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Boom/Gloom Index suggests markets on the edge

Chemical companies, Consumer demand, Economic growth, Financial Events
By Paul Hodges on 09-Aug-2011

Index Aug11.pngThere’s “a 50% chance that the US could slide into a new recession“, according to Harvard’s Prof Martin Feldstein. He sees the economy as “really balanced on the edge“, with housing still depressed and consumer spending flat.

The blog’s own IeC Boom/Gloom Index is flagging similar concerns. As the chart shows, the Index for July (blue column) was very close to 4, which has marked the divide between growth and recession in the past. Equally, the US S&P 500 Index (red line) seems to have peaked in Q2, and to now be weakening.

This is unsurprising, given policymakers insist on viewing current problems as only being related to liquidity. As the blog argued in detail last month, they are about solvency. Providing more liquidity, as announced in the weekend G7 statement, buys time. But it does not tackle the fact that the PIIGS debts will not be paid back in full. Equally, this means many of those banks who made these loans are possibly also bankrupt.

The real worry may be that there is so little discussion of this very obvious risk. Many companies, just like most investors, seem to have convinced themselves that ‘all news is good news’. This has uncomfortable echoes of 2007-8, when it was also widely believed that policymakers could always avert a crisis.