This wasn’t supposed to happen. The week was already on a crummy downhill path globally, and emerging-market currencies were blowing up, when on Friday in China the Caixin’s Purchasing Manager’s Index hit the worst level since March 2009; manufacturing is sinking deeper into the mire.
So the Shanghai stock index plunged 4.3% for the day, and 11.5% for the week, to 3,508, closing at the same level as the bottom of its July rout.
The entire machinery that the Chinese government and the People’s Bank of China had set in motion to bail out the markets during the July rout, which had worked for a couple of weeks, has now proven to be useless. And the markets, thought to be controllable by fiat or manipulation, suddenly regained a will of their own.
Other Asian stock markets plunged too: Hong Kong’s Hang Seng dropped 1.5% on Friday and 6.6% for the week; it’s 5.1% in the hole for the year. The Nikkei fell 3% on Friday and 5.3% for the week.
Europe was next. The German Dax, the British FTSE 100, French CAC 40, the Spanish IBEX 35, the Italian FTSE MIB, they all plunged about 3% for the day and lost between 5% and 6.5% for the week, except for the German Dax which lost nearly 8% for the week. It has now plummeted 18% since its dizzying peak in early April. Easy come, easy go.
Have central banks lost their omnipotence?
That despicable, unpredictable force that central banks were thought to have vanquished – markets with a will of their own – ricocheted in its unruly manner around the world.
In Europe and Japan, the central banks are currently engaging in relentless QE programs to inflate stocks, and China is doing a whole lot more, and yet, this debacle! A few more episodes of this – and folks are going to question the omnipotence of central banks, and they’re going to doubt the central banks’ vaunted ability to inflate the markets. If those doubts spread, not even QE can prop up the markets. Omnipotence only works if people believe in it.
For US stocks, an apt close of a lousy week.
The Dow plunged 541 points to 16,460, or 3.2%, after having already plunged 358 points on Thursday. It’s down 5.8%, for the week, the worst percentage drop since September 2011, and off 10.3% from its peak in May, and thus in a “correction.”
The Nasdaq plummeted 171 points for the day, or 3.5% to 4,706. It too is in a correction, having lost 10% in a month.
The S&P 500 index dropped 65 points, or 3.2%, to close at 1,971, after losing 2.1% on Thursday, and is down 5.8% for the week, also its worst week since September 2011. It’s 4.3% in the hole for the year.
This chart by Doug Short, of Advisor Perspectives, shows the dismal trend for the week. In the bottom section of the chart, note how volume rose sharply each day during the four-day selloff. That’s not necessarily a good omen:
But wait…. The S&P 500 is down only 7.5% from its all-time high, and still not in a correction. Doug Short’s chart of the index shows the selloffs going back to 2007. The last time there was a correction of 10% or more was in 2011. And even that selloff the Fed got ironed out pretty quickly.
Stocks lost their grip into the close. Volume soared. Dip buyers had already checked out. And sellers were lining up to dump their wares so that they could sleep and party over the weekend.
Bill Bonner, Chairman of Bonner & Partners, commented in his mix of cynicism, humor, and razor-sharp observation: “What puzzles us is not why stocks are going down but why anyone thought they were worth so much in the first place.”
It’s just that folks have forgotten after years of QE and ZIRP what a selloff looks and feels like, that stocks can actually decline year-over-year. Folks have come to believe that the Fed will prevent these sort of dastardly events.
But here’s the thing…
All of the gains in the S&P 500 since 2009 piled up when the Fed’s QE and Operation Twist were cranking out trillions of dollars in new play money. But when QE was tapered out of existence last year, the S&P began to lose steam.
ZIRP alone isn’t enough anymore, apparently, to prop up the markets. And now the Fed is even thinking about ending ZIRP….
So Volatility is back with a vengeance.
The CBOE Volatility Index VIX jumped 47% on Friday to 28.2, a level last seen during the heady days of December 2011. For the week, it soared 120%, the largest ever weekly percentage increase.
