A lot more will have to happen before this turns into a crash; and markets are not there yet.
With all this wailing in the media about stocks, you’d think there’s at least some blood in the streets. But no. Not a drop.
The Dow fell 4.6% today to 24,345. This 1,175-point drop, as it was endlessly repeated, was the biggest point-drop in history – but irrelevant given how relentlessly inflated the industrial average had become. The percentage drop today, combined with the drops of last week, took the Dow down just 8.5% from its all-time high on January 26.
For the year, the Dow is down merely 1.5%. I mean, what horror. The last time this sort of debacle happened was way back in ancient history of January and early February 2016.
The Dow is not even in a correction (defined as -10% from its recent high). But that messy Friday and Monday, following a record 410-day streak without a 5% decline, did break the recently pandemic illusion that you cannot lose money in stocks.
When the Dow gained 1,000 points in the shortest time ever, after having already booked the fastest-ever 1,000-point gains in prior months and years, no one was complaining about it. These rapid-fire 1,000-point-gains had become the new normal. So today, one of those 1,000-point gains has been unwound.
The S&P 500 dropped 113 points, or 4.1%, to 2,648. This took the index back to December 8, 2017. The past six trading days were the worst decline since … well, since the weeks leading up to February 7, 2016, at which point the S&P 500 was off 19%, not quite enough for a dip into an official bear market.
The Nasdaq fell 272 points today, or 3.8%, to 6,967, below 7,000 for the first time since the end of December, but remains, if barely, in positive territory for the year.
What’ll happen next? Dip buyers will come in, maybe at this very moment, or maybe later, and some of them will likely get plowed under, but there is way too much cash lined up in hedge funds specifically set up to profit from sell-offs. And dip-buyers have been rewarded relentlessly over the past eight years, and it’s not until the dip buyers get massively destroyed and stop dip-buying that the market is in real trouble.
Because nothing goes to heck in a straight line.
But already, the coddled soothsayers on Wall Street are blaming the Fed. These are the same ones that could never get enough QE, that insisted on calling QE-3 “QE Infinity,” clamoring at the time for eternal scorched-earth-monetary policies so that asset prices would recklessly get inflated to the moon. They’re the same ones now clamoring for the Fed back off its “normalization” strategy.
They just sound like silly little crybabies that cannot deal with markets attempting however briefly and feebly to do some price discovery on their own.
Compared to the sell-off that has been crushing cryptocurrencies – even the largest ones have plunged 50% to 80% from their peak a month ago – the sell-off in stocks so far is mild. Oil sold off too. As did some other commodities and assets. And as confidence in them began to wobble, there are some things that have been rising over past few days, including gold prices.
As usual when too many retail investors suddenly realize that something is up, and they want to get their goods onto dry land, it didn’t work. The websites of a number of online brokers, mutual fund firms, and fintech robo-advisers went down at least briefly under the onslaught of traffic. They included Charles Schwab, TD Ameritrade, Vanguard Group, T. Rowe Price, robo- adviser fintech startups Wealthfront and Betterment, and others.
This sort of thing happens frequently: When retail investors are rattled and are trying to sell, the system breaks for them. This shows how hard it can be for those waiting to sell at the absolute peak — if they could even identify it — to be able to get out at that peak, when everyone is trying to get out at the same time.
So do Friday and Monday count as a “rout?” Yes. But a crash? No. Far from it. A lot more will have to happen before this turns into a real crash, and markets are not there yet. But many people will need to get used to a new sensation in their lives: losing money in stocks.
In terms of bonds, it’s only a question of how disruptive the adjustment will be, whether it will be just a painful sell-off or junk-bond mayhem. Read… Corporate Bond Market in Worst Denial since 2007
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Very good perspective, Wolf. Thanks. I think there will certainly be some dip buying and as to how folks fare in the near term it depends on when they bought and if they are carrying debt, their age, etc? Did they buy products at the peak last Thursday? Last year?
