adding: “I think, rather, 30 percent. Who knows. But all I’m saying is that it’s not a very good time, right now, to buy stocks.”

Previously, in August 2013, Faber predicted that a 1987-style crash was coming. The S&P 500 is about 9 percent higher since he made that call. – CNBC.

Top Economists Warn Germany That EMU Crisis As Dangerous As Ever
Professor Michael Burda, from Berlin’s Humbolt University, said the eurozone’s
core problem is Germany’s current account surplus
 Photo: AP

Council on Foreign Relations compares Germany’s hardline stance with US policy towards Britain at the end of the Second World War. 

The eurozone debt crisis is deepening and threatens to re-erupt on a larger scale when the liquidity cycle turns, a leading panel of economists warned in a clash of views with German officials in Berlin.

“Debts above 130pc of GDP for Italy and 170pc for Greece are a recipe for disaster once we go into the next downturn,” said Professor Charles Wyplosz, from Geneva University.

“Today’s politicians believe the crisis is over and don’t want to hear any more about it, but they have not tackled the core issues of fiscal union and public debt,” he said, speaking at Euromoney’s annual Germany conference.

Ludger Schuknecht, director-general of the German finance ministry, insisted that the debt-stricken states of the eurozone are well on the way to recovery, ending their EU-IMF rescue programmes successfully one by one. There is no need for any major shift in policy. “The strategy has been right. We need to bring down debt and this is now consensus,” he said.

Mr Schuknecht, the chief architect of the EMU anti-crisis regime, said Europe’s banking union may need tweaking but nothing more. “There are some loose ends. These will be tied in a timely manner,” he said.

This optimism is sharply at odds with the view of almost every foreign-based economist attending the event. Charles Dallara, former head of the International Instititute for Finance and chief negotiator for global banks in Greece’s debt-restructuring, said little has be done to put the eurozone on a viable footing, even if sovereign bond yields in southern Europe have fallen to record lows.

“We should not be distracted by what is happening in financial markets, and look at the underlying economies in Italy and Spain. The pace of recovery is so slow and painful that is going to be challenging for democracies,” he said.

“There has been too much belt-tightening and not enough structural reform. Credit is continuing to shrink in the heart of the eurozone. What is needed is a collective effort across the entirety of the eurozone to boost confidence, with a new package of fiscal measures and an end to austerity. Imagine how powerful that would be,” he said.

Benn Steil, from the Council on Foreign Relations, said Germany’s refusal to allow the eurozone rescue fund (ESM) to recapitalise banks directly means there will be no back-stop in place to prevent problems spinning out of control if European banks fail stress tests later this year, as expected.

This ignores the key lesson of the US stress tests, where government capital lay in reserve to ensure the stability of the system. “There is the potential for a fresh crisis if they announce the stress tests without the ESM being able to recapitalise banks,” he said.

While Mr Steil did not cite specific countries, there are concerns that some Irish, Portuguese, Spanish and Italian lenders may fail tests as they grapple with a backlog of non-performing loans.

“Germany and the creditor states are going to have to decide whether they will accept fiscal transfers or whether it is best to wind down the project and let the eurozone unravel,” he said.

Mr Steil compared Germany’s hardline stance with US policy towards Britain at the end of the Second World War, when a prostrate UK emerged with the world’s biggest debts – though US policy later changed. “We are hearing the same language as in the 1940s. The crisis was all the fault of lax policies in the debtor countries. It was precisely the way the US spoke when it was a creditor,” he said.

Mr Steil warned that the achievement of primary budget surpluses in Italy and Greece may prove a Pyrrhic Victory since history shows that heavily-indebted countries are most likely to default once they have crossed this line and can meet day-to-day costs from tax revenue. “This is a good time for Greece to default,” he said.

Professor Michael Burda, from Berlin’s Humbolt University, said the eurozone’s core problem is Germany’s current account surplus – more than 6pc of GDP – and flat wages for a decade. “Germany has to become less competitive or the eurozone is not going to survive. You can’t just save forever. It’s mercantilism and we don’t do that kind of thing anymore. All Germany has to do is to make its people happier by raising their wages,” he said. – Telegraph.

