Meltdown in Asia and Europe, US Stocks in Turmoil, Oil Plunges, Dollar Swoons, as Central Bank Omnipotence Fails

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It’s easy to deny a bubble but impossible to deny its implosion.

We’re having the kind of day when the New York Stock Exchange felt compelled to announce very encouragingly before markets opened that it would halt trading for 15 minutes if the S&P 500 drops 7% to 1,833 before 3:25 p.m. Once trading restarts and the index plunges 13% before 3:25 p.m., trading would be suspended for a second time. If the index plunges 20% at any point today, NYSE would shut the market entirely for the rest of the day.

Monday’s meltdown commenced in Japan.

A follow-on to Friday’s debacle. The Nikkei started out in the hole and dove from there, ending the day down 4.6%. This is a market where the central bank has a mega-QE program in place with an explicit policy to buy equities to inflate them. Yet, despite the furious efforts by the Bank of Japan’s trading desk, the Nikkei dropped to 18,541, down 11.5% since June, the lowest since February.

It was in reaction to a whiff of panic in China, triggered by a total loss of faith in the government’s and the central bank’s machinery designed to prop up the markets.

The Shanghai Composite Index opened down nearly 4% and went to heck from there, closing at 3,210, down 8.5%. It annihilated the entire phenomenal bubble gains this year.

The thing is, the government vowed to support the stock market when it hit the “policy bottom” of 3,500 to 3,600 points. Now that it crashed through what was nothing but a line in the sand, hopes have shifted down to a new line in the sand of 3,000 points.

In all Chinese stock markets, only 12 stocks rose, and 2,200 stocks hit their 10%-down limit.

The Shanghai Composite is down 37% from its mid-June peak. At the time, the halcyon bubble era when the index had been up almost 60% for the year and 100% from a year earlier, the government denied that there was a bubble. It’s easy to deny the existence of a bubble and invoke some magic metrics to explain it as rational. But it’s impossible to deny its implosion.

George Chen, Managing Editor at the South China Morning Post News International Edition shared this tidbit: “A Chinese newspaper editor just told me he got ‘order’ that he shouldn’t use words like ‘crisis’ or ‘disaster’ 股災 for today’s market story!”

So how cheap are Chinese stocks now?

After Friday’s crash, stocks at all mainland-China stock exchanges combined were still trading at 61 times earnings, three times more expensive than the S&P 500, which at its own insane valuation, trades at an earnings multiple of 19.

In its newest move to prop up the markets, the State Council announced on Sunday that it will allow pension funds managed by local governments to buy stocks for the first time. The idea is not to improve the fate of the woefully underfunded pension plans by loading them up with overpriced stocks, but to send new money into the stock markets regardless of what the fundamentals may be, with the sole goal of propping them up.

A draft rule to that effect was first published on June 30, during the prior stock market rout. At the time, the pension funds could only invest in bank deposits and treasuries. But now they can plow up to 30% of their net assets – 3.5 trillion yuan, or $547 billion, at the end of 2014, according to Bloomberg – into equities and other goodies. That would free 1 trillion yuan to stop the meltdown.

Japan has already implemented a similar policy change this year. It’s not working very well though.

For investors in China, this move didn’t exactly inspire confidence. Instead it showed for everyone to see that the government was scared and desperate.

Now there are rumors in the media that the PBOC would add liquidity to the banking system before the end of the month. This was billed as a “surprise” move that everyone is expecting to fix the markets. And if it doesn’t?

Bloodletting hit other Asian markets.

Hong Kong’s Hang Seng plunged 5.2%, down 15.6% from a year ago, and down 26% from its April peak.

The Indian BSE Sensex plummeted 5.9%, its worst percentage fall since 2009, to a new 52-week low, and down 14.7% from the Modi-election bubble peak in March. And the rupee dropped to a new two-year low of 66.74 per dollar.

“We will have no hesitation in using our reserves when appropriate to reduce volatility in the rupee,” Reserve Bank of India Governor Raghuram Rajan explained. But central banks shouldn’t prop up stock markets, he said. “Once market volatility settles down, India should emerge once again as an investment destination of choice.”

Taiwan’s Talex plunged 5.9%, down 21% year-to-date, Asia’s worst performing stock index.

In South Korea, policy makers lined up to stem the bloodletting. Tensions with North Korea, including cross-border shooting incidents, punctuated trading. President Park Geun Hye asked officials to keep an eye on markets and prevent “nervousness” about North Korea from spreading. The Bank of Korea said that calming the markets was important; it would closely monitor external risks and develop measures to mitigate them if necessary.

It might have stopped further carnage. The KOSPI ended the day down 2.5%, but 15.8% off its 52-week peak in April, in the hole for the year, and down 11% from a year ago

And oil plunged.