If I were a retail investor with a 401K, (which I am not), I would watch the dip buys and sell into it. If possible. Being able to sleep nights is pretty awesome. :-)
The wheels are defintely wobling, though. Tomorrow will be interesting.
regards
futures are pointing to another massive down day tomorrow. I think the dip buyers have left town and the exits are crowded. This feels a lot like 2008/2009 stock bear and the parabolic move in gold and subsequent collapse.
The on-line brokers have been reporting record low “cash on the sidelines” for weeks. Funny, when the buying funds dry up the buying ends.
As for hedge fund money buying the dips – they might be too busy shorting to make any long trades.
If it quacks and waddles it’s probably a duck.
The end is nigh – seek ground high.
I wouldn’t call the rise in the gold price a “ parabolic “ move in the 2006 through 2011 period It roughly doubled in 5 years during lots of QE going on The collapse was most certainly FED orchestrated to destroy its credibility as much as That’s possible
You’re analysis will prove to be wrong Van/River. We’re not even close to the end.
This a huge bear trap — retail investors who sell today should be actually buying and hold old turkey through any further drawdown. You should never sell during a panic.
Anytime the VIX breaks over 50 it’s flashing the buy signal – today it spiked above 115! Take a look at the PM’s and Cryptos. Gold rose a little but PM stocks are selling off.
Bookmark this thread —– DOW will cross 28k and NASDAQ will cross 10k by the end of October.
Jaco — I’m hoping you’re right. I loaded up at the bottom :)
The head has been cut off and the tail will drag in fear? I hope tech. Takes over from the short Vol. Debacle as leadership and oil does not continue down? The new Fed was able to do and say things that the old Fed would never dream of entertaining? There is a third mandate; jobs, contain inflation and create liquidity by any means necessary? Audit zee Federal reserve!
Well…it was the first day on the job for the new guy. What does everyone think he will do? Will he a puppet?
Of course he will be They ALL are
Trump doesn’t care about the market anymore. Now that the market is crashing Trump will merely change the subject and never mention it again – just blame it all on crooked Hillary, and start babbling about Benghazi or the wall
Powell has free reign to bring this mother down. It looks like the Fed will not intervene until banks are threatened – the market will likely collapse in the meantime.
Not sure if it’s Fed incompetence or outright corruption but Fed mismanagement has wrought havoc on the working class. How many times will we let them repeat this cycle before we put a stop to it. After what happened in 2008 it’s astounding the Fed pulled out the same playbook but this time they doubled down.
Not sure if it’s Fed incompetence or outright corruption but Fed mismanagement has wrought havoc on the working class.
Now replace the Abbrevation FED with P 44 and P 45 conbined withtheir respective ciongresses and you would be a lot closer to the truth.
FED Head’s have Manners and play by the rules (at least untill now who knows what comes tomorrow with a P 45 FED)
“Monetary policy alone can not resolve all of the Economy’s issues” Words to that effect.
Was a scathing criticism of the non cooperation and inaction of the P 44 administration. In FED Speak.
That’s wishful thinking – If the Crash continues, Trump will be worried and play the tunes. He wouldn’t want the economy to go down under his watch. He boasts about how it has went up under his watch. So he will be worried, that too big time.
Remember, for Trump it’s all about him!
It’s going to, it was a bubble when he said it was while campaigning and it’s a worse bubble now. And since Trump took ownership of the bubble he’s going to get 100% of the blame. If this continues the dumbocrates will win big in November
I wonder where stock prices would be without buybacks.
As has been said elswhere P 45 was a fool to tie himself to the Rising/Strong Market now is not so. HE STILL OWNS IT.
No matter how much he tries to deflect, the media simply wont let him.
P45 Just like china, Deep in a hole, and still digging..
The banks balance sheets are full of tier one cash and the bad guys got smoked , heck maybe corporations might start investing in infrastructure? I remember when putting a monkey in space was a ticker tape parade!
