Source: pixabay
Dear Diary,
The Dow rose 110 points yesterday to settle at 17,972. It seems to be struggling with the 18,000 milestone, as though some inner voice were telling it to beware.
An inner voice is telling us to beware too. It’s impossible to know what will happen next. All we can say with any confidence is that something will happen. Probably something alarming.
Everywhere we look we see rivets popping…
Global Output Shrinks
The Baltic Dry Index has just put in a new all-time low. The index measures the cost of shipping raw materials over 23 sea routes.
As world trade sinks, so does the index, all other things being equal (which, of course, they never are).
Bank of America Merrill Lynch says global GDP may fall by $2.3 trillion in nominal terms (that is, before adjusting for inflation) this year. To put that in perspective, nominal global GDP has only fallen five times in the last 34 years.
Meanwhile in the US, sales are weak. New building permits are weak. And income growth is weak.
And over in Europe, talks have stalled between Greece and its creditors.
We rate the chances of a “Grexit” at about 50/50 in the short term… and closer to 80/20 in the long term. What that will mean exactly nobody knows… but it’s bound to mean something.
Most likely, it will mean an even lower euro versus the dollar. And maybe a collapse of euro-denominated subprime government debt.
The question is: What will the sovereign bonds of Portugal, Spain and Italy be worth after Greece defaults? Won’t bondholders start to get nervous that a domino effect may be under way?
The European sovereign debt market is bigger than the US mortgage market. When it cracks, there are sure to be fireworks. Because there are some $26 trillion in derivatives tied to it.
Citigroup’s Oil Bombshell
The falling price of crude oil was first thought to be a good thing. Consumers could spend less on gasoline. But a 60% drop in the price of the world’s most important commodity can’t happen without major disruptions.
