Wolf Richter: What the Heck Just Happened in Global Stock Markets?

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):

world stock market indexes 2014


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

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  1. Doug

    CME rule 575, prohibiting disruptive practices and manipulative behavior, kicked in on 9/15. No more “spoofing”, quote stuffing” or “disorderly execution of transactions during the closing period”.

  2. Fiver

    I said way back the Fed wouldn’t make it to the end of the taper, so clearly I’m a pessimist – assets are wildly over-priced but nobody actually believes in any of it, or more broadly in what they see for the future, when there’s so much current instability and official promises of more.

    Would note neither Germany nor most of the rest of Europe needed the sanctions regime forced on them by the US when they were already sputtering badly – but I also note quiet progress in Ukraine as well as no head-on US bombing campaign against Assad in Syria (at least yet) suggesting Obama either wants Putin’s help, or respects the ‘ally’ relationship enough to want to manage the debacle in Syria in a way Putin can accept. The Ukraine problem can be resolved and the sanctions removed with cooler heads. If that doesn’t happen fairly soon to kick-start Europe a bit, or if there’s no other stimulus, the US economy will run right over markets on the way down this winter.

  3. Johnny Lunch Box

    Pucker up Butter Cups

    It was a crisp Fall morning and Jack has had enough with all the Turd Blossom Pickers climbing on his Bean Stalk. In a great giant heave ho Jack shakes the Bean Stalk and all the over ripe fruit falls to the ground along with all the Turd Blossom pickers and their bags of Turd Blossoms created by Government intervention. The Bears seeing a great opportunity rush in to scoop them up and gorge themselves leaving Turd Blossom piles every where for the 99%er’s to step in.

    Then Jack begins the long climb up the Bean stalk. Higher then ever before. Past the WaMu signs that advertize 5.5% on 6 month CD’s and past the old rusty Edsel parked amongst the leaves. Off in the distance he see’s whales swimming amongst the moons with a dark space back drop full of stars. As he climbs higher he almost looses his grip on the Bean branch as his hands dislodge a manuscript titled the Glass Stiegel Act. He sits down to dust off the manuscript and begins to read. Could this be the root cause of all the over ripe fruit and Turd Blossoms? Why would and who could of brought it clear up here to hide? As Jack reads he gets to page 63 and a stain appears to have stuck the pages. A dank odor waffles from the pages. He has seen enough. He can only imagine how the Republicans pushed this through a Democrat administration.

    Jack is tired and its time for a nap and as he leans against the trunk of the Bean Stalk, he begins to think of Alice who has Dementia. The Rusted Tin Man who has lost his way. He thinks of his own Yellow Brick Road and his hopes of getting to the top of the Bean Stalk some day. A Blue Bird lands on his shoulder and the two drift off to sleep. A whale blows in the distance and the Blue Bird on Jacks shoulder dreams of the Worm that got away. Out in the distance a Helicopter is dropping 100 dollar bills on the Lemmings who are too focused on getting to the sea and another is dragging a banner with Zirp on it to no avail.

    Suddenly Jack awakes to a chopping sound and he looks down to see folks in Naked Shorts chopping at the base of the Bean Stalk. Off in the distance are more lemmings rushing towards the cliffs and into the abyss of the sea. An old Dead Cat falls from a branch and lands amongst those chopping at the base. It does not bounce. Several Simi trucks with pallets of 100 dollar bills pull out onto the desert. It is chaos every where. Goldie Locks staggers out of a pile of brush with fresh white powder still on her nose her dress is amiss. Pinocchio trips on his nose and Peter Rabbit thinking it was a huge carrot takes a big bite out of it. A huge rotary oscillator named Rush dips into the crick and flings fecal matter world wide. Maggots ooze from its motors mouth. Then Jack spots movement in the branches far below him. It’s Jamie, Lloyd, Lewis and Fudd all scrambling up the trunk of the Bean Stalk. Many others are following them all dragging bags of Turd Blossom paper. Jack ponders the Irony of it all as he knows he can beat them to the top as long as they drag their loot with them. The gate at the top is locked and he has the only key. The gate keeper knows him and trust him and he won’t take Turd Blossoms or IOU’s or bribes for entry. The naked Short people are still chopping on the trunk while Mazillo bask in the sun trying to improve his tan.