West Texas Intermediate at one point hit $37.75, down nearly $3, before bouncing off. As I’m writing this, it trades at $38.35, down 5%! It didn’t help that the EIA just reported this:

Continued growth in global production of petroleum and other liquids has outpaced consumption growth since August 2014, resulting in rising global liquids stocks. Total global liquids inventories are estimated to have grown by 2.3 million barrels per day (b/d) through the first seven months of 2015, the highest level of inventory builds through July of any year since 1998.

In Europe, the bloodbath from Friday continued unabated. The German Dax plunged 4.7%, the French CAC 40 5.4%, UK’s FTSE 100 dropped 4.7%. Euro Stoxx 600, which covers the largest European companies, was down 5.3%.

But wait… Europe is where the omnipotent ECB and other central banks have imposed negative deposit rates. The ECB is engaged in a massive ‘whatever it takes” QE program to inflate stock markets. But it’s not working. Omnipotence stops functioning once people stop believing in it.

Mini mayhem broke out in currencies. The dollar plunged against the euro and the yen this morning as markets abandoned expectations that the Fed would raise rates in this environment or any environment ever, and as the clamoring on Wall Street for QE4 Infinity got even louder. Alas, as stocks recovered, the Fed’s interest rate increase reappeared as a vague possibility, and the dollar found a bottom and then bounced off.

But all is well in US stocks?

After plunging 1,000 points at the open, the Dow has resurged, and is currently down only 157 points, less than 1%. The S&P 500, after hitting 1,867 – a little shy of when the NYSE would halt trading – bounced to 1,950, down about 1%. The Nasdaq, which had crashed to 4,292, almost 1,000 points below its peak last month, has bounced 400 points off its low and is currently down 0.5%. The dip buyers have emerged, after having gotten clobbered on Friday, and they’re once again seeing an endless ocean of buying opportunities, though they may get sucked down again without prior notice.

And this is what happened last week, though it wasn’t t supposed to happen. Read… What the Heck is Going on in the Global Markets?

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  21 comments for “Meltdown in Asia and Europe, US Stocks in Turmoil, Oil Plunges, Dollar Swoons, as Central Bank Omnipotence Fails

  1. August 24, 2015 at 12:28 pm

    Who are these dip buyers? How do we get more transparency into if this is a government plunge protection team or exactly who is the buyer here? I’m trusting currency based on math and buying up bitcoin today!

    • Jungle Jim
      August 24, 2015 at 3:20 pm

      I am afraid that transparency is the last thing the PPT wants to see. Historically they confined their activities to the late afternoon, because until then, they weren’t sure how much to buy. Then, they would quietly buy S&P Futures on margin. That was usually enough to break the market’s fall Next day, the market would notice the trades and react by jumping on them. That would generate at least some momentum, and the PPT would quietly close out their position. That worked fairly well for a long time, but it was predicated on the idea that the problem was in our markets. If everybody goes down, it’s a different ballgame. The world financial system at the moment is a mountain of debt. Debt works wonders on the way up, and horrors on the way down.

      • Jerry Bear
        August 25, 2015 at 1:36 am

        Just who owns all this debt?

        • tobias
          August 25, 2015 at 6:29 am

          I assume the same individuals and organizations that own most of the assets.

        • Jungle Jim
          August 25, 2015 at 8:58 am

          The debt consists of bonds both sovereign and corporate as well as commercial paper like mortgages and car loans that have been securitized into CDOs. It is owned as an asset by all sorts of people and organizations including banks, insurance companies, and wealthy individuals.. Quite a lot seems to be owned by central banks as a result of their asset purchases to support banks.

          The problem is that the quality of the debt is highly variable. Some bonds are rated AAA and deservedly so, others are rated as investment grade and are more or less worthless. That is a serious problem for the organizations that purchased them. The write down would be brutal.

    • Yadubi
      August 24, 2015 at 8:07 pm

      Who are the dip buyers? Hm, maybe the short sellers? Making a trade of their lifetime, or waiting a bit longer for the trade of the millennia. Well, I am not one of them, or I would not be here reading, and making dumb comments.

  2. NotSoSure
    August 24, 2015 at 12:40 pm

    The PPT is alive and well. I bet they needed to replace a lot of keyboards in the Fed this morning. Or perhaps the Fed did their Fat Finger strategy.

  3. Paulo
    August 24, 2015 at 1:28 pm

    And now down over 400 points at 11:30pdt….this ride is so wild there is little accuracy in reports. The last hour could change another 500 points. Tomorrow morning should be really interesting. This has been like a hand grenade going off.

    • Petunia
      August 24, 2015 at 1:43 pm

      All the HFT firms are usually in and out in a trading day and hold no overnight positions. Look for all the openings and closings to be volatile. The first fifteen minutes and the last fifteen minutes will tell you where the market is going.

  4. Dave K
    August 24, 2015 at 1:34 pm

    I’ve been expecting this for awhile. The question is, how does the Fed respond? Do they hint at more QE as a salve to the wound or announce a delay to any rate hikes? How will the can be kicked down the road this time?

