That buying on the dip idea yesterday doesn’t look so hot today.
Markets had another wild ride yesterday. The Wall Street Journal’s overview:
The Dow Jones Industrial Average and S&P 500 entered correction territory for the first time in two years on Thursday as worries about rising interest rates and newfound volatility continued to rattle the markets…
“We opened around the highest levels of the day and closed at the lows, and that’s telling us the sellers aren’t quite done yet,” said Jonathan Corpina, senior managing partner at broker-dealer Meridian Equity Partners…
Mr. Corpina said the pace of Thursday’s declines, at hundred-point intervals, seemed to be driven by large sell orders from institutional investors, as well as by algorithmic orders triggered after major indexes broke through certain levels.
The S&P 500 fell 100.66 points, or 3.8%, to 2581.00 and is now down more than 10% from its record close on Jan. 26.
The decay towards the close does not bode well for tomorrow. The S&P 500 and the NASDAQ lost 3.75% and 3.9%, respectively, in the last hour. But even after the recent swan dive, the S&P 500 is still 12.5% higher than it was a year ago.
Now that this decline has proven to be more than a one-day, algo-driven affair, commentators are looking harder for explanations, particularly since that will give them a rationale for What To Do Next. Bloomberg helpfully offers six interpretations.
But it may not be all that complicated. Despite the seeming strength of the market rally through January, the post-Trump boomlet had less confidence among investors than I can ever recall. Even in early 2007, with the Fed well along in implementing interest rate increases and cracks visible in the subprime market, analysts were complacent, saying the Fed had created a Goldilocks market and would do such a good job of managing interest rates so as to not unduly discomfit investors. By contrast, last year it was common for normally chipper or studiedly agnostic experts to say how overvalued the market was. And that’s before getting to the outsized role that buybacks have played in EPS gains over the last three years.
So most people who were paying attention knew there was a lot of air in stock prices. And with the large role algo trading now plays, when corrections finally arrive, they are likely to be more violent than in the past.
Given that the Fed lost its nerve during the taper tantrum of 2014, they may have been unduly optimistic that central banks would back off from rate increases if stock markets swooned. That may in the end prove to be the case, but there are reasons to think central banks won’t be as easily deterred in 2018.
The first is not to forget that the Fed is very uncomfortable with super low rates. Even though central bank officials would never admit it, my sense is that they recognize that the experiment with QE and other extraordinary policies has largely been a failure. The goosing of asset prices hasn’t translated into growth. It’s increased inequality, which is now increasingly recognized as an economic negative, and also is increasing political instability.
In addition, being at near zero policy rates gives the Fed nowhere to go in a crisis. Even though there has been plenty of academic debate about negative interest rates, for the most part, they’ve only been imposed on end customers indirectly, via fees putting them in the position of having it cost them to park money. In the US, it would be a third rail issue to have rates be enough in negative terrain so as to impose them directly on consumers. Plus the claim that it would lead consumers to spend more is barmy. Negative rates send a loud signal of deflationary expectations, which means spending later is better because goods will be cheaper. And savers deprived of safe interest income will batten down even more rather than deplete principal.
So the Fed has been eager to raise interest rates and has had a bias towards interpreting labor market data as telling the story that conditions are tightening so as to allow them to keep nudging interest rates higher. As we noted, the much-ballyhooed average wage gains of last week went overwhelmingly to managerial workers, not the schlubs. New job creation was until recently in part-time jobs, and even now, the full time jobs created have been mainly low wage. All you need to know about labor bargaining power is look at working conditions at Amazon, not just in its warehouses, but now at Whole Foods and even in its executive offices. Nevertheless, investors apparently didn’t like yet another new unemployment claims report coming in at below 300,000, as that was only going to stiffen Fed resolve.
Not only is the Fed reacting to more signs of life in the economy, but the world economy is having a phase of synchronized growth. That means no other major central bank is likely to start spiking the punch bowl.
