What the Heck just Happened in Global Stock Markets?

It was a crummy week for the world’s major stock markets:

One, volatility came roaring back. Forget complacency. People are still rubbing their necks from whiplash.

Two, the Fed hype-effect fizzled. The publication of the FOMC minutes – designed to pump up markets with their ambiguities – was able to generate a rally that lasted less than a day, followed by a terrific swoon. The ECB too tried to goose markets, which failed miserably. And the Bank of Japan, well, I call it Bank of Japandemonium for a reason.

Three, the relentlessly successful strategy, nay religion, that worked without fail for the last couple of years and allowed traders to earn instant bucks in a seemingly risk-free manner – “Just buy the frigging dip” – turned into a vicious back-biting monster.

The Nasdaq, after dropping 4.5% for the week, the worst since May 2012, closed on Friday below its 200-day moving average. So did the Dow. For chart decipherers and trend prophesiers, those are not exactly propitious signs.

The thing is, if everyone believes that everyone believes in this sort of line crossing and reacts to it, then a simple line either bouncing off or crossing over another line can become a magic signal for a lot of people. And they react to it in unison, and it becomes a self-fulfilling prophesy. It worked wonderfully on the way up. And because it worked so wonderfully and made people rich, more and more traders and investors became chartists, and even economists switched to becoming chartists because economic and corporate fundamentals had become irrelevant to stocks, which soared no matter what, and they had to find something else that their clients actually wanted to hear.

But it’s not just in the US. The European Stoxx 600 dropped 4.1% for the week, also its worst week since May 2012. Most of the national indices were splattered with red. Germany’s Dax dropped 4.4% to the lowest level since October last year. It’s down 12.6% from its all-time peak in January. It’s in a full-blown correction.

The UK’s FTSE 100 dropped 2.9% for the week and closed at its lowest point in a year, down 8.4% from its peak in early August. France’s CAC40 dropped 4.9% and is down 11.4% from its June high, now mired in a correction and in the hole for the year. Even India’s SENSEX, which had been on a politically motivated tear, swooned nearly 5%.

The Nikkei deserves a special word: it dropped 2.6% for the week and is now down 6% for the year. It has been in the red practically all year. The historic money-printing binge that came with Abenomics caused stocks to soar for the first seven months after it became clear in late 2012 that Shinzo Abe and his economic religion would run the show. Then the sheen wore off. What’s left? The same old economy, huge government deficits, an untenable national debt, and consumers who are learning the meaning of what I call “inflation without compensation,” the gradual process of impoverishment via inflation.

Oh, and at a time when annual inflation is 3.3% (goods inflation at 4.9%, service inflation at 1.8%), 10-year Japanese Government Bonds yield 0.50%. It’s the world’s most brutal financial repression. So, despite the pile of money the Bank of Japan has been printing, the Nikkei is now below where it was in May 2013.

The only two major indices that came out ahead were China’s Shanghai Composite (up 0.4%) and Hong Kong’s Hang Seng (up 0.1%). Maybe the markets were just lucky. It was a holiday week with only three trading sessions in Shanghai and four in Hong Kong. Did these folks simply run out of time to dump stocks?

Here are the sinners (chart by Doug Short):


Germany’s DAXK is the orange line that is sagging out at the bottom. The DAXK is the price-only version of the DAX, which includes dividends. The other indices are price-only as well, so the DAXK is an apples-to-apples comparison. This DAXK is down 12.5% from its peak in July. And it’s 11% in the hole for the year.

German stocks are smelling a rat. The economy is on the verge of heading into a recession. When it shrank in the second quarter, pundits fanned out across the planet to claim vociferously that it was just a blip, and they blamed the weather which had been unusually nice in the first quarter! But more recent economic data has been lousy, so lousy that they evoked unnerving comparisons to the unforgettably terrible year of 2009 [read…   “There’s no Reason to Panic” about the German Miracle Economy].

