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Update: VIX SURGES ABOVE 50 FOR FIRST TIME SINCE AUGUST 2015

* * *

It’s a bloodbath, with the Dow set to open 750 points lower “thanks” to the +377 fair value…

… but it could have been much worse, with S&P futures actually trading toward the highs of the overnight session after tumbling an additional 3.5% from Monday’s close, as risk assets around the world crashed then modestly rebounded even as traders remain on edge over what the implosion in the vol complex means for everyone.

World stock markets nosedived for a fourth day running on Tuesday, having seen $4 trillion wiped off from what just eight days ago had been record high values.

“Playtime is officially over, kids,” analysts at Rabobank said. “Rising volatility painfully reminds some investors that one-way bets don’t exist.”

“Since last autumn, investors had been betting on the ‘Goldilocks’ economy – solid economic expansion, improving corporate earnings and stable inflation. But the tide seems to have changed,” said Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities.

Meanwhile, “The euphoria has turned to terror.”

There was a modest bound in European bourses, which opened sharply lower in the wake of the largest ever point loss in Dow Jones Industrial Average history. London’s FTSE 100 lost 3.5% at the opening bell, with every constituent falling and financial stocks hit hardest. The Europe-wide Stoxx 600 fell 2.2 %, while Frankfurt’s Xetra Dax 30 fell 3.5%, before recouping some losses. As of this writing, core European cash equity markets trade around -1.5%/-2.0%.

In fact, as Bloomberg notes, the Stoxx Europe 600 Index at one point today slumped the most since Brexit, with every industry sector falling as much as 2 percent.

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

It’s Looking A Lot Like 2008 Now…

February 3, 2018

It’s Looking A Lot Like 2008 Now…

Did today’s market plunge mark the start of the next crash?

Economic and market conditions are eerily like they were in late 2007/early 2008.

Remember back then? Everything was going great.

Home prices were soaring. Jobs were plentiful.

The great cultural marketing machine was busy proclaiming that a new era of permanent prosperity had dawned, thanks to the steady leadership of Alan Greenspan and later Ben Bernanke.

And only a small cadre of cranks, like me, was singing a different tune; warning instead that a painful reckoning in our financial system was approaching fast.

It’s fitting that I’m writing this on Groundhog Day, as to these veteran eyes, it sure has been looking a lot like late 2007/early 2008 lately…

The Fed’s ‘Reign Of Error’

Of course, the Great Financial Crisis arrived in late 2008, proving that the public’s faith in central bankers had been badly misplaced.

In reality, all Ben Bernanke did was to drop interest rates to 1%. This provided an unprecedented incentive for investors and institutions to borrow, igniting a massive housing bubble as well as outsized equity and bond gains.

It’s worth taking a moment to understand the mechanism the Federal Reserve used back then to lower interest rates (it’s different today). It did so by flooding the banking system with enough “liquidity” (i.e. electronically printed digital currency units) until all the banks felt comfortable lending or borrowing from each other at an average rate of 1%.

The knock-on effect of flooding the US banking system (and, really, the entire world) in this way created an echo bubble to replace the one created earlier during Alan Greenspan’s tenure (known as the Dot-Com Bubble, though ‘Sweep Account’ Bubble is more accurate in my opinion):

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

Is It Just A Coincidence That The Dow Has Hit 20,000 At The Same Time The National Debt Is Reaching $20 Trillion?

January 29, 2017

Is It Just A Coincidence That The Dow Has Hit 20,000 At The Same Time The National Debt Is Reaching $20 Trillion?

The Dow Jones Industrial Average provides us with some pretty strong evidence that our “stock market boom” has been fueled by debt. On Wednesday, the Dow crossed the 20,000 mark for the first time ever, and this comes at a time when the U.S. national debt is right on the verge of hitting 20 trillion dollars. Is this just a coincidence? As you will see, there has been a very close correlation between the national debt and the Dow Jones Industrial Average for a very long time.