    Jack rubs the sleep from his eyes hoping that he is dreaming. But he is not. He must hurry if he is to make it to the top. He is running out of time. Another Whale Blows.

    Johnny Lunch Box

  4. Jim Haygood

    ‘The global economy is drifting off despite massive and global application of policies that have consistently been described as “bold actions” …

    Count on central banksters to do what they always do when the monetary heroin stops working: double the dose.

    Got clean needles?

  5. Washunate

    I think an important element of discussions like this is pointing out the context that stock markets are the playground of the affluent. The vast majority of households hold no meaningful financial wealth. Nothing ‘happened’ in the stock markets per se. This is what happens in a thinly traded ponzi scheme where the government has been providing the marginal investment energy. They go up, down, and sideways for no reason and every reason.

    With the irony being that a few crummy months would do more to combat inequality than just about any policy proposal out there.

    1. jrs

      If it wasn’t a POSSIBLE (maybe not but 2008 …) sign of the economy entering recession again having never really recovered from it, and all that means for rising unemployment which never really recovered as is, but can always get worse.

  6. beene

    “stock markets are the playground of the affluent”
    The above has been true in the past; but in the present we have many who are invested threw retirement plans. Are we just thrilled we were not able to add SS to the loses.

    1. Generalfeldmarschall von Hindenburg

      What happens after a couple more of these colossal “readjustments’? Will pension funds eventually be destroyed, since the Ayn Rand Brigade is so determined to cut or eliminate public and private pensions in order to have more for themselves? I am 48 and I don’t know anyone with anything like a corporate pension scheme so where will the pot of money come from to loot?

      1. susan the other

        Under a misleading headline about taking bold measures to stimulate world economies, Christine Lagarde has actually recommended that all countries come to the aid of the economy by cutting back on social benefits and putting that money into infrastructure. CNBC. And just last week she pushed for Public Private Partnerships to come together and do something to jump-start growth. Obama himself has promoted PPPs recently. So the public contribution will be taxes – a veritable bail-in to languishing corporations which can’t continue to live on rarefied air much longer. And this use of taxes in lieu of bonding for these expenses is to keep the debt hidden. Because the whole structure of capitalism has failed. There is no growth on the horizon with which to service new debt, and the only next thing to plug the leaks is taxes. And mindlessly dangerous growth.

        1. susan the other

          I haven’t heard Lagarde, or any central bankster, discuss what kind of growth. Never a peep about the environment. As Banger below says, we’ve got plenty of problems to solve. Solutions are in high demand. But the finance ministers don’t seem to understand where money should be spent. It’s mind boggling.

        2. jrs

          ugh we should have known the “infrastructure” obsession, constantly saying how we should spend money on infrastructure, would come back to haunt us. Ok some infrastructure is just maintenance, but even those calling for large infrastructure investments very seldom have any vision worth pursuing. Does infrastructure mean massive investments to get off fossil fuels? No, it never actually does.

        3. OpenThePodBayDoorsHAL

          Plenty of fascisti drooling about Grandma moving to a cheaper brand of cat food but almost no debate about a fighter jet that costs $421 million *per plane*. As one commenter noted: “the F-22, now being deployed to bomb the F-150” (Ford pickup truck). Unlimited funds to kill goat herders on the other side of the planet, and 2 million homeless students in the richest nation on Earth. We have plenty of money, folks, it’s where it gets spent that is the issue.

    2. jrs

      It’s probably the playground of the top 30% of incomes, who have if they are extremely lucky pensions, or if not then 401ks. MOST stocks are owned by people much wealthier than that of course! But the 401k employee can actually lose sleep over their modest savings, money is security at that level. For the rich money is power. Though to live in these times (the last decade at least) and to observe what’s going on is kind of to admit there is no real security, on any level.