Ben Bernanke’s “wealth effect” gives way to Powell’s “poor effect”. Now we get to see what happens to the economy after the Fed has made people feel poor. Powell gets to take the heat while Ben and Janet hide behind a tree.
The purpose for holding people accountable is not to serve our desire for revenge but to deter bad actors in the future. Is Ben one such bad actor and should he should be held to account for his actions (at a minimum discredited) – how can receiving a fat paycheck from a hedge fund not be a conflict of interest. Why do we even use the term “public service” anymore.
As a society we must stop letting the bad actors skate while making examples of pikers. We sent Martha Stewart to jail after she followed her broker’s advice and sold some stock but bankers commit outrageous fraud without consequence. The damage Ben caused to the economy is still unfolding, when we are left sifting through the rubble we must remember who led us down this path.
in the immortal words of baldric: “sir, i have a cunning plan.”
+1 for Black Adder reference!
Bernanke’s zero interest rate policy led to the “poor ‘effect” not the “wealth effect”. The idiot copied what Japan did and got the exact same result.
“Bernanke’s zero interest rate policy led to the “poor ‘effect” not the “wealth effect”.”
That policy did what it was meant to.
It recapitalized the Major segments of the US banking system that Needed it (At the expense of savers) and inflated their assets improving their leverage ratios. The “wealth effect” he just didnt specify where in the economy most of it, would end up.
He did what he saw had to be done, To stabilise a weakened Financial System. Unfortunately he also created the conditions for some bubbles, as he didnt stop before QE 3 which he should have done. Market tantrum’s be dammed.
2008 – 2018 has been bad enough for Joe average. Would you rather Ben sat on his hands. Letting Joe experienced something way worse than 1929 -1941?? Which was the other option.
Hank Paulson?
At a certain point it will be the margin calls
Isn’t the figure ten per cent for a correction. And 20 per cent for something a bit worse?
Yup, looks like correction (-10%) territory tomorrow and official bear market (-20%) by Friday.
This is happening while the Fed is tightening so there is no reason to believe it will stop. The last time this happened (Jan-Feb 2016) the Fed suspended rate hikes and issued a lot of dovish statements – this time they are letting it drop.
Why are they letting it drop this time? Credibility? Whatever the reason one thing we know is retail investors only recently fully committed to the market and they are getting crushed.
So their cronies on Wall Street can profit by shorting it and pick up some bargains after the crash
Big call bro. I’ll buy you a beer if you’re right. -20 will be a Fukushima like tidal wave of hurt. Popcorn at the ready.
Over 20% goes into other term’s than correction. Normally.
Recession comes after Correction normally.
Crash comes in at about 35 from Memory (Dont quote that).
10% is a correction.
20% is a bear market.
But the usage of the terms is silly. They’re not magical numbers that mean anything.
In January – February 2016, the market dropped about 20%, and commentators on CNBC were literally waffling back and forth between saying it was a correction… no, a bear market! No, now it’s under 20%, so only a correction… argh, down 21%, bear market!
And by April, the market was positive again.
So… it was the shortest bear market in history, lasting all of 2 months. That’s silly.
To me a bear market means sustained losses over time, while a correction is a short blip that is reversed quickly. A correction could be more severe than a bear market. If the market dropped 30% tomorrow, but recovered it all by next week, who cares? Whereas if the market dropped 10% and didn’t recover for the next three years, I think that would concern a lot more people.
Well said. The psychological effects, which are the hallmark of a change in sentiment, only come with time. Even ’08-’09 was relatively brief, by historical standards. Thus it didn’t take long for investors to repeat the same mistakes
It touched down 10% briefly Monday and bounced into close and than wiped out every stop Monday night and ripped the medulla out of the short Vol. Crowd? Tuesday morning when short vol. Opened 287000 vix contracts were bought and now is now! It was a short buying squeeze and we retest everything the rest of month? The A.I. held and the Fed got liquidity!
Any connection with the crypto crash? Are there some hedge funds over leveraged in crypto currencies?
Exactly my first thought. Cryptos created by those with near-unlimited resources in order to manipulate the “market,” which happens to be mostly computer programs manipulating the exchanges.
It seem the establishment is playing self-inflicted death-by-a-thousand -cuts and still hopes to survive.
The economic powers have staged this to put a lid on equities for now. It will remain volatile for another week or too and then they’ll work behind the curtain to settle things out a bit.
This will also help in the bond sell-off that was occurring since investors were moving money from bonds to stocks causing the steady rise.
As I’ve said many times before, the markets are fully manipulated by the CBs, Treasury and their high paid minions (GS and JPM). They do it with all sorts of tricks (futures, flash trading, etc.). The only thing they can’t protect against would be a real swan disaster where the all investors race for the exits due to an event that would likley be non-financial.
In that scenario, just like 2008, they would wait for the selling to burn itself out and then buy the market back up.
My crystal ball does not agree. I think the market will drop relentlessly. The Fed will not intervene until banks are threatened and the government needs easy money to monetize Trump’s enormous deficits. Without Fed intervention the free-fall will not end.
Asset inflation has gone on so long (half a generation) it can be hard to accept this ongoing reversal. Acceptance is the fifth and final stage, most are still working through anger and denial – they will arrive at acceptance eventually.
It was a long time coming and the housing market will be next
I am expecting a roller coaster of the market that would not even exist without the insiders and the artificial entities.
The trillions created out of nothing must disappear in order to prevent total systemic collapse.
This is the emperor has NO clothes moment, expect behavior change in investors. The same moment Rose shouted “Harvey Weinstein is a criminal pervert”.
Percentage wise, NO big deal. Psychology wise, big deal. Wait till some heavy hitter come out and reaffirm the market, other wise, rout can become a crash fast.
This is always wall street telling the new FED chair, :”you either shower money or we will eat each other alive and drag down everybody with us, your move Jay”
Well, if this is what happens when the Fed scratches away minuscule bits of liquidity from the market, then imagine what might happen if they really get going at the rate they advertised they will. Look for a halting of QT with the excuse being the upcoming debt ceiling situation.
In the grand scheme of things, 8 years of monetary machinations have completely removed any semblance of price discovery in financial instruments. Ergo, anything is possible since prices are so far detached from fundamental valuations that at this point that it’s all about sentiment and momentum. This isn’t the “big one” but if sentiment was to shift to risk-off then coupled with margin calls… things could get interesting.
Dip buyers will definitely enter at some point – but this will be dip buyers based on momentum, not valuations. In order to dip-buy based on fundamentals, the S&P500 still needs to shed about a thousand more points.
Today is Powel’s first day in the office. The market is sending him a message: “MOAR FREE MONEY!!!”
Tomorrow he will make a statement, and the market will rally again.
Yesterday what’s ‘er name said the market was too high. Parting gift?
Mr Yellen flew the coup just in time
She didnt fly P 45 threw her out so this gift comes from P 45.
Even P 45 should know the most hated thing by Markets is uncertainty.
A new Fed Head is defiantly Uncertainty for the markets.
If any 1 person is responsible for this minor correction it is P 45 in his anti P 44 anti Democrat vendetta.
He removed Yellen simply as she was appointed by P 44 and a Democrat.
Her shorten Tenure will go down in History. It may be the only other thing apart from Scandals that keep P 45 in the History Book’s.
If this minor correction turns into something else the blame will lay with P 45.
Not Mrs J Yellen Former Chairperson of the US Federal Reserve Bank.
In my opinion Yellen was “let go” for medical reasons.
I was watching one of Yellen’s speeches with my wife when Yellen wigged out. My wife, an RD, noticed it and thought it looked like a TIA (transient ischemic attack) a possible pre-stoke symptom.
Her Immediate start at Brooking’s,
and step int the media Circuit, says, not so.
