...the risk is that this financial shock [Greece, etc] morphs into a negative economic shock and we endure another feedback loop into the markets. The ECRI leading indicator is pointing to much softer growth ahead, and that is with the policy rate at 0%. In the past, the Fed cushioned soft- landings in the real economy by cutting rates (1986, 1995, 1998) but it has no such leeway this time around and the voting public’s appetite for more fiscal largesse is fading fast — one reason why the latest fiscal bill to work its way through Congress was trimmed in half.
... It may be useful, even if you are an economic bull, to go back to that spasm in the summer of 1998 when the Asian crisis came back to bite risk assets in the derriere (taking LTCM along for the ride). The S&P 500 was down 20% back then, not 11% as has been the carnage to date this time around. Credit (Baa) spreads widened 120bps, double the 60bp move-out thus far. Oil prices slid 30% back then; putting the recent 20% dive into some perspective.
The big difference is that back in 1998, the unemployment rate was 4%, not 10%, and jobless claims were 300k, not 460k. Moreover, the median age of the boomer was 42, not 55, and wasn’t in the hole on his/her net worth by an average of $100,000 from two years earlier and sitting on real estate values that had deflated 30% from the peak.
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