      So …. bring the whole f’n system DOWN!!!! And lets lose it all, if it means hope for the planet and humanity … and not THIS which we have now …. this unending nightmare that is our sociopolitical situation.

  7. Banger

    Technically, rational bold actions are possible but politically impossible since the world is now flat and the moon is made of cheese. Job one of the elite is to make sure we continue to live in fear and the feeling that we live in world of scarcity rather than abundance. We live at time of wonders yet we choose selfishness and war at every juncture ignoring the fact we have the technics to build a sustainable and convivial world. When you think that all JFK had to do is announce we were going to the Moon and with relatively primitive technology it was done in less than a decade think of what we could do now to solve our collective problems!

    1. Demeter

      The 1% has no interest in solving problems, Banger. They just want to hoard resources. Just because. It’s a sickness, Obsessive Compulsiveness, or Greed, if you want to go biblical about it.

      If anything, ebola will bite them very badly, and then maybe, just maybe, they will put some of those resources to work to save humanity. But, I wouldn’t bet on it, because somebody might demand, and have to be paid, a living wage, and we can’t have that, can we?

      After all, they engineered this globally collapsing global economy, and haven’t lifted a finger to right the wrongs they perpetrate daily on the ordinary people or the environment…

      1. MikeNY

        ITA on the 1% …”hoarders” or OCD or avarice, whatever you want to call it.

        The proper response to someone worth $1BN shouldn’t be mollycoddling admiration; it should be to ask, What the hell is WRONG with you?

        And then tax them.

        1. jrs

          I saw this absolutely dreadful article recently:

          Ok one could attack this from an intellectual perspective. Nassim Nicholas Taleb pointed out the problem involved in only looking at traits of the rich and not that those traits may be plenty widespread in the non-rich, so there’s a basic logical fallacy involved. One can point out that it sucks as social science, that you can’t determine that wealth is correlated with certain personality traits by interviewing the rich and generalizing (biased as one is by the halo effect and wanting to sell a book of their own), that this is bad social science, it’s not double blind, how traits are determined is subjective, it is unlikely to pass the most basic peer review. That stuff like this makes people stupid since it teaches them flawed ways of drawing conclusions.

          But the heart of why it’s wrong isn’t primarily that it’s anti-intellectual, though it is. It’s that people who may find themselves almost valueless in the modern world, because modern life can easily become a life without any values, might be tempted to reverse engineer a value system based on whatever values they are told the rich have. Ok well the values listed there might not be bad in themselves. But they’d be just as well off meeting some bohemian and copying their values. It’s how it venerates the rich that is wrong. And the 1% have actually created a valueless world that doesn’t value human beings in terms of fulfillment in the now or in terms of future survival, or the planet and the life on it, or even any decent alternative value systems like pursuit of beauty or truth etc., or really anything pretty much. But remember folks, they have better values THAN YOU!

    2. jrs

      If people can put a man on the moon … why can’t people remember to put the milk back in the fridge?!? Riddle me that, will ya? :)

  8. greg kaiser

    “Ex Nihilo Nihil Fit” applies to all of finance and commerce in the goods produced by the community to sustain [or to enjoy] life. All finance and trade are parasitic. To reduce to a minimum the damage such services must do to the economy, they must be done on a non profit basis of, by and for the people. That applies to big energy, medicine, communications and transportation too.

  9. impermanence

    All of humanity cries, “Give me something for nothing!!”

    The institutions reply, “For your very soul, you can have any illusion you like.”

  10. Jay M

    The smart money distributed to the dumb money. They now sit on the sidelines watching the dumb money fumble the ball on the line of scrimmage and get driven back to their end zone. This is when the vultures fly in and pick over the dead bodies, and the great task of inflating equities begins anew.

    1. MyLessThanPrimeBeef

      Can God create a rock too heavy for Him to lift?

      Well, the Fed is not God, and so we have to have ask that question.

  11. Rosario

    The behaviors are the same as they were 1000 years ago except today we have more encyclopedia volumes and more technology. The trick is creating a world of permanent revolution with stability and security without social stagnation.

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