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Mayhem Beneath the Surface of the Stock Market

Mayhem Beneath the Surface of the Stock Market

But on the surface, stocks still look hunky-dory. 

It’s amazing how individual stocks, at the tippy-top of the biggest stock market bubble in modern times, are getting taken out the back one by one to be crushed, but without denting the overall indices all that much.

The stock market bubble was driven by $4.5 trillion in QE in the US alone, along with many more trillions by other central banks, and it was driven by interest rate repression, even has inflation has been surging to multi-decade highs, not just in the US but globally, and not just in goods, but now also in services, particularly housing, such as rents.

After a decade of QE being relatively benign on the inflation front, giving central bankers a false sense of confidence, it has finally broken the dam, and inflation is now surging everywhere, and it’s spreading across the economy.

Central banks are now no longer denying it, and some have raised rates, and others have ended QE.

Even the Fed, which engineered this money-printing orgy and is very slow in ending it, is now ending it, and it will be raising rates, and everything is moving faster than expected, and suddenly the orgy is over.

Each stock that crashes has its own story for the crash. What they have in common is that they were all ridiculously overvalued, and investors knew it, and they kept hanging on till the last moment to ride them up all the way, but they were sitting all bunched up near the exits, and when the signal came, they all rushed out together, causing those shares to collapse. But even at those much lower valuations, those stocks are still ridiculously overvalued.

…click on the above link to read the rest of the article…

Fed and Treasury Steer Their Unsinkable Ship toward Iceberg

Fed and Treasury Steer Their Unsinkable Ship toward Iceberg

Illustration of the Titanic sinking with iceberg in backgroundThis past week we got to observe Fed Chair Jerome Powell and the US stock market andthe US bond market do everything I said they would do in their complicated shuffle of ships-and-icebergs:

“I’m sure many helium-headed stock investors believe the lilly-livered Fed will turn tail and run from its goal of letting inflation rise as soon as bonds begin to clobber stocks more seriously…. I believe the Fed is more committed than ever to raising inflation as it has been saying it wanted to do for years.”

Stocks in Bondage but Fed Not Fazed

While bond yields had already begun to rise and compete against stocks, the Fed stayed the course, iceberg dead ahead. As a result, longterm bond interest rose even more because the Fed did nothing to jawbone the idea of increasing its bond-buying QE to take interest rates back down (which it accomplishes by purchasing US government bonds from banks to take them off the market, putting them on its own balance sheet).

You see, the Fed is — I believe — caught in its own catch-22. Usually, to lower interest (in order to stimulate the economy and hit the higher inflation number the Fed says it is targeting), the Fed would buy more bonds; however, buying bonds and adding them to its balance sheet tends to create more money in the system, and the bond market is already afraid of rising inflation because much of the new money is now going into the hands of average people. (This game only worked when all new money was going into the stock market.)

As a result, aiming for higher inflation by purchasing more bonds will cause the reinvigorated bond vigilantes to up their demand on bond yields to cover inflation, making it impossible to lower longterm yields by purchasing bonds.

…click on the link above to read the rest of the article…

 

To One Bank, This Is The Flashing Red Warning That A Crash Is Dead Ahead

For much of 2018, the prevailing market theme was the one Morgan Stanley dubbed “rolling bear markets” when any time a given asset was hit, whether emerging markets, Italian bonds, or tech stocks, money would simply rotate from one place to another. However, at the end of September, when rates spiked amid concerns the Fed was prepared to push rates beyond neutral, things changed overnight.

Fast forward to now when what appeared to be somewhat orderly sequential blow ups have mutated into wholesale market panics in which everything starts to go wrong at once, or as Bloomberg describes it “everywhere you look, something’s blowing up.”

In commodities, it’s the record plunge in oil. In equities, it’s six weeks of turbulence in the S&P 500. Debt markets have been rattled by the turmoil engulfing General Electric and PG&E. Bitcoin just plunged 13 percent. And Goldman Sachs, the storied investment bank, is having the worst week since 2016.

