Market Turmoil Is Not a 2008 Redux

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Kathleen Madigan

May 27, 2010, 12:01 a.m. EDT · Recommend · Post:

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Why isn't BP halted during 'top-kill' procedure?

By Kathleen Madigan, Dow Jones Newswires

NEW YORK (MarketWatch) -- The current financial-market turmoil is leading to worries about a 2008 redux and a double-dip recession. Economists are discounting the scenario in part because of government actions and stronger economic fundamentals.

The takeover of a Spanish regional bank, plus tensions between the two Koreas, sent investors rushing to safety plays. Stock prices are collapsing, measures of volatility are jumping, and commercial-paper markets -- where companies borrow to fund such basic needs as payroll and rent -- are seeing durations shorten to below one month.

With the US stock market reeling over worries in Europe and Asia, Antoine Van Agtmael, chief investment officer at Emerging Markets Management explores other regions to invest, and whether you can trust Chinese government data.

If all that sounds familiar, it should. A similar scramble happened in 2008 after Lehman Brothers Holdings Inc. collapsed, money-market accounts broke the buck, and the commercial-paper market became so skittish that overnight lending became the norm.

The resulting liquidity crunch caused banks and other lenders to stop offering money to businesses, or made the rates onerously high. The lack of funding hit small businesses hard, leading to order cancellations, payroll cutbacks and inventory drawdown. The economic recession worsened sharply in the wake of Lehman's bankruptcy.

Why won't the jitters caused by the European crisis paralyze credit again?

First, keep in mind that credit spreads haven't widened as much as they did in 2008. Economists at BNP Paribas measure stress in the credit markets by the difference between the three-month London interbank offered rate, or Libor, and overnight index swaps. The spread has doubled to about 26 basis points in early May from the range of 10 basis points through most of March and April.

In late 2008, however, the spread was in excess of 300 basis points, suggesting that today's market stress is hardly comparable to the previous situation.

Also, as Edward Yardeni of Yardeni Research noted, there is less collateral risk in Europe now compared with the 2008 situation.

"The bonds of Europe's dodgy sovereign borrowers haven't been commingled with other securities in blind pools of collateral," he said.

Another key difference is that the U.S. and global economies are in better shape than they were in late 2008. Back then, the U.S. had been in recession for three quarters. Although it isn't official, the U.S. has probably been in recovery for three quarters now.

In addition, the consumer sector is on the mend. The Conference Board's confidence index rose to 63.3 in May, the highest reading in more than two years. Better job markets -- payrolls have risen for four consecutive months -- are lifting sentiment. Read more about consumer confidence.

Home prices have finally stabilized, and sales of existing homes jumped 7.6% in April, thanks to the buyer tax credit.

James Bullard, president of the Federal Reserve Bank of St. Louis, discounted the idea of a contagion spreading through the global economy.

In a speech delivered Tuesday in London, Bullard said bailout plans in place should buy "substantial time for European governments to enact fiscal retrenchment programs."

In addition, events of the last two years show industrialized economies "will not allow major financial institutions to fail outright at this juncture," Bullard said.

Already, the European Central Bank is committed to buying sovereign debt in the secondary market, which will remove the securities from banks' balance sheets.

As has been the case throughout this business cycle, shocks can derail even the best-crafted forecasts. That could be why the latest twist on the economic landscape -- the Korean saber-rattling -- has caught the attention of investors. So far, though, the recovery has taken all the potential setbacks in stride.

Kathleen Madigan is the primary author of the Big Picture column. This column originally appeared on Dow Jones Newswires.

It's been murky trading BP during the Gulf of Mexico oil spill at the best of times. There's a case to be made for halting the trade of its shares.

4:39 a.m. Today4:39 a.m. May 27, 2010 | Comments: 9

I think there needs to be some balance. Do you really think the consumer is in better shape. Look at actual debt taken out. It continues to fall. Look at gasoline sales. Look at the negative wealth affect's of losing your house equity. How about two years of graduates who are now mainly living off friends and parents. My fingers are too tired to give you more examples. The only thing..."

- Ohwell12 | 11:43 p.m. May 26, 2010

"U.S. stock futures leap on China's denial of euro-zone bond sales http://on.mktw.net/aWLnuF" 4:56 a.m. EDT, May 27, 2010 from MarketWatch

"U.S. Treasury sells 1.5 bln shares, a 19.5% stake, of Citigroup for $6.2 bln http://on.mktw.net/9Ckjdp" 3:06 p.m. EDT, May 26, 2010 from MarketWatch

"Dow falls 69 points, closing below 10,000 for first time since February http://on.mktw.net/c7VjBl" 3:06 p.m. EDT, May 26, 2010 from MarketWatch

"U.S. stocks turn negative in final half-hour of session; Dow off 19 points http://on.mktw.net/94GLvw" 2:28 p.m. EDT, May 26, 2010 from MarketWatch

"U.S. new-home-sales report is strongest in nearly two years http://on.mktw.net/cYdA5S" 9:04 a.m. EDT, May 26, 2010 from MarketWatch

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