Markets Panicked Over Deteriorating Fundamentals (Updated)

The “Fed can fix everything” premium has left the market.

The S&P 500 has been falling even more while I compose this this short post. It went from down over 2.2% to off 2.9% of this writing and the Dow went from down 2.1%. to down 2.6%, Ten-year Treasury yields dropped to below 2%. They recovered briefly to 2.05% but are now 1.99%. Oil fell sharply overnight.

Blooomberg has a raft of “panic is on” headlines on its site:

Screen shot 2014-10-15 at 1.15.55 PM

And Ebola fears are adding to traders’ rattled nerves.

One overview from the Financial Times:

One catalyst for the latest burst of risk aversion came from a batch of weak US data releases, which fuelled worries that the US economy might not be immune to a growth slowdown elsewhere.

“Global uncertainty is ravaging markets,” said Camilla Sutton, chief FX strategist at Scotiabank. “The weight of a deceleration in the global growth outlook, complicated by geopolitics and the threat of Ebola – and combined with strong oil supplies – is driving a wave of risk aversion in markets.”

The 10-year US government bond yield at one stage was down 34 basis points at 1.87 per cent – the biggest single-session fall since March 2009. By mid-morning in New York, it was back to 2.05 per cent, down 16bp on the day…

European stock markets suffered even greater losses. The FTSE Eurofirst 300 ended 3.2 per cent weaker at its lowest point since December while Greek stocks fell 6.3 per cent as 10-year borrowing costs in Athens – already above 7 per cent – soared by the most in 15 months amid growing concerns about the political situation in the country.
The turbulence in equity and bond markets followed the release of data showing that US retail sales fell 0.3 per cent in September. A sharp fall in the New York Fed’s manufacturing index this month added to the gloomy mood.

US producer prices eased 0.1 per cent last month, their first decline in a year.

Bloomberg on the race into Treasuries:

Trading volume in U.S. Treasuries is approaching the highest on record as investors drop wagers that the Federal Reserve will raise interest rates.

About $623 billion in U.S. government debt changed hands by 12 p.m. New York time, according to ICAP Plc, the world’s largest interdealer broker. That’s just below the record $662.2 billion traded on May 22, 2013, when former Fed Chairman Ben S. Bernanke mentioned the possibility of slowing bond purchases.

We’ve been pointing out for some time that conditions in the labor market are too weak to sustain any real recovery. The robust parts of the country have been riding on QE in various forms: energy development, financial services, and frothiness in Silicon Valley. But policymakers live in the Versailles that DC has become, and too many journalists are based in New York City, which is holding up nicely, and don’t get out to the rest of the country to see the distress beneath the veneer of normalcy.

The shale bubble is popping now. And as Ed Harrison pointed out by e-mail:

As oil declines though, qe won’t help because risk premiums will stay elevated irrespective of where safe assets are trading. It is a perfect storm waiting to build because there are fewer safe assets and that will exacerbate the move.

There are a lot of places to look for where the credit bubble is about to detonate. And this could be the subprime ground zero that infects other bubblicious areas: think student loans, leveraged loans, other high yield. The Fed has simply caused a massive misallocation of capital. And eventually this will be found out in a big way.

Agreed. And given how central banks succeeded in their effort to divorce asset pricing from fundamentals, the groping for a new level while reality sets in may take some time. And an additional impact is use of algos and HFT. HFT drains liquidity in roiled markets. What looked benign on the way up is going to add fuel to the fire at times like this.

Update 1:45 PM: The latest from the Journal:

Selling accelerated in U.S. stocks on Wednesday as investors flocked to safe-haven government bonds.

U.S. stocks fell sharply Wednesday, as European markets also posted steep declines.

Stocks plunged to the day’s lows in early afternoon trading, with the Dow Jones Industrial Average falling 402 points, or 2.5%, to 15906. The blue-chip benchmark was on course to fall for the fifth day in a row, a drop that brought the index’s year-to-date decline to 4%.

