Panic on the Street?

by CC June 1, 2011 6:05 pm • Commentary

This morning, after another batch of really crummy economic data was released, I asked, somewhat rhetorically, on Quick Hits:

Jun 1 2011, 10:13 AM     CC: How long can the market shrug off what clearly looks like a growth slowdown?
Jun 1 2011, 10:17 AM     CC: In the interest of avoiding any sort of confirmation bias, what were the recent econ data that were upside surprises?
It didn’t take long for those questions to be answered. The market got hit pretty hard today. If you haven’t been following the economic data that has been coming out lately, here’s a good run-down:

The last month has been a horror show for the U.S. economy, with economic data falling off a cliff, according to Mike Riddell, a fund manager at M&G Investments in London.

“It seems that almost every bit of data about the health of the US economy has disappointed expectations recently,” said Riddell, in a note sent to CNBC on Wednesday.

“US house prices have fallen by more than 5 percent year on year, pending home sales have collapsed and existing home sales disappointed, the trend of improving jobless claims has arrested, first quarter GDP wasn’t revised upwards by the 0.4 percent forecast, durables goods orders shrank, manufacturing surveys from Philadelphia Fed, Richmond Fed and Chicago Fed were all very disappointing.”

“And that’s just in the last week and a bit,”…

…”QE3 anybody?” asks Riddell.

It gets worse. Mortgage applications declined. Auto sales are down. China’s growth is slowing. Greece’s debt rating was cut again. And speaking of Europe, Paul Krugman:

A very important column from Martin Wolf. One way to summarize his argument is to say that slow-motion bank runs are already in progress in the European periphery, and that these countries’ banking systems are being sustained only by a process in which, say, Ireland’s central bank borrows from the Bundesbank and then lends the funds on to Irish private banks to replace the fleeing deposits…

…You can see why we’re now at the panic stage. The Bundesbank is already very upset about its large claims on troubled debtors, which are backed by sovereign debt as collateral. Yet if financing stops in the wake of a debt restructuring, the result will be to collapse the debtor nations’ banking systems, a process Martin believes would lead to their ejection from the euro. (He makes me look like an optimist!)

So the ECB keeps saying that restructuring is unthinkable. Yet austerity programs are not working; the prospect of a return to normal financing is receding rather than approaching.

If you ask me, the water level has now dropped so far that the fuel rods are exposed. We really are in meltdown territory.

Who knows how all of this will play out. Perhaps it’s just a slowdown domestically at the end of QE2. But there are a ton of headwinds on the world economy. And the US just isn’t in the right place politically for any more stimulus or easing. Dan and I had been scratching our heads recently about how the market, over the past month, seemed to be ignoring what was going on. The market certainly isn’t in panic mode yet. But, if today was any indication, the market can go from blissful ignorance to acute awareness on a dime. Stay tuned.