Needless to say, investors have been nervously watching the rise in bond yields. As Bloomberg noted:
Pressure again came from the Treasury market, where another weak auction put gave bond bears ammunition, sending the 10-year yield to the highest in four years. Equity investors took bond signal to mean interest rates will push higher, denting earnings and consumer-spending power.
Treasuries did firm later in the day. Commentators also made much of the fact that bets against volatility, particularly using Cboe Volatility-related instruments like the soon to be shuttered XIV ETN, fed the market decline.
As of this hour, (4:00 AM), the Nikkei had closed its session down 2.54%, the FTSE is off 0.42%, bu Dow futures are up 151 points and the S&P 500 mini, 20.75 points. So the more sanguine mood may hold till the market opening.
Despite the speed of the correction, it’s hard to get worked up about it given that this correction has merely erased recent froth. As indicated at the top, most US stock market investors are still sitting on healthy gains over the past year. And even if the selling continues, there’s no evidence of an unwind of levered speculation that could blow back and damage critical payments systems players or lenders. If the stock market slide continues, however, it could dent Trump’s recently improved approval ratings. Interviews of Trump supporters suggest that one regularly cited reason for their backing is that they’ve seen big gains in their stock portfolios. Will they be as solidly behind him if they were to evaporate?
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Neil Irwin blames Mr Market’s Sad on investors being freaked out by imminent Wiemar-style hyperinflation. Makes sense I guess: if you exclude those pesky labour participation and real wage numbers as outliers, those
cookedunemployment figures definitely point to inflation maybe possibly perhaps sorta potentially rising to a vertiginous 2.5%, which everyone knows is the gateway drug to Venezuela/Zimbabwe. (Fun fact: a ctrl-F on the Upshot article brings up the Holy Inflationary Trinity of Wiemar/Venezuela/Zimbabwe, de riguer for any article on the ‘I’ word).This all makes sense I suppose. The other day I went to the doctor, and when she saw my temperature had risen from 36.4°C to 36.6°C, the first thing she said was “smallpox”.
Failure to understand that the cause of hyper-inflations is rooted mainly in production collapse leads the hyper-inflationistas to be repeatedly wrong. What was Einstein’s definition of insanity again?
Kill the supply of goods needed for survival and prices will skyrocket without the printing of a single $ (or Euro, etc.).
In order to have hyperinflation, you have to put money into the pockets of people who will spend that money so that there is significant velocity of money. I have total faith in Congress and Trump preventing hyperinflation as their policies are focused on putting money into the pockets of the wealthy and corporations who will simply put that money into savings and stock buybacks which will not filter into the economy. As a result, our money supply is likely to continue drinking rose and snoozing in brokerage accounts instead of running around generating economic activity and hyperinflation.
“their policies are focused on putting money into the pockets of the wealthy and corporations who will simply put that money into savings and stock buybacks which will not filter into the economy.”
…yeah…..that’s trumps fault…have you ever heard of barack obama, tim geithner eric holder ben bernanke bill clinton hillary clinton the clinton foundation. Isn’t bezos a democrat? What about all those other tech billionaires intent on getting everything for themselves?
https://www.washingtonpost.com/posteverything/wp/2016/05/31/tech-billionaires-like-democrats-more-than-republicans-heres-why/?
FTA…”The CEO of Uber, Travis Kalanick, has publicly stated that he’s a fan of Obamacare, since it helps his entrepreneurial drivers keep their health insurance as they transition between jobs.
In other words, Silicon Valley believes that the Democratic Party is good for emerging industries. I’ve argued that the modern emerging workforce of tech, urbanized professionals, and “gig economy” laborers all represent an entirely new political demographic pushing Democratic politicians to focus more on education, research and entrepreneurship, and less on regulations and the priorities of labor unions.”
free stuff for the rich, gut regulations and ditch unions, what a bunch of self serving p.o.s.’s
Somehow you managed to completely miss the point of my comment.
Printing money is not the cause of hyperinflation. Both famous hyperinflations in history were caused by collapses in production.