For example, when Ronald Reagan took office in 1991, the U.S. national debt had just hit 994 billion dollars and the Dow was sitting at 951. And as you can see from this chart by Matterhorn.gold via David Stockman, roughly that same ratio has held true throughout subsequent presidential administrations…

During the Clinton years the Dow raced out ahead of the national debt, but an “adjustment” during the Bush years brought things back into line.

The cold hard truth is that we have been living way above our means for decades. Our “prosperity” has been fueled by the greatest debt binge in the history of the world, and we are greatly fooling ourselves if we think otherwise.

We would never have gotten to 20,000 on the Dow if Barack Obama and Congress had not gotten us into an extra 9.3 trillion dollars of debt over the past eight years.

Unfortunately, most people do not understand this, and the mainstream media is treating “Dow 20,000″ as if it is some sort of great historical achievement…

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

Janet Yellen’s $200-Trillion Debt Problem

June 20, 2016

Janet Yellen’s $200-Trillion Debt Problem

Blame “Brexit”

BALTIMORE – The U.S. stock market broke its losing streak on Thursday [and even more so on Monday, ed.]. After five straight losing sessions, the Dow eked out a 92-point gain. The financial media didn’t know what to say about it. So, we ended up with the typical inanities, myths, and claptrap.

“Investors” are pushing the DJIA back up again..apparently any excuse will do at the moment. The idea may backfire though, as exactly the same thing happened shortly before Sweden’s euro referendum (a prominent pro-euro politician was killed by a “lone nut” a few days ahead of the vote), and Sweden still had the krona last we looked… – click to enlarge.

“Brexit panic may be your big chance to buy the S&P 500,” says a headline at Marketwatch. The article claims investors have pushed down the value of the S&P 500 in fear of a so-called “Brexit.”

Next Thursday, in a national referendum, British voters will decide whether to end Britain’s 43-year membership in the European Union. But there are a number of problems with this…

First, there has been no big rout in the S&P 500; it’s only slightly below its all-time high. Second, Brexit is a mystery to most U.S. investors, not a cause for alarm. Third, nobody knows which side will win – or what it will mean.

Would a Brexit be good for Britain? Would it be bad for stocks? Nobody knows! Meanwhile, the Financial Times focuses on “slowing job growth and risk of Brexit…”

It notes that a possible Brexit next week is one reason Fed chief Janet Yellen cited for holding off on raising U.S. interest rates at this week’s monetary policy meeting. The newspaper also notes that the Fed has left “the door open” to rate increases.

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

When the Game Changes

May 5, 2016

WHEN THE GAME CHANGES

“In a free market, the price and quantity of an item are determined by the supply and demand for that item.”

‘The function and nature of markets’ on boundless.com.

In their efforts to jam the square peg of financial theory into the round hole of human nature, economists have perpetrated some pretty stupid things. But few of them are dumber than the efficient market hypothesis. EMH states that it is impossible to beat the market because the efficiency of the market means that prices always incorporate and reflect all relevant information. Why was the Dow Jones Industrial Average worth 22.6% less on Tuesday October 20th 1987 than it had been the previous day ? Why is Warren Buffett worth $67 billion ? Must be all that efficiency.

George Soros (estimated net worth: $25 billion) is also a pretty good refutation of the efficient market hypothesis. As a student at the LSE, Soros chose the Viennese-born philosopher Karl Popper as his tutor. Popper argued that empirical truth can never be known with absolute certainty; scientific laws can never be conclusively proved, they can only be given provisional authority, until some better theory intercedes. No amount of confirmation is sufficient. One failed test is enough to falsify.

“While I was reading Popper I was also studying economic theory and I was struck by the contradiction between Popper’s emphasis on imperfect understanding and the theory of perfect competition in economics which postulated perfect knowledge. This led me to start questioning the assumptions of economic theory.”

Buffett’s refutation is less elegant, but equally effective:

“I’d be a bum on the street with a tin cup if the markets were always efficient.”