The S&P 500 dropped 51 points, or 2.7%, to 1827, a decline that turned the index’s year-to-date return negative. The Nasdaq Composite Index fell 95 points, or 2.3%, to 4130, similarly erasing gains for the year.

Declines were broad and deep, with all 10 of the S&P 500’s sectors tumbling more than 1%.

“There’s a lot of pain out there,” said Dave Lutz, head of exchange-traded fund trading at JonesTrading Institutional Services.

The selloff marked a continuation of recent tumultuous trading sparked by fears of a global economic slowdown, dangerously low inflation in Europe and ripples from a steep drop in oil prices. Feeding the gloom Wednesday was a weaker-than-expected report on U.S. consumer spending. Traders said swings across financial markets appeared to be magnified by investors—particularly hedge funds—scrambling to exit money-losing investments.

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      1. Clive

        I really must attend the same writing school as Jeff as I am, by my own willing acknowledgment, far too wordy…

  1. diptherio

    Nice move by the Saudis—waiting until the US oil industry was leveraged to the gills pumping out barely profitable “tight” oil and then crash the price of their output. One has a hard time feeling too sorry for our oil companies. The sooner the fracking bubble pops, the less environmental fall-out we’ll have to deal with.

    1. Ed

      This is probably a replay of the anti-Russia move that worked so well in the 1980s. But who can keep all these Deep State plays straight anymore?

      1. craazyboy

        Yes, there was that investment newsletter called “When a butterfly flaps its wings in Brazil, it rains on Wall Street”. Or something like that. Tho the author got all the mechanics and civil engineering of it all wrong.

        I just hope Wall Street doesn’t find a way to get all of us involved. Again.

        1. optimader

          Extended Forecast:
          “An overnight low from the East will bring scattered sh.tstorms of exogenous variables, some heavy, expect no accumulation on Wall Street and slippery slopes for the rest of the week”

      1. craazyboy

        Bots can sell zillions of stuff they don’t have for 8 milliseconds, and some accountant comes around to check the books eons of computer time later.

        We’ll have to see how that works out. They say no problem, they know what they are doing. Sumthin’ to do with circuit breakers, flash crashes are so short no one notices except nosy people, fat fingers are a people problem, etc….

    1. 6th-generation Texan

      Agreed. And as the sniper in Saving Private Ryan advised: “Don’t shoot — let’em burn!!!”

      Couldn’t be happening to a more deserving bunch of greedy bankster bastards. Hope all the rich hedgie boys and their .01% clients burn to a charred crisp…..

  2. abynormal

    CNN Defends New Slogan

    NEW YORK (The Borowitz Report)—The president of CNN Worldwide, Jeff Zucker, attempted on Wednesday to defuse the brewing controversy over his decision to change the network’s official slogan from “The Most Trusted Name in News” to “Holy Crap, We’re All Gonna Die.”

    “This exciting new slogan is just one piece of our over-all rebranding strategy,” Zucker said. “Going forward, we want CNN to be synonymous with the threat of imminent death.”

    He added that the network expected to see strong ratings growth as a result of having the words “Holy Crap, We’re All Gonna Die” on-screen twenty-four hours a day.

    Part of Zucker’s new strategy was on display during Tuesday’s edition of the network’s signature program, “The Situation Room,” in which a visibly ill-at-ease Wolf Blitzer appeared dressed as The Grim Reaper.

    “That’s a work in progress,” Zucker said about Blitzer’s makeover. “But once Wolf gets comfortable swinging that scythe, he’s going to be amazing.”

  3. abynormal

    WoWser again
    USD just dropped from hi 86.01 to 84.80
    OIL also dropped from hi 82.45 to 80.01

  4. Auburn Parks

    Just like MMTers have been saying, given the current savings desires of the private sector (a fill in for income distribution and private debt changes), and the trade deficit, there is nowhere for growth to come from if it doesnt come from the Govt’s deficit. There are only 3 sources of demand, foreign, domestic, Govt, and foreign is a negative, so as the Govt deficit shrinks to the size of the trade deficit, if the domestic sector doesnt take on more debt or income distributions change significantly, there is only one place for the economy to go, down.