    Buckle your seat belts. We might not see an outright crash like ’87 but a drawn out correction is not out of the question. The Fed can’t really drop rates unless they want to wade into the NIRP waters so the only round left in the chamber is more QE.

    Should be interesting. I’m glad I have zero debt and no market exposure.

    • Spencer
      August 24, 2015 at 2:48 pm

      I’m with you Dave, on the porch drinking whisky for pleasure not sorrow watching this shit show. I can’t go down far and fast enough.


    • Yadubi
      August 24, 2015 at 4:15 pm

      I am expecting a coordinated announcement from the central banks. Stocks will henceforth have a minimum price, below which the banks will buy stocks and burn them. Similar for housing, and bonds. Mankind has now accumulated more knowledge in the past 20 years than in the entire human history which enables us to manage the economy to perfection.

  5. August 24, 2015 at 3:43 pm

    I thought the Chinese were arresting people for short-selling and FORBIDDEN insiders with a large stake in publicly-listed SOEs from selling.
    Also, they were forcing SOEs to buy into equities.

    OH WELL, I guess all the threats were a hoax after all.

    • Robert
      August 25, 2015 at 7:00 am

      A ban on short-selling does nothing to stop ordinary shareholders from simply selling

  6. Mike R.
    August 24, 2015 at 4:29 pm

    The Fed cannot oppose massive selling. But it can drift the market back up with futures once the selling abates. That is their strategy and they will use it. In 2009 after all the selling washed out of the system, they levitated the market over a period of weeks with very little volume. People astute to this move made alot of money. They will do this again, if they have to.
    In short, selling of equities WILL NOT bring down the market permanently. The Fed will win on that accord. I believe this to be true but still refuse to be in the stock market simply because I don’t want to play the game.

    The thing that brings the system down is loss of faith in the currency; in the US dollar. That is one reason (but not the only one) that the Fed will hold up the US stock markets. Loss of faith in the dollar will kill the Treasury market and then it’s game over. This, I believe to be a number of years away still. The thing that will trigger this is general disgust of foreign countries with the US and how it manipulates the dollar for it’s own benefit.

    • Michael
      August 25, 2015 at 12:59 am

      “The thing that will trigger this is general disgust of foreign countries with the US and how it manipulates the dollar for it’s own benefit.”

      That feeling of general disgust for the US and its government is already here. I think many people around the world are sick and tired of the endless lies, cheating, market manipulation, fraud, bullying, spying and constant interference in other countries internal affairs. When the truth starts to filter through that the US economy is a basket case, I think global US dollar dumping will speed up at an exponential rate.

    • Robert
      August 25, 2015 at 7:05 am

      ” The thing that will trigger this is general disgust of foreign countries with the US and how it manipulates the dollar for it’s own benefit.” When, do you think, disgust with the Fed’s providing virtually interest-free money to the banks which own it will kick in? That is a disaster that hangs like the sword of Damocles over the world: if they can do it says every other country, why can’t we?

  7. Mark
    August 24, 2015 at 4:59 pm

    As I said last week in one of my posts there will be quick correction in the market but market has only one way to go UP. FED knows that and everybody else.
    If stocks go down more and dollar collapses the hell will break out .
    One more day of selling and than frenzy buying will take place.

  8. Nick Kelly
    August 24, 2015 at 6:02 pm

    The existence of a PPT is either falsifiable by empirical evidence of it is a religious belief ( or I guess you say that when a certain point is breached the PPT may exist but is ineffectual)
    So far the PPT either doesn’t exist or is doing a lousy job.
    By the way, the efforts of the Fed to stimulate are too well known by all to qualify as some opaque secret society.

  9. Julian the Apostate
    August 24, 2015 at 7:03 pm

    I found myself today in an almost Zen like tranquility. I was in the shop for repairs and since I was the only driver in the break room I switched over to Fox business and watched the opening bell. The body language was fear on the former bulls, who felt it necessary to soft peddle and say comforting things. The two who were expecting it wore faces of grim determination. All seemed taken aback by the severity of the early 1089 point drop, but recovered quickly. Plans long dormant by the banks and ppts leapt into the breach and by noon were 135 points south of the open. Then the falling knife chopped off their hands and the Invisible Hand bitch slapped them all the way back to -588.
    Whether the Fed prints or falls back matters not. The Central Planners in China did not know that their little devaluation of the Yuan was the Black Swan, and the genie is out of the bottle. They have demonstrated that their free market is not free, and they are not in control. By extension, if the Chinese with all their might are not in control, NEITHER IS ANY OTHER CENTRAL BANK. The Universe blinked, and unnerved everyone in the world who was paying attention. Nothing with counterparty risk will survive, including your Precious Bitcoins. Let the Games begin. We who are about to die, salute you!

  10. Grim
    August 24, 2015 at 11:37 pm

    You can ignore reality but you cannot ignore the consequences of ignoring reality.

    – Ayn Rand

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