A few weeks ago, many market bulls were pointing at the steady, and impressive growth in the stock market as signs the recovery was ramping up. According to the bulls, the growth in the Dow, NASDAQ, and S&P 500 underscore increased confidence in the economy, and businesses.
But as yesterday revealed, that confidence is more like a thin veil of hope that can be shattered at a moment's notice.
While the exact details of what happened yesterday on the Dow—dropping an incredible 750 points in 15 minutes, and at one point being 998 points down, a 10% loss—are still being sorted out, it doesn't matter much whether it was a human error or not. The fact is that the market was already down by the time the crash happened in the afternoon. And it was down on worries about Europe. Worries about fiscal instability in Spain, Portugal, and Italy. Worries about the unrest in Greece spreading. Worries about French and German bank exposure to sovereign debt losses.
The simple truth is that "the recovery" is a sham. There is no stable, solid, sustainable foundation for the economic gains we've had in the past year. Since the market hit a low in March 2009, growth in GDP has been virtually all government driven. Government spending has stimulated some economic growth, this has given confidence to the markets, and in turn the slingshot effect has given businesses confidence to restock their inventories. Not only is this unsustainable growth, it is fragile and could collapse at a moments notice.
Unfortunately, the U.S. isn't in much better shape than Europe. Our debt to GDP ratio is multiple times larger than Greece. The difference is that we don't have a history of defaulting on our debt like Greece does. And we are the United States of America, an intangible position of prestige that gives bondholders confidence that we just can't fail. It is almost impossible to imagine what a US bankruptcy would look like. So people buy our bonds, even as unsustainable debt and deficits grow.
The lack of fiscal responsibility will catch up with us at some point, and that is the unstable foundation the "recovery" is built upon.
Why did markets freak out? The assumption at first from everyone was the drop was related to European debt. It was a natural assumption, because it was on everyone's minds. Long-term investors in the market wisely stood their ground with the drop, but day traders scrambled for the exits at first, before buyers brought the market quickly back up (600 points in 20 minutes). But the fat finger error aside, the nervousness in the market was quickly uncovered. Investors recognize the real danger of a wave of sovereign debt crises. And the U.S. might not be immune this time around.
I discussed this more last night on RT in an interview about the market crash and Greece. Here is the clip: