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The Dow Has Fallen Nearly 1,500 Points From The Peak Of The Market, And Many Believe This “October Panic” Is Just Beginning…

The Dow Has Fallen Nearly 1,500 Points From The Peak Of The Market, And Many Believe This “October Panic” Is Just Beginning…

We haven’t had an October like this in a very long time.  The Dow Jones Industrial Average was down another 327 points on Thursday, and overall the Dow is now down close to 1,500 points from the peak of the market.  Unlike much of the rest of the world, it is still too early to say that the U.S. is facing a new “financial crisis”, but if stocks continue to plunge like this one won’t be too far away.  And as you will see below, many believe that what we have seen so far is just the start of a huge wave of selling.  Of course it would be extremely convenient for Democrats if stocks did crash, because it would give them a much better chance of doing well in the midterm elections.  This is the most heated midterm election season that I can ever remember, and what U.S. voters choose to do at the polls in November is going to have very serious implications for the immediate future of our country.

After a very brief rally earlier in the week, stocks have been getting hammered again.  The S&P 500 has now fallen for 9 out of the last 11 trading sessions, and homebuilder stocks have now fallen for 19 of the last 22 trading sessions.  It was a “sea of red” on Thursday, and some of the stocks that are widely considered to be “economic bellwethers” were among those that got hit the hardest

Several stocks seen as economic bellwethers fell sharply in the U.S., including United Rentals and Textron, which dropped at least 11 percent each. Snap-on and Caterpillar, meanwhile, fell 9.6 percent and 3.9 percent, respectively.

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

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…

Here’s Why the Market Must Continue to Rip Higher — Everything Depends On It

Rarely discussed, corporate and government pensions, are barreling towards disaster. For some reason, there is an assumption that what ails the government, with their $20 trillion in debt, isn’t something that ordinary folk need to worry about. After all, times are good and corporate stock prices are near record highs, people are working, and even wages have been increasing.

But beneath the shiny veneer is a sickness that is festering, a red nightmare of underfunded pensions, both on a government and corporate level. They menace over markets like an explicit threat, a promise of crisis that is both maturing and spoiling with equal violence.

Former Dow component, and once upon a time great American company, has an underfunded pension of $31 billion and a business that is in the midst of restructuring. The stock has been cut in half over the past year.

But at a time when General Electric Co. is facing what amounts to an existential crisis, a $31 billion deficit in its pension plan may complicate any turnaround that involves a breakup of the 126-year-old icon of American capitalism. Divvying up the obligations won’t be easy.

After all, GE owes benefits to at least 619,000 people. And retirees aren’t the only ones at risk. Ideally, breaking up a conglomerate as sprawling as GE would unlock value for shareholders, who have seen their stock fall 40 percent since the CEO took the reins from Jeffrey Immelt in August. Stronger divisions wouldn’t be dragged down by weaker ones, and each business would stand on its own financially.

Here’s a nice genteel list of the top corporate pension deficits in America. The municipal deficit is far more insidious, $6 trillion in the hole.

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

Soaring Deficits and Interest Costs Leave the U.S. Looking Very Fragile

Soaring Deficits and Interest Costs Leave the U.S. Looking Very Fragile

If you take a step back and look at the macro picture of the U.S. economy – it resembles a huge, upside-down, glass pyramid.

Constantly teetering back and forth – struggling with everything it has to keep from collapsing.

And so far – it’s done a good job maintaining its balance. But nonetheless, it’s extremely fragile. And gets more so as each day passes by.

All it needs is a slight push in the any direction and down it goes – shattering into pieces. . .

It’s not hard to see that the ever-growing U.S. deficits – along with the soaring interest costs on the National debt – are going to be the focal point of a worldwide crisis.

Especially over the next few years. . .

To start – the U.S. deficit almost eclipsed $800 billion for the entire fiscal year (which ended September 2018) – a 17% year-over-year increase.

And it’s the largest deficit the U.S. has had in six years.

“Hold up – isn’t the economy doing well? Why’s the deficit soaring?”

See – That’s the problem.