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

A Fatal Flaw in the System

April 11, 2016

A Fatal Flaw in the System

The Hard Rocks of Real Life

BALTIMORE – The Dow dropped 174 points on Thursday, the biggest fall in six weeks. Not the end of the world. Maybe not even the end of this year’s bounce-back bull run. As you’ll recall, stocks sold off at the beginning of the year, too. Then, investors were buoyed up after central banks got to work – jimmying the credit market on their behalf.

5o1rhrdw59wk Photo credit: Andrei Shumskiy

The Fed swore off any further “normalization” until later in the year. Central banks in Europe, Japan, and China all took bolder and more reckless action… with the Bank of Japan following some European banks by going into “full retard” mode with negative interest rates.

DJIA, 10-minute candles; the red rectangle bounds Thursday’s market action. A rebound attempt on Friday failed to go very far – click to enlarge.

Now, according to the narrative popular in the financial press, investors are beginning to worry that central banks are not very effective after all. As to that last point, they’re right; central banks can only do so much. They made the situation what it is. Now, they can only make it worse. How? By adding more of what made it bad in the first place. All they can do is add more debt to a world already drowning in it.

If anyone knows of a different way this story might unfold, we’d like to hear it. But for all the puzzling and preposterous guesswork and wondering, it is still the same tale: Debt builds up; debtors can’t pay; they go broke. It happens all the time.

In a healthy economy – with real money and honest banking – people make mistakes. They go broke. The bankruptcies are absorbed and disposed of in good order. Assets go on the block. Hungry investors and entrepreneurs snap them up… and put them to good use.

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

Alice in Wonderland

March 23, 2016

Alice in Wonderland

Everything Is Nonsense

If I had a world of my own, everything would be nonsense. Nothing would be what it is, because everything would be what it isn’t. And contrary wise, what is, it wouldn’t be. And what it wouldn’t be, it would. You see?

– Alice’s Adventures in Wonderland

Mad_Hatter_0011 A public service message from the Mad Hatter – bad news is bad. Ominous, even. Hat help us all! Illustration credit: Bob Kane

BALTIMORE – The Dow rose the fifth week in a row last week, ending with a 120-point jump on Friday. This has put the index firmly in the black for 2016. Well, this is a showdown, isn’t it?

Either us… or the great mass of investors – one of us is wrong. In the weeks to come, we’ll find out who (notice to new readers: It could go either way). But wait a minute…

Our old friend Rob Marstrand, who writes at Of Wealth.com, explains why the great mass of investors has little to do with it. Apparently, corporations have nothing better to do with their money than buy their own shares.

“There’s a dirty little secret in the U.S. stock market. Corporate America is paying out more cash to shareholders than it earns in profits. This means there’s nothing left to invest in business growth. It also means debt levels are going up, increasing risk…

Analysis by Bloomberg shows that those companies are on track to spend $590 billion a year on buybacks in 2016, at the first-quarter rate. That would be even more than the last point of peak buybacks – at the previous market top in 2007, just before the last crash. Put simply, companies are spending record amounts of cash on buybacks at precisely the wrong time (as usual): when stocks are extremely expensive.”

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

What Markets Are Telling Us

February 15, 2016

What Markets Are Telling Us

Last week US stock markets tumbled yet again, leaving the Dow Jones index down almost 1500 points for the year. In fact, most major world markets are in negative territory this year. There are many Wall Street cheerleaders who are trying to say that this is just a technical correction, that the bottom is near, and that everything will be getting better soon. They are ignoring the real message the markets are trying to send: you cannot print your way to prosperity.

People throughout history have always sought to acquire wealth. Most of them understand that it takes hard work, sacrifice, savings, and investment. But many are always looking for that “get rich quick” scheme. Monetary cranks throughout history have thought that just printing more money would result in greater wealth and prosperity. Every time this was tried it resulted in failure. Huge economic booms would be followed by even larger busts. But no matter how many times the cranks were debunked both in theory and practice, the same failed ideas kept coming back.

The intellectual descendants of those monetary cranks are now leading the world’s central banks, which is why the last decade has seen an explosion of money creation. And what do the central bankers have to show for it? Lackluster employment numbers that have not kept up with population growth, increasing economic inequality, a rising cost of living, and constant fear and uncertainty about what the future holds.

