Friends who know that I work for Bob Prechter’s firm always ask me questions about the markets. Yesterday I went to a small dinner party with my high school friend, and after a few drinks and appetizers the conversation quickly turned to subprime mortgages and the turmoil in stocks.
I wouldn’t even bring this up – because who doesn’t talk about the “credit crunch” these days -- but did I mention that my friend is Russian and the dinner party was in his home in suburban Moscow?
The credit contraction that reportedly started because of the troubles with the U.S. subprime mortgages, the “junk bonds” of the real estate world, is marching around the globe. Even in far-away places like Russia -- which seems insulated against cash flow problems by its vast oil and gas proceeds -- the liquidity crunch is the talk of the town. People are worried.
And they should be. Just like the Dow, Russia’s RTS stock index has lost a big chunk of its value in recent weeks. So have other European stock indexes. Deutsche Welle reports that in Germany, some “banks are still looking vulnerable... as reports broke of another US building society with connections to Germany filing for bankruptcy.“
What’s the “connection,” you ask? Turns out that Deutsche Bank and Commerzbank, two of Germany’s biggest financial powerhouses, “are among the creditors of HomeBanc Corp.” Now that HomeBanc has filed for bankruptcy, German financiers are worried if they’ll ever see any of the $4.9 billion HomeBanc had as “debts” on its books. These banks are just two of several German financial institutions with ties to the US mortgage market.
Maybe I’m naive about the workings of the modern financial system, but is it not insane that mortgages that you and I get from our American lenders could very well be funded by German investors? Or does money truly know no borders these days?
To stop the pool of available credit in the system from shrinking further, central banks are “injecting emergency funds” into the market – to the tune of $300 billion, so far. The question is, will it help save the stock market from a full-blown crash?
Opinions on that are divided, and at Elliott Wave International we don’t have a crystal ball. But we do believe that the underlying dynamic of the current credit contraction is faltering investor confidence – a psychological phenomenon, not a financial one. For that reason, we continue to monitor wave patterns in Europe’s major stock markets and report our conclusions to subscribers.
Last Friday (Aug. 10), our European editor, Tom Denham, told readers of his Mn-Wd-Fri European Short Term Update that the volatility index for the DAX, Europe’s benchmark stock index, “has recently soared to 3 standard deviations above its 60-day average,” which, based on prior data, could be a bullish technical sign.
Even so, “equity investors are more afraid now than they have been in years,” says Tom. And “fearful investors sometimes decide to sell everything regardless of value and move to cash or bonds.”