Nerves had gotten rattled, after years of Fed-induced somnolence, by the insufferable nightmare that central banks might not be omnipotent after all in propping up stock markets forever, and that the markets might be once again developing a will of their own.
“A Global Meltdown…”
That’s what Doug Short called it in his World Markets Weekend Update. All its eight indexes finished in the red for the week. India’s SENSEX, he points out, “was the top performer, down a ‘mere’ -2.5%.” For the rest, they ranged from the Nikkei’s -5.28% to the Shanghai Composite’s -11.54%. The China bubble and implosion (blue line) is the most salient feature this year. By comparison, the selloff this week looks practically benign:
And oil got hammered for the eighth week in a row.
It was the longest weekly losing streak since March 1986. And on Friday, West Texas Intermediate plunged below the $40-mark intraday, hitting $39.86 before bouncing off to take a breath at $40.29, the worst level since the Financial crisis.
Since mid-June, when the delusions of an oil rebound came to an abrupt end, WTI has plummeted 33.6%.
US drillers have accelerated their drilling programs again. Global production, powered by Saudi Arabia, Russia, the US, and especially Iraq – and soon Iran – gives off no substantive signs of slowing down. Hopes for global demand growth are hitting the realty of economic turmoil in China and elsewhere. Crude oil in storage has reached disconcerting levels for this time of the year. And people are starting to pray for miracles.
The overall commodity complex hit new multi-year lows this week. But gold has been an exception, rising from its own dismal multi-year low at the end of July.
Shocked and appalled that the market had somehow rediscovered this dastardly will of its own, Wall Street is already clamoring for ZIRP Infinity and QE4 Infinity, a real “infinity” this time, because everyone knows that at these ludicrous valuations, the market can never stand on its own two feet again, and folks simply don’t want to give up the trillions that the Fed has so magnanimously shoveled their way.
To top it off, currency turmoil tore into the emerging markets, and a debt crisis is starting to build up on the horizon. Read… It Starts: Broad Retaliation against China in Currency War
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The real problem is that revenues, aggregate earnings and earnings per share (EPS) are mostly flat or declining. What’s especially troublesome is that year-over-year aggregate S&P 500 earnings per share are falling even after trillion$ of stock buybacks designed to mask what are basically stagnant revenues and earnings.
I’ve said from the outset that the so-called “economic recovery” is a fraud. It has been a statistical mirage all along, fostered by ZIRP, excessive government borrowing, and reckless central bank money-printing.
The painful reality is that, try as it may, the Fed cannot print revenues or profits.
When the mega layoffs start that will accelerate the deflationary collapse that is already underway.
And unlike 2008 – the central banks will be powerless to stop this because they have used up all their tools trying to stop this outcome.
Bernanke’s nightmare is about to come true
Generally agree but couldn’t QE get restarted if things became that dire?
Yeah it could, if the problem was only a lack of supply…but when the problem becomes a lack of confidence in the value of the money itself then the supply of the money becomes irrelevant.
My view is that at this point if the Fed starts up a new money-printing program, whether they call it QE or something else, such an action will immediately put the lie to all of the nonsensical feel-good propaganda we’ve heard about “economic recovery” over the past 6-1/2 years.
If the carefully-constructed fantasy about economic recovery is shown to be a lie, we might find the financial markets will collapse even faster, rather than rise. This is what China seems to be experiencing after blowing hundreds of billion$ trying to command the Shanghai stock market to rise. That market rose for awhile, but dropped right back to its July lows on Friday.
Lastly, even some of the Fed apparatchiks have concluded that QE is utterly ineffective. To reasonably normal people, the idea that money-printing will somehow “stimulate” economic activity is absurd on its face. Only PhD economists utterly lacking in common sense and their sycophants are gullible enough to fall for that line of hogwash.
The grand illusion is the belief that central banks and, or, governments by pulling the big levers, whether monetary or Keynesian, guide and control markets to create growth and wealth.
They don’t and they can’t, something von Hayek pointed out the very moment the General Theory was published.
