Monday, May 26, 2008
S&P, DJIA, NASDAQ, Russell, Broad Index Declines
The US Stock market is poised for a broad sell off. The rallies we've seen since the mid-March Fed rescue of Bear Stearns are tapped out, and the broader effects of the plummeting US housing market are beginning to impinge on the average American's budget. The US consumer's average debt to income ratios have risen from approximately 90% in the mid 1990's to an impressive 130% at present. Similarly, the mounting trade deficit cannot remain. Financing our consumption with debt from over priced assets has left the consumer between a very hard rock and a very hard place. At the center of this recession is a more complex problem than defaults on subprime mortgages. This is an economically driven correction of financial culture that has lived beyond its means. You cannot consume more than you produce perpetually into the future, particularly when your assets to finance your overspending are rapidly devaluing. Banks are rapidly de-leveraging in a process of selling off assets to improve the asset to equity ratio. Similarly, new risk management criteria including a standardized international banking regulation known as Basel 2 are being embraced by large US broker dealers. These regulations force banks to recognize more complex off balance sheet assets, previously used to fudge capital requirements. To further exacerbate the problem, US consumers are facing rapid commodity price inflations. A number of analyst have tried to identify the causal link including rapid emerging market demand, a flight of capital from dollars to hard goods, and the creation of financial instruments on Wall Street that make commodities an available part of any speculators (or pension fund managers) portfolio. Simply put, there is no room for expansion of consumer spending. Instead, there are very convincing reasons to believe, the average consumer will have to retract, and retract significantly. Consumer spending is approximately 3/4 of the United States Gross Domestic product.