As you say, nothing goes to heck in a straight line.. As of 6:30pm west coast time, the Dow Futures are off by 438 points when a drop of 368 points puts us in correction territory. I think that number makes 10% from the Jan. 26th high. We’ll see rebounds and maybe even higher stock prices but I have never seen a more anticipated bear market and recession and maybe worse than I have for the past number of years. Probably, because for many working class the Great Recession never ended and now that many are getting real fulltime jobs again with wages, possibly matching inflation, the Fed seems ready to pull the punchbowl.. Stock inflation was OK and hedge funds buying foreclosed homes by the thousands with cheap money, if you had connections with bailed out banks, was OK too. Renting those same houses at rent prices beyond reasonable and in many cases to those who were foreclosed was OK. Bundling rents off those homes in some sort of security was perverse and insulting but perfectly OK to the Fed and Wall Street. But let the working class share in something like rising wages and all heck will break loose. If rates do rise significantly in some sort effort to tamp down wages then these parasites will have shot themselves in both feet. Next up, bonds..
.
David, you forgot that the middle class paying banks to hold their savings with almost zero interest rates was OK too, still is.
I believe rates going up has more to do with putting a stop to the Chinese economy forcing a float on their currency. Debt in dollars, and oil prices up which they import, has got to be rough on them. “China #1” is a thing of the past already, now lets see how much credit was used to build those ghost cities?
Think, Die Hard 4 ending. Self inflicting wound.
As i’m writing rates @ 2.77% already up 10 basis points from the low today.
yippy ki yay
Yes, that’s why it’s called Class Warfare…
A lot depends on the reaction of overseas markets. If they react even worse they and NY could get into a feedback loop.
Also,the idea that a ten percent correction brings us back to normal, would normally be true. But we’ve missed several corrections and they have built up.
I wonder if the Fed would have slapped Wells so hard if they’d known this was going to happen. The market was down 4. 5 , Wells almost double that. Could Wells be getting cheap? The Fed could relent on the discipline without too much fuss.
That’s true The Nikkei is down over 5 percent now
“Could Wells be getting cheap? The Fed could relent on the discipline without too much fuss.”
Surely you jest. Wells hasn’t even been fined properly yet. Except for a few fired managers, no one, certainly not shareholders, have felt any pain at all for supporting the corrupt management regime. So those harmed by Wells’ abuses are certainly not seeing justice done yet.
Wells should be made into the poster child for how the Feds will finally break up the TBTF cartel banks.
P.S. WFC is trading around $58/share today, higher than any level in the last few years except for the last few months.
Did I say they SHOULD go easy on Wells? As in doing what might be considered morally correct?
NO.
What I said was that soft peddling Wells punishment could be done without a lot of headlines or reversing of Fed announcements of upcoming hikes. They don’t have to do anything re: Wells, they just have to NOT do things. Much easier from a PR point of view, which is what I meant when I said: ‘without a lot of fuss’
You will note that a whole lot of the comments are along the line of ‘the Fed will have to back of now, there is more QE coming etc. etc.’
I really doubt that there is more QE coming or even that the stated unwind will be changed. But EASY ways to ease up look tempting and one is to pretend to punish the 10 th largest bank in the world but not really doing much.
Got ya. I agree with that.
So again, the question is, will the Fed really truly continue the QE unwinding? The Fed announced in June 2013 that they were ending QE. Stocks tanked, and the Fed went back to QE. In late Oct. 2014, the Fed announced again the end of QE, stocks tanked the following year in 2015. Still no unwinding of the QE. Sept. 2017, the Fed announces that yes, this time they are really serious about unwinding QE! Stocks keep rising, until the Trump tax cut makes people realize, hey, the deficit is going to get bigger, and at the same time the inflation numbers seem to be moving up. Maybe the Fed will be serious this time about unwinding the QE!
We’ll see….
I mentioned elsewhere, the current dip looks like another of those “taper tantrums” over the last couple of years. My guess is that the current dip will recover and push new highs again. Its only early February now.
