AP Photo / Richard Drew
On May 6, shortly after 2:30 p.m., stock markets in the West went bonkers. In the span of 17 minutes, major indices shed nine per cent of their value, erasing $1 trillion in wealth. Then, just like that, prices rebounded and it was over. Dubbed the “flash crash,” regulators are still probing what went wrong. Analysts have voiced their suspicions. A computerized trading glitch was to blame, or someone had a “fat finger” and punched in an errant sell order. It had to be some fluke, though, because nothing warranted a drop in prices like that.
Except two weeks later, markets were back to the gutter level of the flash crash. There may be flaws in the way computers now handle most trades, but it’s also true a great many investors that day believed stocks were dramatically overvalued.
The sense of fear and anxiety now infecting the markets is showing up everywhere. In just the last month, Canada’s S&P-TSX Composite Index has shed seven per cent of its value. Exchanges in America and Europe fell even harder, dropping 11 per cent. Those people who blissfully watched their portfolios rebuild from the crash in 2008 have now seen their wealth drop sharply. Meanwhile, commodities like oil and copper are way down on worries the weak economic rebound will shift back into reverse. Not even the massive bailouts in Europe—first a $140-billion rescue deal for Greece, followed by a surprise $1-trillion “shock and awe” aid plan for other troubled nations like Spain and Portugal—were enough to convince investors the growing debt crisis can be contained.
Cue the doctors of doom. Forecasters like Nouriel Roubini at New York University are back in the headlines echoing the same warnings they had for the world three years ago about debt and overspending. “The recent global financial crisis is not over; it has, instead, reached a new and more dangerous stage,” Roubini wrote in an ominous piece entitled Return to the Abyss. “The recent events in Greece, Portugal, Ireland, Italy, and Spain are but the second stage of the global financial crisis.” And now the United Kingdom, Japan and the United States—Canada’s largest trading partner—are at risk.
How did we find ourselves back on the ledge so soon? Most economists believed the recession was, by and large, behind us. The crisis that exploded in 2008 has been downgraded from the Second Great Depression to the Great Recession to just another downturn, in the same way meteorologists scale back their assessments of subsiding storms. That sunny outlook was reflected in the markets. Prior to this correction, stocks had soared 80 per cent in just over a year.
But the recovery may not have been nearly as robust, or genuine, as first thought. In the U.S., jobless claims unexpectedly rose last week. The U.S. Conference Board’s index of leading indicators, which forecasts future economic trends, declined in April for the first time in 13 months. Meanwhile, America appears to be in the grips of deflation, the vicious downward cycle of prices, demand and wages that led to Japan’s “lost decade.” “What you’re seeing around the world is investors and markets having an ‘aha’ moment,” says Daniel Arbess, who manages the Xerion Hedge Fund at Perella Weinberg Partners in New York. “They’re recognizing that the rally in credit and equity markets that’s taken place may turn out to have been somewhat artificial because it was facilitated by cheap money.” Or as Tom Samuels, manager of the Palantir Fund in Houston put it to the Associated Press: “The economic recovery story has started to look like a mirage.”
If that’s the case, the dreaded double-dip could become a reality. Since the first mention of green shoots last year, economists have warned that if governments cut back on the trillions of dollars they’ve spent to stimulate their economies, it might plunge the world back into crisis. Instead, by bailing out car companies, the housing sector and consumers—practically dropping money from helicopters—countries have taken on debt loads that now form the heart of this new crisis. Some economists warn there could be a wave of defaults across the world. At the very least, as countries slash spending and raise taxes to reduce their deficits, the result could be years of stagnant growth.
Canada, which came through the recession remarkably unscathed, is arguably better positioned than most countries to weather a second crisis. But that doesn’t mean we’re immune. If the European sovereign debt crisis mutates into something larger, Canada could slip back into recession. And there are reasons to fear it could be worse this time.
The Plague of Athens was a deadly outbreak in 430 BCE that killed a quarter of the city’s population and hastened the end of the Athenian empire. Now it could just as easily refer to the epidemic of toxic debt spreading out from modern Greece.
