As all good news junkies at Naked Capitalism no doubt have figured out, Mr. Market had a bad day yesterday, and still seems not too happy overnight. The Dow dropped 4.6%, or 1,175 points, bouncing back from a decline of over 1,600 points. All major US and foreign stock indices are down for the year. Today’s fall puts the Dow down 8.5% from its peak in January. The drop in the S&P 500 and the NASDAQ were slightly less dramatic, at 4.1% and 3.8% respectively. The VIX more than doubled. The CBOE Volatility Index rose by 124% at its intraday peak, and closed up nearly 116%, at 37.82.
WTI fell 2% to $64.15, and Treasury bond prices rose, as the yield on the 10-year fell from 2.852% to 2.794%.
And in the background, Bitcoin fell by 20% to below $7,000 and closed barely above that level at the end of the day. From Bloomberg:
Bitcoin tumbled for a fifth day, dropping below $7,000 for the first time since November and leading other digital tokens lower, as a backlash by banks and government regulators against the speculative frenzy that drove cryptocurrencies to dizzying heights last year picks up steam…
Weeks of negative news and commercial setbacks have buffeted digital tokens. Lloyds Banking Group Plc joined a growing number of big credit-card issuers have said they’re halting purchases of cryptocurrencies on their cards, including JPMorgan Chase & Co. and Bank of America Corp. Several cited risk aversion and a desire to protect their customers.
Overnight, as of this hour (3:30 AM) the Nikkei closed down 4.7% and the FTSE is nearly 3% lower. The Dow and S&P 500 futures had been down when I kept checking (the NASDAQ would occasionally rise into positive territory) and as of now, Dow futures are down 119 while the S&P is up 6 points and NASDAQ futures, up 36 points.
The US stock market selling was largely algo-driven as the market dropped through technically important levels, triggering more selling. Bloomberg says traders weren’t panicked while a Wall Street Journal headline blared the reverse, so you can decide which version of yesterday you like better.
Regardless,some automated services did better than others. Business Insider reports that two of the biggest roboadvisers, Uses of Betterment and Wealthfront, had their sites go down during the market swoon.
The bigger question is what if anything this means. The simplest version is the markets had gotten way too frothy (even sober types like Mohamed El-Erain had been pretty alarmed for months) and the nature of lots of algo in the market means that downturns are more likely to be violent than in the past.
But another way to read it is that this particular downdraft is a symptom of how much owners of securities think that what is good for workers is bad for them. This is a reversal of the old post-war economic model, in which policy-makers focused above all on rising wage rates as the driver of prosperity. That went out the window with the 1970s inflation. The Fed, starting with Volcker, has made curbing inflation a bigger target than fostering growth, and has become more and more eager to create more unemployment in order to curb wage growth, which they see as the driver of inflation. That is a pretty dated view of the economy, since in the 1970s, not only did labor have more bargaining power, but many companies had formal or informal policies to increase wages in response to inflation, which had the potential to create accelerating inflation. Not only does that practice no longer exist outside the executive suite, where pay consultants seem expert at creating excuses to increase CEO pay vastly faster than inflation or performance would warrant, but much of what looks like inflation occurs in selected sectors (health care, broadband prices, higher education) as a result of aggressive use of pricing power.
More specifically, the most common explanation for the market swoon is that jobs reports on Friday that showed what were interpreted as strong wage gains would lead the Fed to decide it was behind the curve and at least stick to its three planned rate increases this year, and potentially make them a bit sooner than expected. And these rate increases come with a backdrop of adequate to pretty good (by “new normal”) standards around the world, so no other major central bank is expected to be easing this year and therefore provide something of a buffer to the Fed’s tightening.
However, over at Bonddad, New Deal democrat parses the data and takes issue with the conventional reading of the Friday jobs report. His take is that most workers didn’t get much in the way of pay increases, that the gains were mainly in the supervisory classes. From his post:
I wanted to follow up on why I dissented Friday from the near-consensus take that workers finally got a nice raise, with many citing hikes in the minimum wage. As you may recall, the YoY% change in the average hourly earnings of all employees rose 2.9% as of January.