Markets will sort this mess out as they always do. Entrepreneurs and households are not going to just roll over and die.
They might not create wealth but they can transfer wealth. So much so that the entrepreneurs are indistinguishable from the crooks.
Tick tock. We may see a dead cat bounce into September (the dead cat seems to have 9 lives this time around) but I think the long expected unwind is here. As perhaps a glimpse of future events my wife stopped at the grocery store to get a gallon of milk, and the cashier warned her ‘cash only’ as their card readers were down. She shrugged and paid in cash. The woman behind her however went ballistic. If you think I’m putting back all these groceries you’re nuts! She was still screaming as the wife exited the store. She’s REALLY going to be upset when all her digital dollars disappear into cyberspace and she has none of those barbarous paper relics in her possession to get her over the hump. Let alone REAL money. Be afraid – be very afraid. The Cargo Cult is about to implode.
Julian I think grocery you are right, traffic has picked up big time in tulsa the last week but it’s not a comfort because I know it’s about school starting which is government work for the most part, also I have noticed a bunch of new cleaning people in the high rises I work at they ate young mid 20’s college grads who can’t find jobs, even the managers of these high rises are looking for cleaning work. My debt card got hacked last week probably from the flashlight app my grandson installed on his phone did ya know the flashlight apps are hacking devices? Also about the grocery store I’m sure you know walmart has stated that consumers are buying only as needed and most Americans have only a 3 day supply of food and no extra medication. I talk to people all the time about stocking up on food water cash silver, everyone thinks I’m crazy. We are having 4.5 earthquakes in tulsa the new madrid fault is rumbling if there is some interruption of services we are in big trouble.
This time it will be different… and not in a good way.
Asian stock markets (especially the Shanghai Composite and the Nikkei 225) are a shape of things to come. Instead of catastrophic drops and ensuing panics, what lays ahead is one Hell of a (downward) rocky ride. We are bound to see daily 4% drops followed by mini rallies, followed again by more drops as volatility comes back with a vengeance (VIX is bound to rise again) and risk returns in the dictionary.
And governments and central banks will not sit idly.
The PBOC’s monetary gymnastics and the Communist Party’s iron fist are just one side show of the big show. I fully expect the BOJ to continue its massive ETF purchases (betting on Kuroda’s monetary Japandemonium has been one of my best investments in the past three years), and perhaps to directly purchase stocks as well, and the ECB to double down on its QE program, which already includes corporate bonds two steps removed from junk.
No stone will be left unturned, though I doubt Japanese and European politicians will risk looking like bigger fools than they already are by openly threatening “malicious sellers”.
The big question is now what the US Federal Reserve will do.
In 2011 Peter Schiff said the Fed would never raise rates again and at the time I agreed with his opinion. But many things have changed.
The Fed followed closely (but from a safe distance) Europe’s experiments with NIRP’s and concluded they just don’t work. Negative rates cause only marginal distortions (look at Danish mortgages), not the big booms modern economies need. In short too much work for too little reward.
But at the same time the Fed has access to raw, unadulterated data which I bet say what Wolf Street readers know all too well: real world CPI is closer to 4% than to 2% in face of stagnating blue collar wages and extremely dangerous distortions due to suppressed rates are popping up in many critical sectors of the US economy, from shale to rents. All indicators are flashing red at the moment.
Now, modern Western economies are complacent to point of torpor: 2008 changed everything according to many. But what really changed is that for the first time in my adult life the natural liquidation following a bubble has been largely avoided by what is effectively a massive wealth transfer from Main Street to Wall Street. That liquidation is still waiting to happen: it didn’t magically disappear into thin air. If everything, things have gotten worse.
And here’s the kicker that’s probably keeping Yellen up at night: the chief weapon to avoid that liquidation was savagely slashing interest rates. Next time liquidation looms, there’s literally nothing to slash. In short the Fed needs higher rates to have something to slash next time liquidation knocks at the door.
