October 2007 was the launch point for the last big crash. If you had the Greedometer and mini Greedometer, you would have recognized it (see here). But if you only worked from  anecdotal economic and fundamental data, what could you have looked for?

  • flat/inverted US Treasury yield curve
  • Fed interest rate cuts
  • bank loan loss reserves growing
  • the financial sector hitting a lower peak in October 2007

By the time we got to the recession entry point (Dec 2007):

The Fed had been dropping rates for 4 months.

fed funds 2007 to 2011

Banks had begun preparing for a storm by raising loan loss reserves from levels far too low.

bank loan loss reserves 2007 to 2011

Bank profitability had been in decline for a while because of the flattened yield curve – but accelerated with the building of loan loss reserves. This put downward pressure on bank stock prices (proxy: XLF).

XLF 2007 to 09

 

Where  we are now:

Flat Yield curve-> Yup.

Fed to begin dropping rates next month. Last time, the Fed had 5.25% of dry powder to burn through.  Now: 2.5%.

Fed funds now

Banks are about to begin prepping for a storm by building loan loss reserves — from almost the same levels (too low) as was seen in 2007.

bank loan loss reserves now

Bank profitability is about to get squeezed. So is their stock price.

XLF now

 

What’s different now vs 2007:

  • less interest rate room for the Fed to cut
  • far worse debt/GDP levels (no more tax cuts that blow out the debt!)
  • U.S. stock markets are considerably more overbought and overpriced now than in 2007.  At the peak of 2007, the S&P500 CAPE was approx 27. It is now approx 34. (long term mean approx 16)
  • global central banks are sitting on over $20T on their balance sheets they did not have in 2007 (bloated)
  • The Greedometer and mini Greedometer sequence is starting out much higher & faster than in 2007. Translation: a faster & deeper crash is getting ready to launch.

Everyone expects the Fed to drop the Fed Funds rate at the July 30-31 FOMC meeting by 25bps –because of one dovish and vague sentence at the end of the statement issued last week. According to the Greedometers, a lot of pain is built-up/ready to be unleashed. The Fed better start hinting of a 50bps cut at the July meeting and that more will be coming. Start going all-in.