      1. Paul Tioxon

        Obviously, there still is a problem, since there still some deficit remaining. Nothing another government shutdown can’t cure. Driving the deficit down to current levels is a success of the Sequestration of the Federal Budget. Time for Sequestration ; THE SEQUEL! This time’s … it’s personal!

    1. tiebie66

      That is the whole point of austerity, imo, for the economy to go down and resolve the massive misallocation of capital. Per E. H. in the post: “The Fed has simply caused a massive misallocation of capital.” Now MMTers want the Gvt. to step in to continue these massive misallocations of capital. All the while knowing that income inequality will change only in one direction under Gvt. largesse. Why continue the misery?

      Sometimes the cynic in me wonders who’s really behind these calls for deficit spending.

      1. James Levy

        If you cut out the middle man and pay people directly, putting them on the Federal payroll like the CCC and WPA, it will benefit Americans and the economy. What we’ve done is create a whole level of intermediaries between the people and the government (see Obamacare). If the government ran deficits by hiring people directly to do things, it would not be a problem and it would not directly subsidize the rich the way QE and ZIRP have.

      2. Auburn Parks

        I’m sorry but its clear that you dont understand anything I just said and how it relates to the quote you provided.

        First of all, as a technical matter, all positive interest levels on Govt liabilities is a market manipulation by the Govt. The natural market rate for reserves in a non-convertible Govt fiat currency is always zero. The Govt issues securities and pays interest on reserves to get the rate above zero.

        Secondly, using QE to change the composition of Govt liabilities has nothing to do with the broader economy, its a method to influence asset prices, thats it. QE is not necessary for ZIRP. Monetary policy doesnt add any new money to the economy, fiscal policy is the only way to do that through taxing and spending.

        “Now MMTers want the Gvt. to step in to continue these massive misallocations of capital.”

        We want Govt to solve a demand deficiency driven economic slump by, adding demand. For example, suspending FICA is not the Govt “stepping in to misallocate” anything, its the exact opposite actually. Its the Govt reducing its interference in workers incomes.

        So basically, everything you said in your comment is actually the opposite of reality.

        1. susan the other

          QE was runway foam. An hour ago the DOW shot up like a rocket. Gosh. Who could have done all that intense buying? No need to buy up the banksters fraudulent securities anymore. But gotta catch those crashing corporate shares now; without QE the FED has to do a Draghi and just buy the stuff outright. Just put those stocks in the Fed’s big pile of assets for now, and sell them back to the corporations when the dust settles. Probably can’t let them just “run off the books” since they prolly won’t be around that long. Get the feeling that maintaining everything at some agreed-upon level of value is the goal? It’s all fiat; always has been. “Growth” was just the ponzi. So why pretend? Nobody is fooled anymore. And it’s high time we all got our fair share.

    2. Whine Country

      You’re right, but our economists do not base their conclusions on those facts, so no policy changes are needed.

  5. ptup

    Don’t forget that a lot of this cheap and easy money is fueling our auto industry, which actually has defied predictions from around the GM bankruptcy time that we would never see 15 million units a year again for a long time. That’s a LOT of people employed who wouldn’t be if we let those companies go the way of darwin.

    1. Auburn Parks

      Yep, capitalism runs on sales. And demand is the easiest of all economic problems to fix as the supply of money is infinite. Which makes it even more disheartening to think about just how terrible the economy is for hundreds of millions of people around the world.

      1. MyLessThanPrimeBeef

        Can you compare the limitless supply of money and, say, the limitless supply of time or the vast supply of space?

        Space is almost limitless (but not really), and yet we can’t experience it all.

        Money is limitless, but can we use all of it, at once or over time?

    1. Peter Pan

      The stock market rallied on this “leak”. Unfortunately the last 15 minutes of the S&P500 futures market declined by 12 points. Probably not a good sign.