But at the same time higher interest rates would mean the instant death of all the fantastic bubbles that allowed the US economy to inch its way forward while Europe sank into full blown stagnation.
I am sure Yellen and her colleagues are spending many sleepless night thinking how to have higher rates while at the same time avoiding popping the bubbles. Many are betting on a series of “baby step” hikes (25bps per quarter), conveniently forgetting what happened in 1989-1990 when the BOJ tried the same thing.
The reality is Yellen here has to make a choice: either do nothing and watch liquidation happen one way or the other and spiral out of control or force a truly painful but quick liquidation through a Volcker-lite style hike (given leverage ratios, 3-4% would be enough to achieve that, though 5-6% would achieve this far quicker).
However Volcker had a secret weapon back in the days: Reagan’s political capital, which the Gipper was ready to spend to put Nixonomics back in their place.
Yellen has no secret weapon: Obama is probably already thinking about writing his (next) autobiography and the two once favorite presidential candidates (Hillary Rodham-Clinton and Jeb Bush) are being flat out rejected by both parties’ bases, which seem to favor “outsiders” such as Bernie Sanders and Donald Trump.
The next month is going to be very hot at the Eccles Building…
This is what happens when you tell too many lies for too long!! All of your friends desert you, no one wants to hear anything that comes out of your mouth or what you may write because they already know it’s going to be another big, fat LIE!!
The biggest lie in this whole mess, is that fiat paper currencies are just as good, if not even better, than gold and silver! ONLY the ones who are still believing that lie are the ones who are still getting hurt by it, all the ones who woke up to the lie got out and preserved what little real wealth they had left! The really smart people saw the scam for what it actually is and only played along in it long enough to cheat the suckers, and then they bailed out to leave the idiots wondering what the heck had happened!
So long as real economics is not taught in the public fool system, these kinds of things will always go on. The ignorant get duped and ripped off by the educated dishonest ones.
“If something cannot go on forever, it will stop.” – H.S.
I’ve been waiting…
@ Randy
re: statement “So long as real economics is not taught in the public fool system, these kinds of things will always go on. ”
I started out work life as an apprentice and obtained a red seal carpentry ticket. Along the way I raised fish, flew bush planes off and on for twenty years, and taught high school for the last 17 years while building and flying on the side. Needless to say, when I taught a basic economics class I extolled the virtues of no debt and of obtaining a trade or technical skill before even thinking of university attendence. I also said, “one does not go to university to ‘find yourself’, you need firm goals and a step by step plan to achieve those goals all seasoned with a good work ethic”. To make a long story short I had a few parents come in and complain to school admin about this message. In fact, the vp (who is one of my fishing buddies) came to me and asked right out, “did you really tell your students to get a trade and not go right to university as per parent’s plan”? My response was, “my son is 28 years old and is an industrial electrician. He is very intelligent. He earns at least 25% more than the school district superintendent and likes his job. He makes 2X what his Dad makes with a masters degree teaching high school and doesn’t have parents coming in to bitch about him having a different opinion”. (End of discussion, as we have a lot of teacher autonomy in BC thanks to our strong Union). The status quo is self reinforcing. The ‘system’ is run by those who have excelled in the system and have often never worked anywhere else in their entire live. Plus, parents..most if not all parents, seem to want their kids to have nice safe white collar jobs no matter what their children are able to realistically do. I have had total lazy average C students tell me they were going to be doctors. I have had students tell me they were going to be major league baseball pitchers and NHL players. It was dumbfounding.
Anyway, I bailed and retired to the country, so to speak.
I wanted to say that today’s article and comments are absolutely outstanding. Thank you for sharing the wisdom.
Next week looks very interesting.
Sorry Paulo, but I have to disagree. I know that everybody can’t and shouldn’t go to college, but you miss the point. An education is about being educated, not about getting a job. Education gives you choices, a trade gives you a living if you are lucky. One of the men I admire the most is a locksmith I met in New York City. His Harvard degree is right by the cash register. He is a locksmith because he always loved locks.
