Events in Europe appear to be causing unrest in markets. Again. Or perhaps reflecting unrest, depending on your point of view. Things have been rather bad for some time, but they may be setting themselves up for another fairly dramatic plunge.
Everyone notices the various stock indices falling, but several
things in particular point to a bad round of things in the short term.
The first is a flattening yield curve,
and especially a drop in long-term rates. Lending rates are determined
primarily by two forces -- 1) supply of savings, and 2) demand for
loans. At the onset of recession, rates tend to drop, but in
particular, long-term rates tend to drop dramatically as businesses fear
making new long-term investments. Meanwhile, some demand persists for
shorter-term credit as businesses try to wrap up whatever they have
going on at the moment.
On the flipside, lenders tend to pile on to the long end of the
curve to lock in a higher interest rate and avoid short-term lending
because they fear being forced to roll over the shorter-term loan at an
even lower rate in the near future. Together, the two groups wind up
working at cross-purposes on the loan market, and lending terms tend to
'invert,' with short-term rates sometimes actually higher than long-term
rates. Sometimes it does not quite get to that point, and with
short-term rates as low as they are now, and demand in general as low as
it is, it would be rather difficult for them to invert at this point.
But the curve is definitely flattening.
The second big thing is falling factor prices, and as anyone who
drives a car has noticed, oil prices have been falling pretty rapidly --
from about $105 per barrel about a month ago to about $85 today. Some
of this is due to new supply, as 'hydraulic fracking' technology has
taken off of late. But that has been going on for some time, and surely
cannot account for such a rapid movement. Many other commodity prices
are falling as well, and if employment continues to stagnate as badly as
the last labor report indicated, wages will eventually drop, too.
Several times since the 2008 crisis, I have thought that we were
entering into another deep drop, but each time it has proved to be less
dramatic than I had thought. I do think that when all the dust settles
and all the revisions are in, another small event will be declared in
the 2010-2011 period which did not quite register enough to be called an
official recession. It is hard to say if this event will prove
particularly more significant or not.
But eventually, 'the big one' will come...