Now unnamed sources in the ruling coalition leaked that the German government would cut its growth forecast for this year and next year on Tuesday, when it announces its twice-a-year projections. It would amount to a “sharp cut” from the already tepid 1.8% growth projections made in April.

This despite the all-out ZIRP and QE central banks have inflicted on conservative investors and aging baby boomers in order to force them into stocks and junk-bond funds and asset-backed securities and other chimera of Wall Street. The purpose was to drive up asset prices. And it worked. Now that these folks have stashed their money in stocks at peak valuations, the whole thing is unraveling.

The bitter irony in all this? The global economy is drifting off despite massive and global application of policies that have consistently been described as “bold actions” to stimulate the economy: dizzying government deficits, massive QE, and brutal ZIRP. These “bold actions” have driven up asset values, but that’s all they’ve done. And now as things are once again wobbling, global organizations like the IMF along with various central bankers and of course the wusses on Wall Street are clamoring for more “bold action.”

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  30 comments for “What the Heck just Happened in Global Stock Markets?

  1. Why are German products shipped to other EU countries considered ‘exports’? Isn’t that like saying all of Detroit’s cars shipped to California are exports? I don’t understand how the structure of the EU can exist when the products of all its entities are considered ex/imports between member States, yet with only one ECB as though it’s one country with subordinate states like the USA. Do you think Ambrose Evans-Pritchard could shed a light on this (to me, but apparently no one else, as I’ve never seen this question raised anywhere) conundrum?

    • Wolf Richter says:

      Ask the people!

      The people of the Member States cling by their fingernails to the – perhaps quaint – notion that they’re people of democratic nations, and not just subjects of the largely non-democratic structure of the EU. The United States of Europe, though much desired by Eurocrats and some politicians, is still many years away, if it will ever happen – largely because the people don’t want to lose what’s left of their identity. So each Member State remains an independent country doing business with other countries.

  2. Vespa P200E says:

    Oh yeah let’s blame global warming or something but seriously the global market had been drunk from CB’s liquidity spouts for too long. Trouble is the drunken global markets deny that they have CB kool-aid spiked drinking problem while in drunken stupor and are begging for that 1 more drink knowing that the hangover will be nasty.

    Yep – dejavu Oct 2008? I for one thinks so with perhaps worse than 2008 as fundamental debt bombs and associated derivatives grew not to mention global CB circle jerk liquidity one-upmanship putting the world closer to mother of all inflation but alas this time not much to eject?

  3. economicminor says:

    Bubbles http://www.peakprosperity.com/video/85852/crash-course-chapter-17-bubbles

    You can watch all of the Martensen’s other videos if you want more of the story. Personally it all makes a clear picture as to where we are and how we got here. It isn’t really for the squeamish though. Chris was an oil engineer when he started looking around and noticing that reality and hype were at odds. He started trying to figure things out with his scientific engineering background and this is his conclusion.

    He sure paints a perfect picture as far as I can determine. Logic backed by facts and figures and history.

  4. NotSoSure says:

    Too early to say I think. It could also be another massive bear trap!!

    • Bill S. says:

      It could be (a bear trap), but, in order for this situation to be a trap you need one of two situations:
      1. The fundamentals have to be in place for stocks to turn around, or;
      2. The FED has to take action to bail out the market again.

      If you can satisfy yourself as to either of these situations, you have a bear trap in the making.

      • NotSoSure says:

        Is there any doubt to no 2? We will see QE Infinity for sure just to save “Western civilization”.

      • care package says:

        Bill, you referring to liberal fundamentals or is a ‘fundamental’ those who refuse to call evil good and good evil?

  5. VegasBob says:

    The people in charge are not capable of admitting their mistakes, or that they have a flawed understanding of the global economy, or that they just don’t know what’s going on. So, when confronted with their policy failures, their only real option is to double down on their already-failed policies.

    If central bankers had functioning brains, they would understand that people who are struggling to pay down the accumulated debts of the past cannot comfortably take on any new debt, even at a negligible interest rate. They would also understand that an aging society consumes less of virtually everything except healthcare-related goods and services, and that this damper on consumption is worsened further when central banks zero out elderly savers’ interest income.

    I could be wrong, but I think the preceding paragraph identifies much of the reason that the US economy isn’t reaching “escape velocity.”

    This latest iteration of Federal Reserve money-printing was on the order of $1.6 trillion over 22 months or so. Yet, the only accomplishments of all this money-printing have been (1) to create a huge pool of counterfeit “wealth” at the top of the economic ladder, while virtually none of it has trickled down to productive economic activity, and (2) to stick the lower and middle economic classes with horrendous inflation in the cost of housing (both rents and home prices), energy, and food.

    Why is it so difficult for policymakers to grasp simple truths? The most obvious truth is that no society in history has ever printed its way to prosperity. The second most obvious truth is that if you’ve dug a hole and fallen into it, you should stop digging. Even though the abject failure of the latest money-printing scheme is apparent to all, the Keynesian lunatics are lining up to come out of the woodwork and claim that the latest money-printing program failed because it wasn’t bold enough. So, it would not be one bit surprising to see a new iteration of money-printing on a much grander scale, perhaps $3 trillion over 2 years.

    Maybe they’ll print enough to try to goose the DOW to 50,000 and goose median house prices in San Francisco to $5 million. When that fails, what will the money-printers do? Why, they’ll claim that their previous money-printing program was not bold enough, and they’ll print enough to goose the DOW to 100,000 and goose median San Francisco house prices to $10 million!

    • economicminor says:

      VegasBob, You ask why the can’t see their mistaken policy repercussions? Well, even if they could at this point, there isn’t any thing they can do besides keep on keeping on. With the amount of leveraged debt they have created, it takes more and more just to keep that inverted pyramid from collapsing.. They can’t quit and they won’t quit until the entire mess collapses upon them and they lose everything. Go to the video I posted and click on the Crash Course and watch them. They will truly enlighten you. The other great source of value in understanding this is look up Steve Keen and listen to him. Exponential growth in a finite system is impossible. It can work for a while then the parabolic rise comes crashing back down. This is a math problem, not an economics one. Economic can not stay outside physics, math and history for ever. We are coming to the end of this cycle. It just is.

    • Jukka Kautto says:

      Why can´t people admit their mistakes..
      This a parallel case to Japan´s hideous rampage in the Far East during WWII. Most of those involved in atrocities refused to recognize any wrong doing even afterwards. The only problem in the context was their losing “unfairly” the war. Should you put today´s mobsters of the biggest economic crime in human history to the Hague Tribunal they would swear their innocence precise similarly one to one.

  6. Petunia says:

    The Alibaba IPO was a twilight zone production. You think maybe some investors thought they have now gone toooo far? I still can’t figure out what it was the “investors” bought.

    • Si says:

      They bought into the 40 thieves!

    • Vespa P200E says:

      The biggest sucker bait IPO of the year Alibaba is sure sign of lot of liquidity looking for something “better” than minus yield (if inflation is taken into account). BTW – even 60-min exposed the Alibaba’s dim prospect and certain doom if they were stupid enough to branch outside China (that is IF one is stupid enough to trust the “audited” financials).

      Heck this was 2nd time they did the IPO after rather tepid IPO back in 2008 in HK and by the end of 2008, it slumped 55 percent and the company lost more than $20 billion in market value. Ma the man ended up delisting in HK, and did some accounting trick to reel in suckers again this time thru NYSE.

      Yes Virginia there are SUCKERS born every minute.

  7. economicminor says:

    As for Germany, it is a lot like Goldman Sachs in that it plays the game to benefit themselves. Greece, Spain, Italy and Portugal are in such bad shape because Germany needed people to sell its massive production to. The US had switched to the Pacific Rim for many of its products. Russia and the EU were still at odds. So Germany set up systems to loan money into those countries so that they could keep their economies going and their people could buy German made products. Nice circle except that the productivity level in Greece, Spain, Italy and Portugal were no where near that of Germany so it was really one sided. Money and products in funded with debt… until that debt was totally unserviceable and now they are basically insolvent.

