Yves here. One might argue that stock market jitters are a sign that investors are finally taking note of crappy fundamentals, since even ZIRP and QE, which central bankers keep insisting won’t go on forever, were starting to lose their effectiveness in already-frothy asset markets.
By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street.
It was a crummy week for the world’s major stock markets:
One, volatility came roaring back. Forget complacency. People are still rubbing their necks from whiplash.
Two, the Fed hype-effect fizzled. The publication of the FOMC minutes – designed to pump up markets with their ambiguities – was able to generate a rally that lasted less than a day, followed by a terrific swoon. The ECB too tried to goose markets, which failed miserably. And the Bank of Japan, well, I call it Bank of Japandemonium for a reason.
Three, the relentlessly successful strategy, nay religion, that worked without fail for the last couple of years and allowed traders to earn instant bucks in a seemingly risk-free manner – “Just buy the frigging dip” – turned into a vicious back-biting monster.
The Nasdaq, after dropping 4.5% for the week, the worst since May 2012, closed on Friday below its 200-day moving average. So did the Dow. For chart decipherers and trend prophesiers, those are not exactly propitious signs.
The thing is, if everyone believes that everyone believes in this sort of line crossing and reacts to it, then a simple line either bouncing off or crossing over another line can become a magic signal for a lot of people. And they react to it in unison, and it becomes a self-fulfilling prophesy. It worked wonderfully on the way up. And because it worked so wonderfully and made people rich, more and more traders and investors became chartists, and even economists switched to becoming chartists because economic and corporate fundamentals had become irrelevant to stocks, which soared no matter what, and they had to find something else that their clients actually wanted to hear.
But it’s not just in the US. The European Stoxx 600 dropped 4.1% for the week, also its worst week since May 2012. Most of the national indices were splattered with red. Germany’s Dax dropped 4.4% to the lowest level since October last year. It’s down 12.6% from its all-time peak in January. It’s in a full-blown correction.
The UK’s FTSE 100 dropped 2.9% for the week and closed at its lowest point in a year, down 8.4% from its peak in early August. France’s CAC40 dropped 4.9% and is down 11.4% from its June high, now mired in a correction and in the hole for the year. Even India’s SENSEX, which had been on a politically motivated tear, swooned nearly 5%.
The Nikkei deserves a special word: it dropped 2.6% for the week and is now down 6% for the year. It has been in the red practically all year. The historic money-printing binge that came with Abenomics caused stocks to soar for the first seven months after it became clear in late 2012 that Shinzo Abe and his economic religion would run the show. Then the sheen wore off. What’s left? The same old economy, huge government deficits, an untenable national debt, and consumers who are learning the meaning of what I call “inflation without compensation,” the gradual process of impoverishment via inflation.
Oh, and at a time when annual inflation is 3.3% (goods inflation at 4.9%, service inflation at 1.8%), 10-year Japanese Government Bonds yield 0.50%. It’s the world’s most brutal financial repression. So, despite the pile of money the Bank of Japan has been printing, the Nikkei is now below where it was in May 2013.
The only two major indices that came out ahead were China’s Shanghai Composite (up 0.4%) and Hong Kong’s Hang Seng (up 0.1%). Maybe the markets were just lucky. It was a holiday week with only three trading sessions in Shanghai and four in Hong Kong. Did these folks simply run out of time to dump stocks?
Here are the sinners (chart by Doug Short):
Germany’s DAXK is the orange line that is sagging out at the bottom. The DAXK is the price-only version of the DAX, which includes dividends. The other indices are price-only as well, so the DAXK is an apples-to-apples comparison. This DAXK is down 12.5% from its peak in July. And it’s 11% in the hole for the year.
German stocks are smelling a rat. The economy is on the verge of heading into a recession. When it shrank in the second quarter, pundits fanned out across the planet to claim vociferously that it was just a blip, and they blamed the weather which had been unusually nice in the first quarter! But more recent economic data has been lousy, so lousy that they evoked unnerving comparisons to the unforgettably terrible year of 2009 [read… “There’s no Reason to Panic” about the German Miracle Economy].
Now unnamed sources in the ruling coalition leaked that the German government would cut its growth forecast for this year and next year on Tuesday, when it announces its twice-a-year projections. It would amount to a “sharp cut” from the already tepid 1.8% growth projections made in April.
This despite the all-out ZIRP and QE central banks have inflicted on conservative investors and aging baby boomers in order to force them into stocks and junk-bond funds and asset-backed securities and other chimera of Wall Street. The purpose was to drive up asset prices. And it worked. Now that these folks have stashed their money in stocks at peak valuations, the whole thing is unraveling.
The bitter irony in all this? The global economy is drifting off despite massive and global application of policies that have consistently been described as “bold actions” to stimulate the economy: dizzying government deficits, massive QE, and brutal ZIRP. These “bold actions” have driven up asset values, but that’s all they’ve done. And now as things are once again wobbling, global organizations like the IMF along with various central bankers and of course the wusses on Wall Street are clamoring for more “bold action.”
In the US, mega-startups have gone parabolic as the bubble blooms into its full splendor. Read… Last Time It Was This Crazy, the Stock Market Crashed