    2. economicminor

      Yellen and her rat pack are good with their Group Think and its mantra of the Power of Positive Thinking. Hear no problems, See no problems and the most important Speak No Evil (I mean problems).

      They won’t know until after it snacks them hard in the face that there is No real recovery going on…. To much education and to little common sense or real world experience..

  6. Rosario

    And the fantasy world crashes all around us. I’m sure we will try again in a few years. Still with no direction, no reason.

      1. Chauncey Gardiner

        Heh, Good One, Lambert!… We all care. But I rather suspect they picked up the cue after lunch, covered their shorts, and rode the right arm of the “V” up until 3:30 pm ET before heading over to the Club.

      2. proximity1

        Suppose they were already “short” on the market–right? Otherwise, what’s being inside for?

  7. JustAnObserver

    Next up as an indicator – those “No Business Meetings” (*) full of Very Serious People declaring that ” is contained”.

    (*) JK Galbraiths term coined in his book on the Great Crash.

    1. Chauncey Gardiner

      Suspect there’s little need for the 0.01% to fret overly much about the hoi polloi when flying in the Gulfstream, whether its crewed by one’s corporate employees or those of the charter company. Also, the drop in the price of oil means cheaper jet fuel. So, it’s a twofer!

  8. Larry

    So hedgies are all running for the exits and probably algorithm traders too, but what are the odds this is a for real crash and not just a spooked day. Domestic oil plays aren’t that big a deal .

  9. not_me

    So much for monetary policy. The solution was always fiscal policy; ideally a universal and equal (including to non-debtors) distribution of new fiat ala Steve Keen.

    Hopefully this will prove true:

    You can always count on Americans to do the right thing – after they’ve tried everything else.

    Winston Churchill

    1. MyLessThanPrimeBeef

      It can be either be ‘a bug’ (one time event) or a ‘feature’ (built in, regular basis).

  10. economicminor

    Well the S&P did break thru the 1835 (1843 today) top of the older lower channel line and then closed above it. When it broke thru the newer upper channel, it broke thru it 2x before it broke and ran lower. Don’t know if that means much but the market has been going down pretty hard and fast and it would make sense for it to go sideways or up for a few days.

    The S&P also finished the day with a hammer candle which usually means a reversal.

  11. ewmayer

    Yves, if that’s the same Ed Harrison as the one I regularly watch on RT’s Boom/Bust for a sane outside-the-bubble perspective on economies, markets and central-banker distortions of same, we need more of him around here!

  12. Jay M

    The termites are moving. Who knew that having a cellulosic substrate would register as food for the termites. And nobody predicted that the insects could scale–ie their onslaught. How cool is that? Bummer all the CO2 and physics and all that, short sell something for a diversified portfolio. Beta that way.

  13. proximity1

    So, who has the Big Boys’ bail-out “back-stop” this (the next coming) instance ? How’s moral hazard doing, by the way?

  14. proximity1

    Some market commentators reason that we needn’t worry since, having checked the humours of Warren Buffet and, having found them in good form, there’s really no cause for alarm. +Warren isn’t worried+ and that’s all you’re supposed to really need to know. At 84, diagnosed with prostrate cancer, and, with a (September, 2014) net worth estimated at 67 bn. (USD), Mr. Buffet is really not that troubled by the market’s turnulence and has even been snapping up some shares at bargain prices.

    Later, we’ll be offered man-and-woman-on-the-street views of the latest consumer-confidence polls (of the man-and-woman-on-the-street). If the man and woman on the street find favor in the last cited polls of consumer confidence on the parts of many men and women on the street, then, logically, all must be well–or at least it ought to be, if it takes the poll data into account.

  15. Whine Country

    The financial markets cannot be allowed to fall substantially because the result is the very rich hate and fear most – redistribution. While no one wants to acknowledge it, having the very rich get much poorer is a means to cure inequality. Also, given the present state of our financial markets, large losses have the effect of redistribution among the rich. That’s another thing we just can’t allow.

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