Production usually collapses when people are not buying the produced things. It is typically the bottom 90% that does most of that buying. So diverting money from them to the top 10% or 1% or to an external entity, such as the Weimar war reparations, results in less purchasing.
In Zimbabwe, agricultural production collapsed when farming was turned over to inexperienced natives.
In Weimar Germany, Germany’s most productive region was occupied by the allies presumably so Germany couldn’t produce weapons. In addition, Germany had to pay war reparations in gold, having to sell or export essential goods to acquire gold, which created shortages for the locals, driving up prices.
In both case the governments tried to keep up with the inflation by changing the denomination of its currency, which was a hopeless endeavor because what doesn’t exist can’t be bought at any price.
Amen. You might also mention that shortage of goods in the ’70s called the “oil shock” that caused the less-than-hyper inflation in the U.S.
Stephanie Kelton mentions a Cato (!) study of 50+ hyperinflationary episodes throughout human history. They *never* were produced by central banks run amok. Shortages of goods and balance of payments were the sources.
…Or just look at the recent sub-prime/derivatives meltdown. The Fed issued $16 – $29 trillion to cure the frauds of the financial sector in an eight month period in 2007-8. Where’s the inflation.
The notion that money printing “causes” inflation is deeply embedded. It’s practically like watching Pavlov’s dogs if you try to discuss this…but that’s pretty common in most out-of-the-mainstream discussions. As Max Planck said “The truth never triumphs. Its opponents simply die off. Science advances one funeral at a time.”
Hyperinflation always required a physical host in the past, be it Roman denarii or Germanic coins from around 1623 or three centuries later in the same region-paper money. Even in odd instances such as the myriad of currencies the Japanese issued in locales they won in battle in the South Pacific during WW2, a host with the most, was needed.
The word everybody is pining for which didn’t exist until now, is ‘Cyberinflation’, a no host party, which has some attributes of hyperinflation-as in way too much money created, which in the past debased it’s buying power, but that was then and this is now.
It’s only being channeled to a minuscule amount of the population, so in a Bizarro World way, the manna has only greatly increased the prices on things the lucky ducky recipients liked the most, such as $400 odd million paintings, real estate, see me-dig me accoutrements, et al.
In my mind (admittedly a small, fearful and shrinking place) the whole derivatives game is best seen as counterfeiting. “Printing” and “minting” and now “mining” funny munny, with the intent to harm “the economy,” for personal gain.
Players in that scam are perceived by lesser humans as holding vast wealth, which the encourages people with Real Stuff ™ to hand it over to the looters in exchange for promises to pay, hand it over maybe not altogether in good faith and with clean hands, but “sir, here’s the keys to your 640-foot yacht, call us when you want to step up a notch. “
And yes, “everybody knows” that “notional value” is “not real,” but somehow the collapsing-in of the derivative thing a decade or so ago seems to have made some bad things happen, to Mopedom, at least. Let’s hear some older words from Gaius Publius:
We wrote earlier about the recent move by bankers — and the politicians who serve them — to unreform the derivatives market, to return it to its pre–Dodd-Frank, pre–Crash-of-2007 state. This is a serious move by banks and bank lobbyists, and it could well happen soon. The seven bills in the House package of “tweaks” — as the House Agriculture website dishonestly puts it — have cleared the committee with Democratic support and are headed to the House floor. In the meantime, there are companion bills in the Senate.
What will happen in the Senate? Well, Dick Durbin (always an Obama surrogate) famously said of the Senate that “the banks own the place.” And of course the White House has been notoriously bank-friendly since day 1. As a friend told me last week, “Bank lobbyists are good; they really earn their money.” Indeed.