The U.S. is borrowing at levels not seen since the direct aftermath of 2008. When the economy was in shambles.

As usual – government spending greatly outpaced revenue.

U.S. Treasury ‘outlays’ (spending) increased $127 billion compared to government ‘receipts’ (income) of only $14 billion.

That’s a $113 billion more than last year’s deficit.

The main causes for the increased deficit was because of Trump’s Tax Cuts (which brought in less federal revenue). And from soaring spending – which came from Defense/Military, as well as Medicaid, Social Security, and Disaster Relief.

It doesn’t look good – does it. But here’s the worst part – things are only going to get worse going forward.

The Congressional Budget Office (CBO) recently published, ‘The 2018 Long-Term Budget Outlook at a Glance’ white paper.

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

Opinion: Powell has lost his North Star, and the Fed is flying blind

The Fed risks raising interest rates too much as the compass spins wildly

STAN HONDA/AFP/Getty Images
Stars appear to rotate around Polaris, the North Star, in this time exposure of the Kitt Peak National Observatory near Tucson, Ariz.

Federal Reserve Chairman Jerome Powell is in an unenviable position. Folks expect him to fine-tune interest rates to keep the economy going and inflation tame but he can’t make things much better — only worse.

Growth is nearly 3% and unemployment is at its lowest level since 1969. What inflation we have above the Fed target of 2% is driven largely by oil prices and those by forces beyond the influence of U.S. economic conditions — OPEC politics, U.S. sanctions on Iran, and dystopian political forces in Venezuela and a few other garden spots.

When the current turbulence in oil markets recedes, we are likely in for a period of headline inflation below 2%, just as those forces are now driving prices higher now.

Overall, long-term inflation has settled in at the Fed target of about 2%. The Fed should not obsess about it but keep a watchful eye.

Amid all this, Powell’s inflation compass has gone missing. The Phillips curve, as he puts it, may not be dead but just resting. To my thinking, it’s in a coma if it was ever alive at all.

That contraption is a shorthand equation sitting atop a pyramid of more fundamental behavioral relationships. Those include the supply and demand for domestic workers and in turn, an historically large contingent labor force of healthy prime-age adults sitting on the sidelines, the shifting skill requirements of a workplace transformed by artificial intelligence and robotics, import prices influenced by weak growth in Europe and China, and immigration.

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

St Louis Fed Discloses More Free Money: A Carry Trade in Liquidity

Not only do banks earn free money on excess reserves, they can borrow money and make guaranteed free money on that.

The Federal Reserve Bank of St. Louis discusses the Carry Trade in Liquidity.

The IOER [interest on excess reserves] has been the effective ceiling of other short-term interest rates. The figure above compares the IOER with overnight rates on deposits and repos.

As we can see, the IOER has mostly remained above these two rates, implying that (at least some) banks have been able to borrow funds overnight, deposit them at the Fed and earn a spread, in essence engaging in carry trade in liquidity markets.

Interest Rate on Excess Reserves

How Much Free Money?

Fed vs ECB

While the Fed has been busy giving banks free money by paying interest on excess reserves, banks in the EU have suffered with negative interest rates, essentially taking money from banks and making them more insolvent.

If the goal was to bail out the banks at public expense (and it was), it’s clear Bernanke had a far better plan than the ECB.

The Credit Cycle is on the Turn

We are on the verge of moving into an era of high interest rates, so markets will behave differently from any time since the early-1980s. There are enough similarities with the post-Bretton Woods era of the 1970s to give us some guidance as to how markets are likely to evolve in the foreseeable future.

u turn 1

The chart above says much. Last week, the yield on the 10-year US Treasury bond broke new high ground for this credit cycle. The evolution of key moving averages in bullish sequence (for higher yields, but sharply lower bond prices) is a model example out of the chartist’s textbook. The underlying momentum looks so powerful that a quick rise to 3.5% and beyond appears to be a racing certainty. The credit cycle, transiting from a period of cheap finance into higher borrowing costs is clearly on the turn.