    Similar happenings in the US. Except here it was the middle class that was targeted by the Banksters. Similar results though. We have two differences. One is the US reserve currency status and the other is our use of Level 3 accounting. We don’t even know how insolvent we are.

    • Petunia says:

      If Germany has been dumping production all along to increase GDP what is to stop them from breaking the sanctions and trading with Russia to make up the shortfalls. With winter coming I can see there being public support for it, gas for stuff. A win win for them both, and what are we going to do about it?

      • economicminor says:

        Nothing except their tie to NATO and their long memory. Russia has not been a friend of Germany ever.

  8. Petunia says:

    I just saw a headline about Dubai stocks tanking and it reminded me that they are a big investor in Florida rental RE. Even though rents are very high in FL they have come down from this time last year. Even with families doubling up, housing is very unaffordable due to the low wages. Could the cracks be spreading. Eventually these companies need real income to operate not just accounting tricks.

    • VegasBob says:

      Petunia wrote: “Eventually these companies need real income to operate not just accounting tricks.”

      That is another major shortcoming of the central bank money-printing regime.

      The central banks cannot print revenues and they cannot print profits.

  9. DG says:

    What just happened? Confidence in the global Ponzi scheme is beginning to invert so capital is now exiting the scheme faster than it’s entering. More QE will stop this fraud from collapsing so expect this (called by another name) in the coming months…

    • Dead at 18, buried at 65 says:

      An excellent answer! However, I strongly doubt and I am not so confident that there is any more QE machinations left to do. If we think about it for a moment, … the FED has done everything it can, according to it never learning, never understanding, always failed, completely unproven, Keynesian principles and academic financial models, to re-ignite a worn down and dying global economy; an economy that was made sick by endless credit, ever rising inflation, 5 year asset bubbles, and increasing taxation.

      A sickly and weak global economy, made ill with over-regulation, endless laws, cronyism, and government interference: through command-and-control, no-price-discovery markets, High Frequency Trading, and mute financial fraud convictions. Where government policies and laws encouraged, outsourcing, downsizing, offshore accounting, and labour automation.

      A broken and perishing global economy: where governments ignored their deficits, and flooded their financial markets with vast amounts of digital inflation. -Pushing their economies to work against their shrinking resources: – Peak oil, peak gold, peak silver mining; peak fishing and peak water consumption.

      And, last but not least – peak money printing! -Printed millions: a drop in the ocean; Billions: like pissing into the sea; And, trillions: were never enough to sway the motion of monetary and fiscal debt, death!

      Sorry folks,
      but there is nothing else left that is going to save the government from itself:
      A government which thought it could replace those who create real wealth for that which steals and prints; A government which thought to attract investment, not by encouraging real business, but by rewarding speculation; Governments which have exhausted themselves in successfully destroying the middle and working classes.

      Let me ask you, who is going to save us from government monetary death?

      • Dead at 18, buried at 65 says:

        … There is nothing left folks! Oh yes, there is one thing left: one Bastian of real money, one untouched asset of real liquidity left; and that is your pension folks! And believe me, they are all coming for that next!

        • NotSoSure says:

          There is one more thing other than that. Right now the Fed has been stealthily buying assets like stocks. They can always pull a BoJ and explicitly buy stocks promising a “good” return for future taxpayers.

        • DG says:

          Dead @18 – you could be right, this could be the end, but then again markets could defy the economic laws of gravity a bit longer and lurch even higher from here, who knows.

          This madness has gone on 3-yrs longer than I thought it would or could, so what the hell do I know.

          I know this: The Fed will not give up trying the same failed experiments no matter how futile or how devastating the long term consequences. They will keep printing money under a different moniker or brand name until the market says “enough” and takes them out to the wood shed.