As Bloomberg correctly notes, by themselves these sudden asset air pockets would be enough to incite panic, “but have them erupt all around and even the most grizzled Wall Street types can start to sound paranoid. Does GE have something to do with Goldman? How does Bitcoin sway the stock market? Wildfires have nothing to do with crude’s convulsions, but both are bad news for banks.”

“The risk of contagion is understood. What’s not understood is where and how connected things are,” Stewart Capital Advisors’ Malcolm Polley said by phone. “Just about anything can create panic, create contagion, and it doesn’t have to be something that makes sense.”

That bad things should congregate isn’t surprising to Donald Selkin, chief market strategist at Newbridge Securities, who sees it as a consequence of having it so good for so long. He’s waking up every night to check the futures.

…click on the above link to read the rest of the article…

“No One Has Outlawed Recessions” Stockman Sees S&P Fair Value “Way Below 2000”

“If you’re a rational investor, you need only two words in your vocabulary: Trump and sell,” says David Stockman, former President Reagan’s Office of Management and Budget director, warning that a 40% stock market plunge is closing in on Wall Street.

While not the first time Stockman has warned of a catastrophe waiting to happen in markets, he told CNBC’s Futures Now that, after the worst monthly loss for global stocks since the financial crisis, that the early rumblings of that epic downturn are finally here.

“No one has outlawed recessions. We’re within a year or two of one,”  adding that:

“fair value of the S&P going into the next recession is well below 2000, 1500 – way below where we are today.”

According to Stockman, Trump’s efforts to get the Fed to stop hiking rates from historical lows is misdirected…

“He’s attacking the Fed for going too quick when it’s been dithering for eight years. The funds rate at 2.13 percent is still below inflation,”

Specifically, Stockman notes the trade war is a major reason why investors should brace for a prolonged sell-off.

“The trade war is not remotely rational,” he said.

If the dispute worsens, it “is going to hit the whole goods economy with inflation like you’ve never seen before because China supplies about 30 percent of the goods in the categories we import.”

Stockman ends on an even more ominous note:

“We’re going to be in a recession, and we’re going to have another market correction which will be pretty brutal,” Stockman said.

“[Trump]’s playing with fire at the very top of an aging expansion.”

For now, all traders can think about is tomorrow – but we suspect Stockman will be right in the end.

Did The Nasdaq Bubble Just Burst?

Regular readers will recall when back in March, Bank of America cautioned that after the tech bubble in 2000, the housing bubble in 2006, we were witnessing the third biggest bubble of all time: the e-Commerce bubble.

Well, after several weeks of sharp volatility which has hammered tech stocks, slammed momentum trades and hurt growth factors, the tech sector is once again sharply lower after hours largely on the back of disappointments from Google and Amazon, with the  ETF which tracks the Nasdaq 100 dropping about 2%, and threatening to slide back into a bear market.

The reason for this latest weakness in the QQQs may be that investors are finally realizing that the latest Nasdaq bubble may have popped, if for no other reason than what is shown in the Bloomberg chart below: namely revenue growth at the two e-commerce titans, Google and Amazon, appears to have finally peaked.

Granted, the decline is not in revenue but in revenue growth, however when investors are already beyond skittish about peak earnings, a slowdown in the second derivative may be all they need to sell now and ask questions later. Which may explains why FANG stocks are all sharply lower after hours as the market begins to reasses just how much longer the “e-commerce bubble” as defined by Bank of America has left before it pops…

Oil Markets Tremble As Chinese Stocks Crash

Oil Markets Tremble As Chinese Stocks Crash

China Yuan

China’s stock market fell sharply on Thursday, dragged down by a range of concerns that should offer a warning to the broader global economy.

The Shanghai Composite Index fell nearly 3 percent on Thursday, falling to its lowest point in nearly four years. The problems in China are dragging down markets across Asia, including in Japan and South Korea.

The Shanghai Composite is now down more than 25 percent since the start of the year, and is down more than 10 percent in the last three weeks alone. Viewed another way, the Chinese stock market has lost more than $3 trillion in the last six months.