Our earlier story focused on both aspects of this push — the “bad Dems” side and the derivatives side. Let’s now look at just the derivatives aspect. http://americablog.com/2013/03/the-worldwide-derivatives-market-could-be-over-1-2-quadrillion-in-notional-value.html
The piece goes on to explain a bit about derivatives and how they operate. And GP notes that at the time of writing, his estimate of the notional value of derivatives contracts was $1.2 QUADRILLION*, several times the capitalization of “the market.” Stuff I read says the “overhang” has only been getting yuuuuger
I and the rest of the Mopery have been rebuilding the real wealth that these “liquidity makers” collapsed so very recently, like the good brothers and sisters who pay off the markers that compulsive-gambler Black Sheep siblings run up in Vegas and Macao and Monte Carlo. What’s going to happen the next time that these High Flyers bring down the house, and we mopes are tapped out?
*For extra credit: A Quadrillion is what fraction of a Squillion?
“….put money into the pockets of people….”
Yes, put the money into the pockets of those who lay awake at night trying to figure out how to spend all that money the next day…..instead of into the pockets of those who lay awake all night contemplating how to survive the next day(s)……
‘inflation maybe possibly perhaps sorta potentially rising to a vertiginous 2.5%’
The New York Fed’s underlying inflation gauge sits at 2.98%, with an update (presumably higher) due on Feb 14th. Legendary trader Paul Tudor Jones is thinking along similar lines:
With CalPERS having decided to dump its commodity allocation [see today’s CalPERS post], the wise will back up their lorries to take these scorned assets into safer hands.
Please Comrade, this is a family blog. If you get the image of 3% in[censored]ion into the chilluns’ heads, they won’t sleep for weeks.
Pity the Venezuelen niños:
Yes, pity the poor Ven ninos (not the ones of the Ven Elites, who are of course doing just fine, thank you) . Pity them indeed, crushed under the Great Juggernaut of FIRE and the wheels and treads of the Great Globalized Looting Machine. (Sheds crocodile tears…)
Any stick to beat a (nominally) Socialist Dog…
I hear Gaia was talking with Great Spirit the other millennium, and offered that “the only good human is a dead human…”
At 76, I know very little about the stock market. What I have concluded after years of objectively observing, is that a boom in stock prices wan’t going to last forever. What is now happening has happened in the past so this didn’t surprise me. Several years before the collapse of the financial system I was telling friends that something bad was going to happen. People were spending like drunken sailors. I knew what I earned while working and people were spending well beyond their means. I thought cheap credit was the reason. When I purchase my home in 1971, I thought my 7% interest rate was a good deal. At that time car loans were going for 12%. Fast forward and it made sense to me that something negative wag going to happen. It was only a matter of time. I remember when I knew people with Corning stock who suddenly becoming millionaires. In a matter of weeks they were broke because the stock and the stock market tanked. A lession I learned early in my life is if you play with matches you will eventually get burned. That’s why I’ll never be wealthy but also why I won’t be poor.
Your comment about Corning stock reminded me of an interview I saw on TV (way back in 2001) that I still vividly remember today. Some poor engineer with Enron had $1.5 million of company stock in his retirement account. In the course of a single week, he lost his job and saw his retirement account lose over 99% of its value. When the smoke cleared, he barely had enough to buy a decent used car. There were definitely some lessons there as well.
To be fair, that guy’s retirement account had probably also gone from ‘not much’ to $1.5 mil pretty quickly too. I remember when Enron went from boring utility to high flying ‘new economy’ company trying to sell bandwidth futures or some such among all the other scams it had going at the time. It’s stock price went into the stratosphere in a hurry right along with all the InfoSpaces, etc of the day. The analysts touted it as some new type of company that the old rules of valuation didn’t apply to anymore, kind of like they did for the entire market at the time.
I remember reading somewhere that some of Enron’s growth was made through buying other smaller companies. Some of those companies had stock-ownership-plans for some of their employees and that employee-owned stock was all converted to Enron stock.
Does anyone else remember reading anything like that or about that?
The opposite was true, actually. Much of Enron’s “growth” came from creating spin-off companies. The spin-offs would record a revenue stream to Enron while retaining the debt on its own books. As long as the spin-offs remained viable, Enron looked to have money flowing in from everywhere. In reality, the spin-offs were drowning in debt.