In the fiat-money world, everything takes its valuation cue from US Treasury bonds. For equities it is theoretically the long bond, which is also racing towards higher yields. Having ignored rising yields for the long bond so far, the S&P500 only recently hit new highs. It has been a fantasy-land for equities from which a rude awakening appears increasingly certain. It is likely that the current downturn in equity prices is the start of a new downtrend in all financial assets that have been badly caught on the hop by the ending of cheap credit.

At some stage, and this is why the bond-yield break-out is important, we will face a disruption in valuations that undermines the relationship between assets and debt. This has been a periodic event, with central banks taking whatever action was needed to rescue the commercial banks. When the crisis happens, they reduce interest rates to support asset valuations, propping up government bond markets and ultimately equities.

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

Ten Years After the Last Meltdown: Is Another One Around the Corner?

Ten Years After the Last Meltdown: Is Another One Around the Corner?

September marked a decade since the bursting of the housing bubble, which was followed by the stock market meltdown and the government bailout of the big banks and Wall Street. Last week’s frantic stock market sell-off indicates the failure to learn the lesson of 2008 makes another meltdown inevitable.In 2001-2002 the Federal Reserve responded to the economic downturn caused by the bursting of the technology bubble by pumping money into the economy. This new money ended up in the housing market. This was because the so-called conservative Bush administration, like the “liberal” Clinton administration before it, was using the Community Reinvestment Act and government-sponsored enterprises Fannie Mae and Freddie Mac to make mortgages available to anyone who wanted one — regardless of income or credit history.

Banks and other lenders eagerly embraced this “ownership society”’ agenda with a “lend first, ask questions when foreclosing” policy. The result was the growth of subprime mortgages, the rush to invest in housing, and millions of Americans finding themselves in homes they could not afford.

When the housing bubble burst, the government should have let the downturn run its course in order to correct the malinvestments made during the phony, Fed-created boom. This may have caused some short-term pain, but it would have ensured the recovery would be based on a solid foundation rather than a bubble of fiat currency.

Of course Congress did exactly the opposite, bailing out Wall Street and the big banks. The Federal Reserve cut interest rates to historic lows and embarked on a desperate attempt to inflate the economy via QE 1, 2, and 3.

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

World Finance Leaders Scramble For A Solution To Escalating Trade War, Rising Rates

The main takeaway from the IMF and World Bank Group annual meeting in Bali, which hosted financial ministers and central bank governors from around the world this weekend, was that global trade tensions were having a profound effect on global growth and need to be solved.

Most of the participants – save for China and Mexico – seemed united and in agreement that trade talks have to continue. Bank of Japan Governor Haruhiko Kuroda stated that it was essential to have dialogue on trade while at the same time, the president of Brazil’s central bank, Ilan Goldfajn, noted that the trade wars were one of the biggest threats to emerging markets. Indonesia’s president Jokowi Widodo said starkly that “winter is coming” for the global economy if there is no solution on trade.

However, not everybody was prepared to find a solution at any cost. Bank of China governor Yi Gang stated that he was preparing for the worst, despite still seeking a constructive resolution to the problem. Gang stated at the meeting: “You see a lot of people in China now preparing for this trade tension to be a prolonged situation. The downside risks from trade tensions are significant.”

Mexico also stepped in to voice its support for China. Former Mexican president Ernesto Zedillo told China that they should follow the example set by Mexico and Canada during their negotiations with the United States, because they both were able to secure the terms that they wanted, even though some may disagree violently with this hot take.

Zedillo said, “Mexico and Canada made clear that they’d rather not have Nafta than having the deal that the U.S. wanted. In the end, Mexico and Canada got their way in every single issue that had been drawn as a red line. So I hope China doesn’t blink.”

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

Wolf Richter: Making Sense Of The Recent Market Gyrations

PODCAST

Wolf Richter: Making Sense Of The Recent Market Gyrations

Which triggers are driving the action? What’s next?

Every week at PeakProsperity.com, we record a podcast exclusive for our premium subscribers titled Off The Cuff, where Chris and a weekly expert discuss the notable developments of the week. Every once in a while, we’ll share one of these episodes with the general public, which we’re doing this week. Here’s Chris Martenson in discussion with Wolf Richter, evaluating the causes and repercussions of last week’s violent drop across the stock and bond markets.