The past decade has been a lot like the 1920s, when prices wanted to drop but the Federal Reserve kept the price level steady through injections of easy money into the economy. The result in the 1920s was the Great Depression. But in the 1920s prices were dropping because of increased production.

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

Convenient Beliefs

February 15, 2016

Convenient Beliefs

“Massive Deterioration” – Worse Than 2008

BALTMORE – “Stocks still not finding bottom” warned a headline at Investor’s Business Daily. On Thursday, the Dow ended down 255 points – or 1.6%. The index is down by almost 9% since the start of the year.

“These developments, if they prove persistent, could weigh on the outlook for economic activity…” proffered a nervous-looking Janet Yellen in her testimony on Capitol Hill. She was signaling to investors.

Yellen_cartoon_02.27.2015 Smoke signals…

“Don’t worry about us,” she may as well have said. “If we can get away with a big U-turn, we’re not going to raise rates anymore.”

On Tuesday, Maersk Group, the world’s largest container shipping company, said it was suffering a “massive deterioration” in its business.

“It is worse than 2008,” its CEO, Nils Andersen, told the Financial Times. But this is not even near the bottom for the world economy. Hedge fund manager Kyle Bass warns that the other shoe is a big one… and it hasn’t dropped yet.

A Maersk container ship…the line is feeling the pinch – the Baltic Dry Index has collapsed to just 291 points (from approx. 11,800 at the 2008 peak) and container shipping rates have declined sharply as well. Photo credit: Michael Kooren / Reuters

China’s economy is heavily dependent on capital investment. It puts its money into building factories, highways, offices, apartment blocks, railroads, ports, and airports. What do all these projects require? Rebar!

Concrete is reinforced with steel bars. As the pace of building slows, the price of rebar goes down. In 2008, a ton of rebar cost about 5,500 renminbi ($836). Now, it costs barely 2,000 renminbi ($304) – the lowest price in at least 15 years.

Shanghai steel rebar futures, weekly in RMB – click to enlarge.

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

Here Come the Money Helicopters!

February 11, 2016

Here Come the Money Helicopters!

The Negative Wealth Effect

Since the start of the year, the Dow is down about 7%. But certain stock market sectors have undergone a much harder pruning. First, energy… then the tech… and now banks. Shares in too-big-to-fail bank Citigroup are down almost 28% so far this year. And shares in Europe’s biggest bank, Deutsche Bank, are down by more than 36%.

As always, we don’t know where this leads.

But as we warned at the start of the year, it could be the beginning of a serious bear market. And more! As Nobel Prize-winning economist Paul Samuelson put it, the stock market has famously predicted nine out of the last five recessions. Further study shows that a stock market plunge of 10% has about a 50% probability of presaging a recession… 100% of the time!

Hope that’s clear.

But a stock market plunge not only predicts trouble in the economy; it also causes it. The Fed’s treasured “wealth effect” – in which investors, seeing the value of their portfolios rise, feel richer and rush out and spend – works in both directions. When stock prices fall, investors pull back on spending, and the economy goes into a cold funk.

The further stocks fall… the more the likelihood that the economy will follow. This has the central planners worried.

Pushing on a String

Here’s the chief economics commentator at the Financial Times, Martin Wolf:

What might central banks do if the next recession hit while interest rates were still far below pre-2008 levels? As a paper from the London-based Resolution Foundation argues, this is highly likely. Central banks need to be prepared for this eventuality.

How?

The most important part of such preparation is to convince the public that they know what to do.

Good luck with that!