Two such projects that came to mind, they tried to build an old fueled power plant somewhere in the middle of the jungle in India (or was it Indonesia.) At some point, investors realized that the power plant was built no-where near a power grid, nor did they secure a fuel source. Needless to say, the venture went belly up. Another profit venture they tried was to sell water rights from an anticipated privatization of EU’s water supply. When that venture failed, the holding company had to buy back its ventures, even though the profits had already been given to Enron.
The final nail in Enron’s coffin proved to be the Californian Electric Crises. The exact details escape me, but some how Enron secured a contract giving it the power to operate California’s grid, where before it was run by a state appointed committee. Enron then used its now power to create the crises, with “rolling brown outs” across the state. The argument was that California grew to fast and demand outstripped productions, which was in turn hobbled by “gomit” environmental regulations that were hamstringing new oil and coal plants. (At the time, California was pushing for natural gas plants.)
However, actual numbers told a different story, that California had plenty of production capacity. Much of the independent power producers were actually shut off from the grid, preventing them from selling power during “brown outs.” while Enron operated planets suddenly went off line for invented reasons.
It was later learned that the crises were manufactured in a last minute to stave off bankruptcy. They bilked the state and rate payers for hundreds of millions in additional rate hikes. The crises only ended when the Democrats gained a one seat majority in the House and thus had the power to investigate the crises (which they declined to do, I will note.) Cornered, Enron collapsed three months later.
‘Pressure again came from the Treasury market … sending the 10-year yield to the highest in four years’
No one should be surprised that Treasuries are getting trashed, with today’s budget deal gratuitously turning up fiscal stim to
elevennigh on 6 percent of GDP.As the US economy heads toward politically induced overheating, yield on the 10-year Treasury is edging up ominously toward the Dec 31, 2013 high of 3.04%. 2013, you’ll recall, was a terrible year for bonds.
Stocks represent the discounted value of future earnings and dividends. Raise the assumed discount rate, and stock prices … go down.
Knocking a thousand points off the Dow is an impressive achievement of the retarded elephant party.
You have clearly missed the latest economic theories. Economic theory today is easily explained by the following:
“Democrat Party budget deficits are evil and will lead us to economic and social collapse leading to communism. Republican Party deficits are good and ordained by God.”
Reset & jubilee, don’t worry spend happy now! Whistle, whistle, whistles…
There is a tremendous amount of noise obscuring the simple math of future values discounted at a rate no longer complacently assumed to be near zero. One can almost hear the rolling global wave of buy and sell side spreadsheets being updated with new rate assumptions and lower return expectations on equities. One wonders when the fumes will waft over to the credit lab and work their way into credit analyst balance sheet assumptions.
Right on cue, the credit lab awakens in a foul mood:
US triple-A rating = fudged due to ‘special snowflake’ status
The world was supposed to come to an end when S&P was threatening a downgrade of the US from triple A and finally pulled the trigger. We were virtually alone in saying it would be a nothingburger.
Kinda above my pay grade but I will chance a comment. Thinking long term this “correction” may be a good thing as apart from blowing away some of the hype off the market, it is testing the systems in place to meet an even more serious crash down the track. Computer based trading has again been found wanting but don’t know if that will change any time soon. I won’t hold my breath.
My understanding is that the Cboe Volatility Index (also known as the “fear gauge”) mentioned here was set up to track the volatility of the stock market. Since you can’t make money on the CVI, an inverse one was set up which is called the Velocity Shares Daily Inverse VIX Short Term ETN (right so far?). Apparently Bloomberg reckons that it is now worth some US$1.5 trillion which is starting to be serious money here but the correction meant that most of the big inverse VIX trades made has come crashing in value thus making the correction even worse. Count on Wall Street to create something out of nothing and to make a buck on it – and then to totally stuff it up with greed.