Recorded last week as the market was in full melt-down mode, Chris and Wolf Richter decode the underlying drivers of the sudden reversal, and peer into the future to predict what is most likely to happen next. Both agree that, whether stocks are briefly ‘rescued’ in the ensuing days, the long-awaited downward re-pricing of the ‘Everything Bubble’ is nigh.

As Wolf puts it:

The emerging market stock index is down 22% from January. So they have gotten hit pretty hard. There’s this trend from the outside toward the core. So when something deteriorates, it starts at the outside and moves toward the core, the core being the higher quality US financial instruments. So that’s probably a dynamic that has already started. And I agree with you. The central banks removing liquidity is a big thing, and it has a big impact.

And people have said, for years, well, QE didn’t cause stocks to go up. So when that goes away, it’s not going to cause stocks to go down. But that’s just not true. The purpose of QE, as Bernanke himself explained it in a Washington Post editorial in 2010, is to create the wealth effect, to bring asset prices up so that the wealthy feel wealthier and spend more money and then this someone trickles down.

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

US Spending On Interest Hits All Time High As Budget Deficit In Trump’s First Year Soars To $779 Billion

One month ago we already knew that the U.S. budget deficit for the 2018 fiscal year – Trump’s first full year in office – would be jarring after the August deficit soared to $211 billion, nearly double the deficit gap from one year ago (largely due to calendar quirks) which on a cumulative basis for the first 11 months of the fiscal year was a staggering $895 billion, $222 billion or 39% more than the previous year. This was largely due to outlays which climbed 7% while revenue rose a mere 1%.

Today at 2pm we got official confirmation of the rapid expansion in the US budget deficit when the Treasury announced that in Trumps first full fiscal year as president, the U.S. budget deficit grew 17% to $779 billion from $666 billion…

… the highest full year total since 2012 amid tax cuts and spending increases, if below the trailing 12 month total as of August which, as noted above, was a whopping $895 billion.

The budget gap for the 12 month period ended September was 17% greater than the same 12-month period a year earlier, as spending rose 3.2% and revenue gained just 0.4%.

The deficit as a share of GDP was 3.9% in fiscal 2018, up 0.4% point from the prior year.

To fund this deficit, the U.S. government borrowed $1.08 trillion from the public in Fiscal 2018, more than double the amount borrowed in 2017 ($498.3 billion) and the most borrowed from the public in a fiscal year since FY’12.

There was some good news: contrary to more pessimistic expectations, the surplus for the fiscal year’s final month of September jumped to $119 billion, the largest windfall for the last month of any fiscal year on record. However, like in August, there were calendar effects in play – and if not for timing shifts, last month’s surplus would have been just $44BN, $7BN (13%) less than Sep ’17 surplus.

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

Choking On the Salt of Debt

Choking On the Salt of Debt

Life After ZIRP

Roughly three years ago, after traversing between Los Angeles and San Francisco via the expansive San Joaquin Valley, we penned the article, Salting the Economy to Death.  At the time, the monetary order was approach peak ZIRP.

 

Our boy ZIRP has passed away. Mr. 2.2% effective has taken his place in the meantime. [PT]

We found the absurdity of zero bound interest rates to have parallels to the absurdity of hundreds upon hundreds of miles of blooming crop fields within the setting of an arid desert wasteland.

Given today’s changing financial conditions, namely the prospect of a sustained period of rising interest rates, we have taken the opportunity to refine our analysis.  What follows is an attempt to bring clarity to disorder.

The natural starting point for the topic at hand is from a place of delusion. That is, the popular delusion that central planners can stimulate robust economic growth by setting interest rates artificially low. The general theory is that cheap credit compels individuals and businesses to borrow loads of cash – and consume.

Over a sample size of five to ten years, say the growth half of the business cycle, central bankers can falsely take credit for engineering a productive economy.  Profits increase.  Jobs are created.  Wages rise.  A cycle of expansion takes root.  These are the theoretical benefits to an economy that central bankers claim they impart with just a little extra liquidity.  In practice, however, this policy antidote is a disaster.