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

A 918 Point Stock Market Crash In Japan And Deutsche Bank Denies That It Is About To Collapse

February 10, 2016

A 918 Point Stock Market Crash In Japan And Deutsche Bank Denies That It Is About To Collapse

On Tuesday junk bonds continued to crash, the price of oil briefly dipped below 28 dollars a barrel, Deutsche Bank was forced to deny that it is on the verge of collapse, but the biggest news was what happened in Japan. The Nikkei was down a staggering 918 points, but that stock crash made very few headlines in the western world. If the Dow had crashed 918 points today, that would have been the largest single day point crash in all of U.S. history. So what just happened in Japan is a really big deal. The Nikkei is now down 23.1 percent from the peak of the market, and that places it solidly in bear market territory. Overall, a total of 16.5 trillion dollars of global stock market wealth has been wiped out since the middle of 2015. As I stated yesterday, this is what a global financial crisis looks like.

Just as we saw during the last financial crisis, the big banks are playing a starring role, and this is definitely true in Japan. Right now, Japanese banking stocks are absolutely imploding, and this is what drove much of the panic last night. The following numbers come from Wolf Richter…

Mitsubishi UFJ Financial Group plunged 8.7%, down 47% from June 2015.
Mizuho Financial Group plunged 6.2%, down 38% since June 2015.
Sumitomo Mitsui plunged 6.2%, down 26% since May 2015
Nomura plunged a juicy 9.1%, down 42% since June 2015

A lot of analysts have been very focused on the downturn in China in recent months, but I think that it is much more important to watch Japan right now.

I have become fully convinced that the Japanese financial system is going to play a central role in the initial stages of this new global financial meltdown, and so I encourage everyone to keep a close eye on the Nikkei every single night.

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

How Corporations are Being Removed From the Food Supply

February 1, 2016

HOW THE CORPORATIONS ARE BEING REMOVED FROM THE FOOD SUPPLY CHAIN

“Industrial agriculture has created a complex system of interlocking oligopolies that spans seeds, agrochemicals, biotechnology, trading, and retailing and consumer goods companies.”

The Poverty of Capitalism

The above quote is made by John Hilary, director of the NGO War on Want sums it all in his recent book The Poverty of Capitalism. The industrial food system is characterized by economic focus through an outgrowth of a long and on-going process that has allowed major agribusinesses—companies that supply the chemicals, seeds, equipment and services that are critical to industrial farms—to greatly determine and influence the modern food system. It’s estimated that in 2004 only 8% of farms in the US accounted for 72% of sales.

Further, the top ten seed firms were estimated to control the entire world seed market and the top ten agrochemical corporations controlled 84% of the $30 billion agrochemical market. Further, only six corporations – Monsanto, DuPont, Dow, Syngenta, Bayer and BASF – control 75% of the world pesticides market, Factory farms now account for 72 percent of poultry production, 43 percent of egg production, and 55 percent of pork production worldwide and only four corporations – ADM, Bunge, Cargill and Dreyfus – control more than 75% of the global grain trade who overwhelmingly push commodity crops like corn and soy on local farmers at the expense of native crops.

The major aim of most of these agri-corporations the world over is to earn profit through their operations. They are more concerned with their own interests and not those of the public. The policies of these organizations are usually profit oriented. The underlying policy is profit making leaving other superficial benefits constant. With the hegemony of transnational food corporations, food production has been reduced to becoming a model of profit generation instead of producing quality food production. Food is considered to be one of the basic requirements for humans to survive, and agriculture is one of the largest employers/ occupations in the world.

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

The FOMC Decision: The Boxed in Fed

January 29, 2016

The FOMC Decision: The Boxed in Fed

An Imaginary Bogeyman

What’s a Keynesian monetary quack to do when the economy and markets fail to remain “on message” within a few weeks of grandiose declarations that this time, printing truckloads of money has somehow “worked”, in defiance of centuries of experience, and in blatant violation of sound theory?

In the weeks since the largely meaningless December rate hike, numerous armchair central planners, many of whom seem to be pining for even more monetary insanity than the actual planners, have begun to berate the Fed for inadvertently summoning that great bugaboo of modern-day money cranks, the “ghost of 1937”.

Bugaboo of monetary cranks
The bugaboo of Keynesian money cranks – the ghost of 1937.