IMF Warns Europe’s Banking System Poses Threat To Global Financial Stability
The eurozone’s creaking banking system poses a threat to global financial stability, the IMF has warned.
IMF says end of low US interest rates and sharp slowdown in China could also derail recovery
Photograph: Oliver Berg/EPA

The eurozone’s creaking banking system poses a serious threat to global financial stability, according to the International Monetary Fund, which warned European leaders to accelerate plans to support weak banks and create a banking union.

In a report that forecasts a “Goldilocks” outcome of stable growth, IMF financial counsellor José Viñals said the end of low interest rates in the US, coupled with a failure by the Obama administration to monitor risky lending, a sharp slowdown in China and disruption to emerging markets could all upset expectations of a smooth recovery.

“Can the US make a smooth exit from unconventional policies? I call this the ‘Goldilocks exit’ – not too hot, not too cold, just right.

“This is our base line, most likely outcome. After a turbulent start, the normalisation of monetary policy has begun. But a bumpy exit is possible.”

He said the eurozone’s incomplete repair of bank and corporate balance sheets continued to place a drag on the recovery, while the widening gap between Germany and the poorest of the 18 member states was restricting the flow of funds around the currency zone and hampering the growth of smaller businesses. “Thus, further efforts must be made to strengthen bank balance sheets, through the European comprehensive bank assessment and follow-up, and to tackle the corporate debt overhang,” he said.

The IMF, which published the global financial stability report on Wednesday, acts as lender of last resort to bankrupt countries and is one of many economic organisations to worry about the effects on global growth of the US attempting to behave as if the recovery is complete when many countries are still struggling to cope with the aftershocks.

Since last May’s signal from the US Federal Reserve that interest rates would soon begin to rise, policymakers have been wary of the knock-on effects of a return to more normal rates in the US. The hint by former Fed boss Ben Bernanke caused a flight of investor capital from Turkey, Brazil and South Africa back to the US in the expectation of better returns.

Willem Buiter, chief economist at US bank Citi, told an audience at the IMF’s spring conference that the US central bank was irresponsible to predict higher interest rates without putting in place insurance plans for countries that will be hit by the increased costs.

Buiter said greater co-operation was needed to insulate weaker countries from the ripple effects of policy changes in the US.

A refusal by the European Central Bank and its boss Mario Draghi to make borrowing cheaper for local banks was also a concern, he said.

“We talk about the US exiting loose monetary policy and low interest rates, but the eurozone has not yet even entered. Europe is too confident that everything will be OK when its banks are still in need of massive support,” he said.

“The markets are strong, but investors are still sniffing the glue provided by Draghi and his declaration to do whatever it takes to rescue the euro.”

Buiter said the banking union needed a €1tn fund to underwrite European banks and not the €55bn proposed by Brussels.

Alistair Darling, the Labour MP and former chancellor of the exchequer, said the banking union was desperately under-capitalised.

“In my experience €55bn only rescues one bank,” he said.

“We kid ourselves into believing that it is all over and a banking crisis could never happen again. This is very dangerous. “

Viñals also explained that a repeat of the sub-prime loans disaster that sparked the financial crisis was also possible, though less in the housing market and more in the sale of corporate bonds. He said the value of low quality bonds, issued by companies with a high risk of going bust, was more than double the level over the last three years as the amount recorded before the crash.

While commending US regulators for being “on top of this”, he said a panic could increase the costs of financing company debts and trigger a flurry of defaults and a second crisis.

Charles Evans, president of the Federal Reserve Bank of Chicago, argued that the US economy was still fragile and in need of huge support from the central bank.

Signalling that many members of the Fed board support chair Janet Yellen’s doveish stance, he said: “US unemployment is higher now than it was at its peak in the last recession. US workers are not in as strong a position to withstand shocks and face many obstacles to higher productivity and wages from technological and structural changes.”

Viñals said emerging markets from Turkey to Indonesia could struggle in the face of rising interest rates, weakening corporate earnings, and depreciating exchange rates.

“Indeed, in this scenario, emerging market corporates owing almost 35% of outstanding debt could find it hard to service their obligations.

While the situation varies widely across countries, those economies under recent pressure also share some vulnerabilities in their corporate sectors,” he said.

To solve issues that reveal the inter-connectedness of national economies, he said: “We need greater global policy cooperation as we are all in this together. This extends to monetary policy, financial regulation and supervision, and ensuring orderly market conditions.” – Guardian.

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