It’s not the end of the world as we know it, as Yves points out, but it may be the beginning of the end of the easy money era. The what, $30 trillion dollars used to bail out the banks the past decade as far as I can see were not based on real wealth but just summoned up out of cyberspace. This money was lent out on artificially low interest rates to the wealthiest segment of the population and made real asset prices meaningless. If you can’t value something, how do you know what it is worth. Is a five-hundred year old painting really worth nearly half a billion dollars? Is shale-oil worth the money spent developing it? Are interest rates reflecting real values or has the LIBOR rates been corrupted yet again. Who can tell? All I can say is that Wall Street I wouldn’t want to be you.
And, right on cue, my e-mailbox has a message from a company that used to manage part of my retirement money. “Stay in the market!” is the theme.
Personally, I’d rather not be in the market at all.
When you don’t have a scintilla of savings held by greed agreed upon that by any means necessary is alright by them, you rest easy watching their machinations run amok. I imagine the real messy bits yet to come will resemble that car pile up video from the BBC.
Everybody is going to want to get out at the same time.
Where, then, would you recommend parking your savings?
Think along the lines of what a reversion to the mean could mean to means.
NYSE margin debt chart won’t reflect the past week’s change for 6-8 weeks, put brobably its down a hair from record high. When the margin calls start to ring off the hook and this pile of debt really begins to fall the avalanche is unstoppable.
The last two times indexes only just fell back to the 140-yr trend line, an abnormally high bottom… usually it falls substantially below trend. But economy is weaker now than when fed set off selling with higher rates in 2000 and 2007, and inequality means a higher fraction of the pop is just clinging to their standard of living (spending), so a substantial decline in GDP will be harder to recover from… unless congress quickly spends like mad to compensate for private sector demand crash. Forget a jobs guarantee from DC, would they even agree to massive infra? I doubt it. Next case likely longer and deeper.
Negative interest rates? Time to fire up the FINCEN form 104 and store actual cash.
Now that perceived risks to the payments system have largely if temporarily been put to rest, and bank profitability concerns have arisen as the yield curve was flattened and savers euthanized under years of QE-ZIRP, economist Irving Fisher’s idea that central banks can increase inflation by increasing their nominal interest rate targets seems to be gaining some traction. As a layperson this view, labeled “NeoFisherism”, seems to directly counter Milton Friedman’s view which has so dominated the thinking of the generation of monetarist economists at the Fed who have controlled central bank monetary policy for decades.
It’s too early to say whether the Powell Fed is adopting a “Neo-Fisherian” approach, as that would likely suppress stock prices. (And who owns a disproportionate share of corporate stocks?…)
https://www.stlouisfed.org/publications/regional-economist/july-2016/neo-fisherism-a-radical-idea-or-the-most-obvious-solution-to-the-low-inflation-problem
I feel like the equity market won’t really crack until junk bond and leveraged loan markets have a break down.
https://www.forbes.com/sites/spleverage/2018/02/08/covenant-lite-credits-continue-to-dominate-u-s-leveraged-loan-market/#2c3fefca4400
If default rates pick up or interest rates rise enough and spreads blow out, then there’ll be genuine damage. One of the early, understated problems in 2007-8 was the huge overhang of hung bridge loans that got stuck on balance sheets of big banks. That helped clog up the financial system and added to the liquidity event which started with subprime.
https://www.bloomberg.com/news/articles/2018-01-24/hot-leveraged-loan-market-is-a-problem
Cov-lite loans, high cash burn rates, compressed spreads (against treasuries)….lots of combustible material here for at least a small-ish financial crisis.
Big banks right at the center of it, too!
Why is a drop called a “correction”? Is it one of the typical US euphemisms, where the use of direct words appear to cause harm?
Would that mean a rise is an “aberration?”
eg: Today the US stock market experienced a large aberration and rose 500 points!”
well, a lot of smart people have been saying exactly that for a quite a while…
the price of a company’s stock should be somehow anchored in the value of the company, and it’s ability to produce revenue, n’est-ce pas?