That was the story in, for example, Marketwatch:
Average hourly wages jumped 9 cents, or 0.3%, to $26.74, according to the Bureau of Labor Statistics. That means wages have increased 2.9% over the last year — the biggest gain since the end of the Great Recession in June 2009.The federal minimum wage is $7.25 an hour and hasn’t increased since 2009. But many states and municipalities enacted laws to raise the wage this year….
The reason I dissented is that the YoY% increase for nonsupervisory workers was only 2.4% — right in the range it has been for over a year. As Jared Bernstein, who called the number “A Nice Wage Pop,” pointed out:
There were some weak spots in the report. Wage growth for the lower-paid 80% of the workforce that have production or non-managerial jobs was up only 2.4%, implying that faster wage growth last month mostly benefited higher-paid workers.
Both types of workers are literally from the same survey — i.e., the one measure is a subset of participants in the whole survey. So if minimum wage hikes were responsible for the big YoY increase, we should see it in their hourly wages.
In January’s case, we don’t.
Since nonsupervisory workers account for about 80% of all workers (h/t Bill McBride), we can back them out of the total figure, and calculate the YoY% increase in wages for managers…
While regular workers saw nominal wages go up a little under 0.2% per hour, their bosses saw wages go up 0.8% per hour!
So this is pretty rich. The Fed and the investor classes are getting worried that the labor markets might be getting too tight, as shown in the wage data…when properly disaggregated, it shows instead that what is going on is ho-hum increases for the masses, and more transfers from them to the managerial classes.
Now in terms of the bigger picture, so far, even though the stock market has looked very much ahead of itself, and could well have some more air taken out of it before it settles down (and that could be an intermittently very bumpy ride that takes some time to play out), there aren’t any signs of blowback to credit markets or lending institutions. Even very big stock market busts with no meaningful debt market involvement, like the dot-bomb era, have only limited real economy impact.
Having said that, there are some possible worries on the horizon. One is China. People have been wondering for so long about how long China can keep its debt-fuelled growth going that the worry-warts look a lot like the boy who cried “wolf”. And even though China’s visible metrics do appear to be improving, no one has a good handle on what experts have come to see as its real risk, its “shadow banking system”. Another view of China’s risk came from Steve Keen, who was one of the few economists to call the 2008 crisis, was that a mere slowing in China’s debt growth would be enough to precipitate big time trouble. But with data out of China being fabulously unreliable, who knows if and when things will crack.
Another wild card is Brexit, but the inertial path there is to kick the can down the road till December 31, 2020, although if the UK sticks to its guns and really does leave the single market, it’s going to suffer major dislocations. I should write it up, but we now have the unhinged behavior of the Tories managing to reach new levels, as pretty much everyone seems to be trying to blame Theresa May for a mess that has resulted from a divided party and utter delusion about what anyone could obtain. Even though ultras are threatening the horror of putting functional morons like Rees-Mogg in positions of authority, she appears able to take a phenomenal amount of pounding and does not appear inclined to leave unless forced. Despite all the caterwauling, it’s hard to imagine that the Tories would go the “no confidence” vote route, particularly since the last two times it was used successfully was in 1979 and 1924.
However, the internal contradictions of the hard Brexiter positions are becoming more and more impossible to maintain, and wore, the ultras seem delighted with the prospect of blowing things up if that’s what it takes to get what they want. This means the risk of a “hard Brexit” or even worse, an apocalyptic “no deal” departure in March 2019 are real. That would be a very very ugly ride, as well as terrible for the citizens of the UK.
But as the discussion above suggests, the real danger is that the neoliberal model is increasingly under stress, as the consequences of rising inequality and unheard-of low levels of the benefits of growth going to laborers undermines the legitimacy of the system and is producing bad outcomes ranging from political fracture to falling life expectancy and an opioid crisis that is in large measure the result of the collapse of typically rural communities. The last thing the US needed was more transfers to the rich in the form of the Trump tax bill. So while Mr. Market may recover his sunny mood, the foundations of the economy continue to rot.
Update 7:20 AM: Mr. Market is in a less cheery mood that he was at 3:30 AM. Dow futures are now down 378 points, the S&P mini is down 28.50, and the NASDAQ mini is down nearly 47 points.