Then why pay for an education at a university when it is free at a library?
Regards,
Cooter
A library can only give you information. A good teacher shares their wisdom.
There is nothing like a good, well-paid trade.
But then, BS is one of the best-paid trades around these days.
Nor can it be out-sourced to Asia…….
“Omnipotence only works if people believe in it.”–I love it, pure gold; haha, its gems like that which keep me coming back week after week.
I’m sorry, but the central banks can hardly plead impotence here. They’re responsible for the current situation, indeed they apparently intended for it to happen, presumably to profit their shareholders.
The current debt-based monetary system is a scam. It’s organized theft, it’s inherently unstable, it puts nation-states at the mercy of private corporations and it promotes war, waste and environmental destruction on a vast scale. Imagine al capone with an army of PhD’s and you have a picture of our central banking system. Monetary reform is job one.
I’m looking for a coordinated and massive equity market buyup starting tonight in Asia. I’m certain the Fed has orchestrated this to stop the selling. Will be interesting to see if it holds.
Global Markets are suffering from demographics that can no longer support the Ponzi Scheme that most governments have fallen for – Socialism. When more diapers are sold to seniors than to infants The Debt Party is OVER.
Japan is there. China will soon be there. Europe is there and the United States is in line behind them.
http://eaglefordshale.com/news/8331/
Eagle Ford is dying . I used to see the grave trucks all over the place on the road coming into town , going to the caliche mine to get another load of number 2 road base to take down south. but no more. they are gone now. i figured the middle of the summer, but i was off a tad. this downturn will hurt very bad, so many people in my opinion , had unrealistic expectations and did not stop to think that what goes up can and will go down. So now, they lose everything they own because like all good Americans, they buy now and pay later, usually financed probably with liar loans. we will reap what we have sown.
We will see if china does anything to save their stock market. If they do we could be saved for awhile. Think of Greece and how there is a sell off until they are bailed out. Of course most likely Greece will default this year. Especially if the rumor data becomes official. And of course China’s stocks will just sell off again later this week this year if it is saved.
Of course fun thing to look forward to is how shocked markets are after Fed refuses to raise rates. Almost impossible for me to imagine what would happen if people were told the US economy wasn’t gonna be strong this year.
I bought some small VIX option position (strike price 18) expiring Nov 2015 two weeks ago. The short term VIX rose like crazy and yet my position barely budged, and that’s apparently because the term structure of the VIX is inverted.
So folks, apparently we’ll have an apocalypse next month and then calmdown afterwards.
Don’t worry it’s all part of the plan.
Prototypegirl1 welcome to the tinfoil hat crowd. Petunia, isn’t there a point of diminishing returns on education when it ceases to be education and becomes indoctrination? Having a mentor would have been nice but I was able to slog through on my own. Or to quote Nietzsche “Ye say ye are my followers but what matter all followers?” I am mentoring some these days but I always tell my students not to take something I say as Gospel but to fact check on their own, as I am human and might be mistaken. They might arrive at a different conclusion. Reality is the court of final appeal.
Julian, the point of diminishing returns in my own profession, tech, came my first semester of grad school when I realized I was wasting my time and money. I could learn more on the job or on my own. Before that I needed what I was getting at university.
P.S. I noticed that the reads on Zero Hedge spiked from the normal 4 to 5000 hits to 122000…hmm
The future of higher education is on the internet. As the price of a four year college goes ballistic with no apparent connection to improvement in quality, online courses and degrees will replace attendance at Univeristies and Colleges.
I agree that the direction of education is digital. I home schooled my son for a couple of years using the Florida Virtual School program. I thought is was great. He completed 3 years in 2 and it wasn’t difficult to do at all.
Why this is such a big deal? Well, pension funds, formerly the bastions of conservative (bond) investment, are now stacked full with stocks, thanks to ZIRP. The one I keep an eye on, is up to 50% stocks. Canada pension plan just recently announced it’s stellar returns for the year. On bonds? I don’t think so. What could possibly go wrong.