By Graham Summers
Starting back in August, I began suggesting that we were approaching a Systemic Crisis/ Crash scenario in the markets.
The technical and fundamentals both supported this forecast, but I completely underestimated the degree to which the Central Banks and EU would attempt to prop up the market.
At that time, I thought it likely we’d see a Crash, which would then be met with another round of stimulus, which would push the economy temporarily into the green. It seemed the most logical outcome given that we were heading into an election year with a President whose ratings were at record lows.
Instead, the Federal Reserve, particularly those Fed Presidents from Financial Centers (Charles Evans of Chicago and Bill Dudley of New York) began a coordinated campaign of verbal intervention, hinting that more easing or QE was just around the corner.
These verbal interventions coincided with coordinated monetary interventions between the Federal Reserve and other world Central Banks: first on September 15 2011 and again on November 30 2011.
The effects of both coordinated moves were short-lived in terms of equity prices, but they did send a message that the Central Banks were willing to intervene in a big way to maintain the financial system. This in turn helped to ease interbank liquidity problems in Europe (more on this in a moment) and maintain the belief that the Fed backstop or “Bernanke Put” was still in effect.
Another issue that served to push the markets higher was European leaders’ decision to go “all in” on the EU –bail out project. I’ve tracked those developments closely in previous articles.
Regarding this factor, I also underestimated the extent to which leaders would push to hold things together. After all, Greece had already received bailouts in excess of 150% of its GDP and still posted a GDP loss of 6.8% in 2011. It’s hard to believe they’d want to accept more austerity measures and more debt.
Moreover, political tensions between Greece and Germany had reached the point that Greeks were openly comparing German Chancellor Angela Merkel and Finance Minister Wolfgang Schauble as Nazis while the Germans referred to Greece as a “bottomless hole” into which money was being tossed.