As the story goes, the fact that the FDR administration’s run-away deficit declined a bit, combined with a small hike in reserve requirements by the Fed “caused” the “depression-within-the-depression” of 1937-1938, which saw the stock market plunging by more than 50% and unemployment soaring back to levels close to the peaks seen in 1932-33.

This is of course balderdash. If anything, it demonstrates that the data of economic history are by themselves useless in determining cause and effect in economics. It is fairly easy to find historical periods in which deficit spending declined a great deal more than in 1937 and a much tighter monetary policy was implemented, to no ill effect whatsoever. If one believes the widely accepted account of the reasons for the 1937 bust, how does one explain these seeming “aberrations”?

The DJIA in 1937 (eventually, an even lower low was made in 1938, see also next chart) – click to enlarge.

As we often stress, economics is a social science and therefore simply does not work like physics or other natural sciences. Only economic theory can explain economic laws – while economic history can only be properly interpreted with the aid of sound theory.

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

Stock Market Suffers Worst Start to the Year Ever – What Does it Mean?

January 12, 2016

Stock Market Suffers Worst Start to the Year Ever – What Does it Mean?

From December 30 to the end of the first week trading week of January, the DJIA has declined by roughly 7.7% (approx. 1,370 points) and the SPX by roughly 7.6% (approx. 160 points). This was nothing compared to the mini-crash suffered by China’s stock market early this year, which continued this morning with the Shanghai Composite (SSEC) declining by another 5.33%. The SSEC has put in an interim peak at approx. 3684 on December 23 and has since then fallen by slightly less than 670 points, or about 18%. Most of the decline occurred in the first week of January.

S&P 500 Index, daily. The year has begun with a big sell-off in stock markets around the world – click to enlarge.

Although the sell-off in the US stock market was comparatively mild, it still ended up as the worst first trading week of January in history. Had January started out on a positive note, the mainstream financial media would have been full of reminders of how bullish a strong showing in the first week of January was, and what a good omen it represented for the rest of the year. Instead they felt compelled to tell us why a weak start to the year should be ignored.

The contortions went as far as one analyst informing us last week that the sell-off was actually happening “in a parallel universe”. As our friend Michael Pollaro has pointed out to us, central planning worshiper Steve Liesman told CNBC viewers last week that the terrible trade numbers (both imports and exports kept declining) were actually a positive, because they would “subtract less from GDP” – as imports have declined at an even faster pace than exports. Such unvarnished nonsense can only spring from the fevered minds of Keynesians and Mercantilists.

2-US exports and imports …click on the above link to read the rest of the article…

Stock Market Crash 2016: This Is The Worst Start To A Year For Stocks Ever

January 8, 2016

Stock Market Crash 2016: This Is The Worst Start To A Year For Stocks Ever

We have never had a year start the way that 2016 has started. In the U.S., the Dow Jones Industrial Average and the S&P 500 have both posted their worst four-day starts to a year ever. Canadian stocks are now down 21 percent since September, and it has been an absolute bloodbath in Europe over the past four days. Of course the primary catalyst for all of this is what has been going on in China. There has been an emergency suspension of trading in China two times within the past four days, and nobody is quite certain what is going to happen next. Eventually this wave of panic selling will settle down, but that won’t mean that this crisis will be over. In fact, what is coming is going to be much worse than what we have already seen.

On Thursday I was doing a show with some friends, and we were amazed that stocks just seemed to keep falling and falling and falling. The Dow closed down 392 points, and the NASDAQ got absolutely slammed. At this point, the Dow and the NASDAQ are both officially in “correction territory”, and some of the talking heads on television are warning that this could be the beginning of a “bear market”. But of course some of the other “experts” are insisting that this is just a temporary bump in the road.

But what everyone can agree on is that we have never seen a start to a year like this one. The following comes from CNN…

The global market freakout of 2016 just got worse.

The latest scare came on Thursday as China’s stock market crashed 7% overnight and crude oil plummeted to the lowest level in more than 12 years.

The Dow dropped 392 points on Thursday. The S&P 500 fell 2.4%, while the Nasdaq tumbled 3%.

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

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