          I see it like this: if you place a gallon a jet fuel next to a roaring fire we don’t know which spark will be responsible for igniting the explosion or when it will happen… all we know is a violent explosion is inevitable.

      • DG says:

        You are correct that QE is finished, but I’m afraid you are wrong about the fact that the Fed is finished. As mentioned, they will deploy another round of QE in the coming months … only do not expect an announcement.

        The Fed cannot do a 180 and reverse course making a public pronouncement to the world that their policy failed and they must now reverse course and restart QE – this would be an epic PR disaster undermining Fed credibility and destroying confidence in their omnipotence which would crater the markets in an instant. For this reason “QE 4” is off the table.

        We should look to Belgium for a clue as to what the Fed has up it’s sleeve next …

        If you recall in the month of Nov 2013 the Fed announced it was tapering. If you recall it was also revealed that simultaneous to the Fed tapering announcement tiny little Belgium decided it would step up and purchase $141.2 billion of US Treasury bonds. Now, where the hell did Belgium come up with enough money to allocate during a 3-month period 29 percent of its annual GDP to the purchase of US Treasury bonds? The short answer: it didn’t!

        That money came directly (or indirectly) from the US Fed (where else), and the purchase was laundered through Belgium in order to hide the fact that the Fed never tapered at all, which is why the equity market actually celebrated (vs. having a tantrum) on the day of the taper announcement and has continued to rise ever since.

        As evidenced by the Belgium backdoor money laundering scheme, the Fed will “jawbone” victory and announce the end of QE which will also support the “economic recovery” narrative, but rest assured the Fed will secretly keep on buying … because they know they have no choice.

        Bottom line: The Fed is not done … they will keep printing and buying only this time around it will be done in secrete with actions carefully coordinated with coconspirators that will help disguise their backdoor purchases.

        Yes, this game will eventually end but not because the Fed willingly volunteers to unplug the printing press or because they run out of ink, it will end when their actions no longer have any effect on the markets or it will end in a currency crisis – either way the printing press will have to be forcibly taken from the Feds ink stained hands.

        • Dead at 18, buried at 65 says:

          “Yes, this game will eventually end but not because the Fed willingly volunteers to unplug the printing press or because they run out of ink, it will end when their actions no longer have any effect on the markets or it will end in a currency crisis – either way the printing press will have to be forcibly taken from the Feds ink stained hands.”

          … Well, DG. I thought that is where we are now?

  10. Bob Miller says:

    “We don’t even know how insolvent we are.” – Wolf Richter

    That depends on who Mr. Richter is talking about. If it’s Main Street USA, he is 100% correct. And I might add the majority of these souls are more concerned with what sporting event will be televised and when. I don’t believe this has changed much since May 1945.

    On the other hand, the banking industry, especially the central banks, know exactly how insolvent we are. They also know that this new world economy is going down for the third time in a sea of red ink, and like the incomprehensible stress of those returning in the Space Shuttle Columbia, all these sociopaths can do now is kick that preverbal can down the road and send more billions to their and their accomplices offshore accounts, and hope to land safely.

    It’s my belief that for this to happen, the Paulson, Bernanke, Blankfein and Dimon types might have to depend on Mission Control to declare marshal law. That’s not as severe as it sounds for these men since several agencies of the US and UK governments have been preparing for this in earnest since January 30, 1976, the first day that Mr. George H.W. Bush was appointed the Director of the Central Intelligence Agency.

  11. John says:

    “Just buy the frigging dip”

    But that only applies to stocks, never the metals – they are a relic & always in a bear market according to them.

  12. Look like China sneezed, the rest of the world has caught pneumonia …

    Who is going to be in a bull market, to pull the rest out of the ditch?

    (Islamic State?)

  13. 300 Super says:

    Little sheep, little sheep, its time for shearing. You knew this was coming. You have been told over and over. You have no business in stocks. You are living the scam. Tis soon past the time!!

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