(Click to enlarge)

Shanghai Composite Index, last 12 months

The troubling thing about the recent declines is that the factors driving the losses are multiple. The trade war with the United States, mountains of debt held by local governments within China, a broader slowdown in growth, a weakening yuan and high oil prices are all creating headwinds for the Chinese economy.

China’s central bank said that it still has plenty of tools that it could use defend against the trade war. Looser reserve requirements took effect a few days ago, a move the central bank made to inject money into the economy.

The IMF says that China’s GDP growth could slow from 6.6 percent this year to just 6.2 percent in 2019, although the risks are skewed to the downside because of the trade war. The Fund said that a worst-case scenario in which the U.S. slaps stiff tariffs on nearly all imports from China would shave off 1.6 percentage points from Chinese growth.

China won’t see any relief from the U.S. Federal Reserve. Minutes of the Fed’s last meeting in late September were released on Wednesday, and they reveal a determination on the part of the central bank to continue to tighten interest rates.

…click on the above link to read the rest of the article…

Leon Cooperman: “The Whole Structure Of The Market Is Broken”

In a wide-ranging interview on CNBC, Leon Cooperman, chairman and CEO of Omega Advisors, explained that he doe snot see the market as ‘cheap’ or ‘expensive’ currently but warns that traditional value-manager-driven strategies face difficulties because ” all these quantitative trading systems are destroying the structure of the market…particularly that group that buy strength and sells weakness.”

Cooperman goes on to reflect on last week’s mini-crash as being overdone, because “credit was relatively flat” but warns that “It’s crazy…selling begets selling because of these quantitative trading systems,” adding that he thinks “all this fixation and fear about interest rates is misplaced.”

However, he does warn that “the strongest economy in 50 years” could be a problem as “it forces the hand of The Fed.”

Full Transcript

Who knows. I mean basically I think that the whole structure of the market is broken. You know when I came into the let’s put it this way. Whatever success I’ve achieved I think I’ve achieved it because I’ve been very lucky. I have a common sense basically. And I have a strong work ethic. And this whole thing now with all these quantitative trading systems are destroying the structure of the marketyou know particularly that group that buy strength and sells weakness.

So, everyone I know that’s accumulated wealth, whether it’s Warren Buffett, Ken Langone, Mario Gabelli – all friends of mine – I think they made their fortunes that by buying weakness and selling strength. What’s happening now [with the algos] is they’re trend followers and they really are exaggerating the trends up and down. The condition is that normally call for a significant market decline are just simply not present.

…click on the above link to read the rest of the article…

Pop goes the Bubble

Pop goes the Bubble

Running a fundraiser (which, by the way, has been a great success—thank you all very much!) has prompted me to think about money more deeply than I normally do. I am no financial expert, and I certainly can’t give you investment advice, but when I figure something out for myself, it makes me want to share my insights. I know that many people see national finances as an impenetrable fog of numbers and acronyms, which they feel is best left up to financial specialists to interpret for them. But try to see national finances as a henhouse, yourself as a hen, and financial specialists as foxes. Perhaps you should pay a little bit of attention—perhaps a bit more than one would expect from a chicken?

By now many people, even the ones who don’t continuously watch the financial markets, have probably heard that the stock market in the US is in a bubble. Indeed, the price to earnings ratio of stocks is once again scaling the heights previously achieved just twice before: once right before the Black Tuesday event that augured in the Great Depression, and again right around Y2K, when the dot-com bubble burst. On Black Tuesday it was at 30; now it’s at 27.22. Just another 10% is all we need to bring on the next Great Depression! Come on, Americans, you can do it!

These nosebleed-worthy heights are being scaled with an extremely shaky economic environment as a backdrop. If you compensate for the distortions introduced by the US government’s dodgy methodology for measuring inflation, it turns out that the US economy hasn’t grown at all so far this century, but has been shrinking to the tune of 2% a year.

And if you ignore the laughable way the US government computes the unemployment rate, it turns out that the real unemployment rate has grown from 10% at the beginning of the century to around 23% today.

 

…click on the above link to read the rest of the article…

Olduvai IV: Courage
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Olduvai II: Exodus
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