THE 2007 CREDIT CRISIS: THEN AND NOW

dboy

In my 34+ years on the trading floor of the Chicago Board of Trade and the CME I can honestly say that 2012 was the “Year of the Headline.” While Google’s top 10 trending stories are Hurricane Sandy, Kate Middleton’s pictures, the 2012 Olympics, the SOPA debate, the Costa Concordia crash, the presidential debates, the stratosphere jump, the Penn State scandal, the Trayvon Martin shooting and the Pussy Riot band, none of that had much to do with the ups and downs of the S&P 500 futures.

When I look back, one of the other times headlines played such an important role in moving the S&P was during the 1990 allied invasion of Iraq, when Saddam was lobbing SCUD missiles into Israel and seeing how that played out live on television. Everyone was glued to Fox News as it showed the anchorman running for cover.

Five years into the credit crisis and all its headlines, the markets are still churning. While the stock market has emerged from the global financial panic of 2007, it all started with two hedge funds that made some big losing bets in the mortgage market that helped take down Bear Stearns. No one could have known that the brokerage failure was going to be a prelude to one of the largest global financial meltdowns since the 1929 stock market crash and Great Depression. Had Congress not passed the $700 billion bailout plan on Oct 8, 2008, and the Federal Reserve not pumped money into the system, there would have been a full -blown meltdown in the U.S.


Chart by Wonkblog


The repercussions of the credit crisis quickly jumped to Europe and then around the globe, closing banks from Ireland to Spain. Tightening credit and global job loss helped push the global economy into a recession. As the markets bounced, several countries took action to stimulate their economies. In 2009, the Democrats in Congress passed President Obama's request for $787 billion in economic stimulus measures.  China followed suit with nearly $500bil in stimulus and several other central banks followed the United States and China’s lead. At home in the U.S., the government was dealing with skyrocketing unemployment and the bankruptcy of Chrysler and General Motors (GM) to the tune of $60bil and the loss of thousands of jobs. Things appeared to level off in 2009 when many of the banks’ stock prices leveled off. After reporting large profits most of the banks began the process of returning the bailout money they received from the federal government as unemployment continued to rise at record levels.

In 2010 the markets started heating up again as Greece's debts continued to accumulate. As concern over Greece's debt grew, it weakened many European economies and stock markets and slowed growth in China. In May of 2010 the European Union and the IMF pledged nearly $1 trillion to bail out countries in need. Countries like Portugal and Ireland topped the list. The problem was the U.S. was slowing again and the Federal Reserve announced a second round of “quantitative easing.”

Additionally, a tax deal was struck between the Republican Congress and President Obama. In 2010 Washington continued to struggle with its budget. After promising to making deep spending cuts and clashes between the Democrats and Republicans and within hours of a government shutdown, President Obama and House Speaker John Boehner struck a deal that was supposed to reduce spending by $38bil during the last six months of 2010. Long before the deal was even cut  both the Democrats and the Republicans started looking at the 2012 budget and the federal debt limit, which was hit in May with the Treasury saying it could manage to pay its bills up to Aug. 2. By the middle of the summer the talks turned negative and have continued that way ever since. On July 31 President Obama and congressional leaders announced an agreement that would raise the debt ceiling by $2.4 trillion. Under the plan which was approved by the House on Aug. 1, the Senate was given the task of coming up with a second round of deficit reductions by Thanksgiving. The automatic spending cuts would mean across-the-board spending reductions in Medicare payments to health care providers, military spending cuts and education, but the committee never reached a deal, which set the stage for a yearlong political dogfight. In August 2011 Standard & Poors downgraded the United States, removing it from its list of risk-free borrowers.

In 2012 the job picture started to improve. The Dec 2011 jobs report added 200k new jobs and the jobs rate dropped to 8.5%, the lowest on three years. There was a flurry of improvements on the economic front as consumer confidence jumped.After a jump in small business and factories activity, the economic news was starting to show some momentum. Over the next six months, job growth slowed to a net gain of just over 100k jobs, not enough to keep the economy going and not helping President Obama in his re-election bid.  It became apparent that after a small uptick in the economy, employers remained cautious. This was not the only problem the administration was dealing with. With all the fighting going on and the inability to work together the next thing to worry about was and still is the “fiscal cliff.”  Jan. 1, 2013, is the date when the Bush tax cuts are set to expire. Both sides say they do not want this to happen, but with five days left in the year the government is still playing Russian roulette.  The big concern is what the “cliff” will do to such a fragile economy. The concern is the  tax increase that would come from the expiration of both the Bush tax cuts and the Obama stimulus would follow a decade of little to no income growth for many people in the U.S.

I did my best to explain something I knew very little about five years ago. And while this may not be a complete explanation of how things have gone over the last five years, it does lay out how it started and where we are in the process. It’s hard to believe that in the 11th hour we had to worry about this over the Christmas holidayand now into the end of the year. I said over four years ago that this was a 10-year process, that this would not go away, and now it’s looking like it could take a lot longer than that to clean this mess up.

Let’s cross our fingers that the government does something right over the next five days for the people of the United States and not for themselves.

Danny Riley is a 34-year veteran of the trading floor. He has helped run one of the largest S&P desks on the floor of the CME Group since 1985.


Our view:
It’s hard to believe that there are just six days and three trading days left in the year. Time is running out for the cliff. Have we changed our opinion that the government will come to a deal? No, we have not, but they better get to it quickly. As we said going into Monday, if you get a weak expiration, that weakness generally spreads into Monday. That was correct. Now the question is how long will the weakness last? Today is the start of the Santa Claus rally, the last three trading days of the year and the first two of the new year.  


For today:

  • It’s 7:15 a.m. and the ESH is trading 1423, up 3.25 handles; crude is up 54 cents at 89.15; and the euro is up 10 pips at 1.3211.
  • In Asia, 10 out of 11 markets closed higher (Shanghai Comp. +0.25%, Hang Seng +0.16%).
  • In Europe, 5 out of 10 markets quoted are trading lower (CAC -0.24%, DAX -0.47%).
  • Today’s headline: “S&P 500 Futures Seen Higher as Budget Talks Resume”
  • Economic calendar:  MBA Purchase Applications, ICSC-Goldman Store Sales, Redbook,  Richmond Fed Manufacturing Index, State Street Investor Confidence Index.
  • Globex volume: 318k ESH and 2.4k SPH traded
  • Fair value: S&P +2.25, NASDAQ +3.50


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