Without question, cheap credit can have a stimulative influence on an economy with moderate debt levels. But once an economy has reached total debt saturation, where new debt fails to produce new growth, the cheap credit trick no longer works to stimulate the economy.  In fact, the additional credit, and its flip-side debt, distorts prices and strangles future growth.

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

Yes, Something Broke

Yes, Something Broke

In this missive, we are just going to focus on the “WTF!” moment of this past week. In order to do this properly, I need to start with last week’s missive where we asked the question “Did Something Just Break?” In that article we addressed very specific concerns about interest rates and the problem they were going to cause.

Speaking of rates, each time rates have climbed towards 3%, the market has stumbled.”

Chart updated through Friday.

“If you note in the chart above, a short-term ‘warning signal’ has been triggered which suggests that if rates remain above 3%, stocks are going to continue to struggle. The last time this occurred was in May when rates popped above 3%, stocks struggled and bonds outperformed.”

We also updated the pathway analysis for the highest probability outcomes over the next couple of months.

Chart updated through Friday – pathways remain unchanged

While the majority of the pathway’s accounted for a continued corrective, consolidation, process through the end of the year. It was Pathway #3 which came to fruition.

“Pathway #3: The issue of rising interest combines with a break in the economic data, or another credit-related event, and sends the market heading back to test supports at 2800 and 2750. This would likely coincide with a more severe contraction in the economic data which is not an immediate threat. Nonetheless, we should always consider the risk of an unexpected, exogenous, event. (10%)”

The recent sell-off coincides with the rising concerns of higher rates coupled with deterioration in economic growth heading into 2019. To wit:

“As such, our best initial take is that yesterday’s repricing of US growth was an overdue gut-check following last week’s monetary and oil supply shocks.”

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

Peter Schiff Explains “What Happens Next” In 47 Words

Outspoken critic of The Fed and one of the few that can see through the endless barrage of bullshit to how this really ends, has laid out in a tweet “what happens next”…

Likely sequence of events:

1. Bear market;

2. Recession;

3. Deficits explode;

4. Return of ZIRP and QE;

5. Dollar tanks;

6. Gold soars;

7. CPI spikes;

8. Long-term rates rise;

9. Fed. forced to hike rates during recession

10. A financial crisis without stimulus or bailouts!

h/t @PeterSchiff

We Witnessed The 3rd Largest Point Crash In Stock Market History On The Same Day That The 3rd Most Powerful Hurricane To Ever Hit The U.S. Made Landfall

We Witnessed The 3rd Largest Point Crash In Stock Market History On The Same Day That The 3rd Most Powerful Hurricane To Ever Hit The U.S. Made Landfall

If you don’t believe in “coincidences”, what are we supposed to make of this?  On Wednesday, the 3rd most powerful hurricane to ever hit the United States made landfall in the Florida panhandle.  Entire communities were absolutely shredded as Hurricane Michael came ashore with sustained winds of 155 miles per hour.  You can find the entire article that I just posted about this massive storm right here.  In this article, I am going to focus on what just happened on Wall Street.  At the exact same time that Hurricane Michael was causing chaos in the Southeast, an October stock market crash was causing havoc in the Northeast.  The Dow Jones Industrial Average was down 831 points, which was the 3rd largest single day point crash in stock market history.  Of course it isn’t as if we hadn’t been repeatedly warnedthat this was coming, and the truth is that it looks like this is only the start of the financial shaking.

In fact, international financial markets are in a state of chaos as I write this article.  Asian markets are a sea of red, and at this moment Dow futures are way down.

So it appears likely that Wednesday’s nightmare may extend into Thursday as well.

But before we look ahead too much, let’s talk about the utter carnage that we just witnessed.

According to Bloomberg, the 500 wealthiest people in the world lost 99 billion dollars on Wednesday…

Plunging global markets lopped $99 billion from the fortunes of the world’s 500 wealthiest people on Wednesday, the year’s second-steepest one-day drop for the Bloomberg Billionaires Index.

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

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