July 5, 2012

Lehman Redux: Is It Time to Panic Again? Gross, Others Think So

The LIBOR-fixing scandal, other signs reek of 2008

Bill Gross, Chairman, PIMCOAll the panic you need in 140 characters.

The wonders of modern technology mean Bill Gross (left) can efficiently text that the end of the world is nigh in between posts about Kim Kardashian’s new shoes and Justin Bieber’s puppy. Forget the flowery prose and often inappropriate metaphors he routinely employs in his monthly outlook. His Twitter hash tag of the past few weeks is replete with warnings of a slowing global economy.

“Credit creation lifts financil risk mrkts but only so far,” read his July 4 tweet. “Ultimatly wealth creation comes from the real econmy & it’s slowing markedly.”

His observation follows a recent conference in which his colleague, PIMCO CEO Mohamed El-Erian, said, “We are experiencing a global realignment our children and grandchildren will talk about.” The conference’s other keynote speakers, including DoubleLine Funds' Jeff Gundlach, agreed.

So is this another “Lehman moment?” Is it time to allocate a significant portion of your client’s portfolio to shotgun shells and canned goods?

While it might be a tad overly dramatic, signs point to yes.

Last month Robert Zoellick, outgoing head of the World Bank, warned that financial markets face a rerun of the “great panic of 2008.” His comments, made to the U.K.’s Daily Mail, came on the same day as a “raft of dismal economic news from around the world, with manufacturing output falling in Britain and Europe, unemployment jumping in the eurozone and America, and fast-emerging economies such as Brazil and China showing signs of running out of steam.”

But that was last month, eons ago in the increasingly volatile, yet interconnected world in which we live. Is it getting any better? Quick answer: no, as the European Central Bank, which has an inate fear of inflation, felt compelled on Thursday by the economic crisis in Europe to cut its benchmark interest rates by 0.25 percentage points, bringing the refinancing rate to a record low of 0.75% and the overnight deposit rate to zero.

“The bank's president, Mario Draghi, conceded Thursday that the eurozone's debt crisis had led to a generalized economic slowdown, hitting even the strongest countries in the region,” The Wall Street Journal reported. “The governing council's decision was unanimous, indicating that even hawks such as German central bank chief Jens Weidmann had voted for the easing.”

“Are global central banks in panic mode?” was the headline response on Yahoo’s Breakout.

“Some, including me, suggest that all this easing, from all these banks, all at once smells—at best—of a well-coordinated response to a serious economic threat,” wrote Breakout columnist Matt Nesto. “At worst, I think it suggests they're in panic mode.”

To be fair, there were signs of economic life, however small, with ADP on Thursday reporting 175,000 private-sector jobs created in June, though that drastically overshot the government's June report on Friday of only 80,000 jobs created. ADP's number was also below earlier analyst estimates of at least 200,000 new jobs added each month for the remainder of 2012, and barely above the 150,000 new jobs needed simply to keep pace with economic growth and new job market entrants. So much for the good news.

The LIBOR-fixing scandal and the renewed spotlight on banks certainly reeks of 2008, so if the best of the very worst is the most one can hope for, a heightened state of anxiety (or panic if you prefer) just might be the appropriate response.

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Check out Don’t Believe June Jobs Report, TrimTabs Says at AdvisorOne.

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