For the FED to call off QE unwind or even drop hints of QE4 ;-) an outright crash of another 10% is required but is highly unlikely now, given such a strong reaction bounce back up today.
All this volatility so early in this cycle (and the year). already tells me there is going to be more waves of selling to come later in the year.
2018 is going to be interesting. just like the previous approx.11 year periods dating back to 1987 (Black Monday), 1997 (Asian financial Crisis started with EM currencies), 2007/8 (US sub-prime & Lehman bankruptcy).
Good article Wolf.
I agree with the views that you expressed. The values have declined, but for some to describe that devaluation as a crash, they are being inaccurate.
In a market where the direction was only one way for a very a long time, I suppose when a reversal does arise, some will exaggerate in their description of that reversal.
A crash is when the market did what it did in 2008. In 1987, the market fell by 22% in one single day. Both of these events were crashes
4.5% fall over 4 days from it’s all time high valuation is a decrease, not a crash.
That ’87 recession was such a killer.
Very true, yesterday’s drop doesn’t even crack the top 300 percentage loss days in DOW’s history.
This market went up too far too fast in January and was extremely overbought at the beginning of this month. A lot of people have also gotten very complacent seeing the S&P relentlessly go up 0.3% day after day after day.
Sell offs like this happen from time to time, and the market was way overdue for one. Weak hands are being flushed out before we move higher for the rest of the year. The economy looks just as good today as it did a week ago. Would not sell out here.
I have to emphasize on psychology, NOT data. Folks in market does NOT expect drop. Equity can drop is a BIG surprise for them after so many years of low vol asset buying. They start to think stock in the same way as bit coin, and that will send fear.
Plunge protection team, and all companies will be buying stocks tomorrow to stop this sell off. So, unless they completely lose control, by the end of week, they will poor billions into stock market and stabilize it. Let’s hope free market role over them and crush them like peanuts; but I won’t hold my breath.
Tesla won’t be buying stocks, but it will be trying to sell some, or go bust.
Look for PPT to become a very passe term. Hadn’t heard it for a while. If the Fed isn’t on board the Team doesn’t have a quarterback.
PPT has been around, but there was no point for them to do anything as the market went up by themselves; but now that he sell off has started, they’ll be hard at work.
As for Tesla, the company has one asset that no other company has; that asset is called “Elon Musk”; I bet he can sell you and me a few bridges despite the fact we know him :). So, I expect Tesla to be the last one to fall.
Looks like a rinse job with some margin selling when the Dow went from down 700 to down 1600 in minutes. Admittedly it made for appalling TV. But I think it’s all about scaring the little folk away.
No this is how they rope in the last remaining sheeple. Let the market drop another point of two then open with:
“Man you missed the last run up to 26k, you sure don’t want to miss the next run up to 27k or 28k. This is just a small correction before the big push.”
Hook, line and reel them in. Sheep are suck suckers.
They may gain 10-15% returns over the next year, but will fail to get out before the big 30-40% take down.
Game, set, match.
The talking heads are already saying this is not the time to move to cash. See sheep cannot be trusted to hold onto cash for too long. Just not good for the wolves.
Right, percentage-wise it’s still a blip, but wasn’t there a record amount of margin in the stock market. I am guessing some people might be getting margin calls, soon. The herd mentality will prevail just as during the “meltup”.
As I read on other site, yields on treasuries reversed trend, and are going down.
The Plunge Protection team will undoubtedly step in, and make sure the crash when it really happens, will be truly epic.
Fed is stock market’s bitch. I fully expect some members to starg giving interviews how QE is being slowed down, stopped or reversed and if that doesnt do the trick then no more interest rates for this year. There is no price discovery or free market, it is all centrally planned , in the name of stability.
“Like watching paint dry”
Completely discounting any sense of the risk parity paradigm.
“…and it’s not until the dip buyers get massively destroyed and stop dip-buying that the market is in real trouble.”
I don’t think there has been much dip buying the last couple hours of the trading day.
I wouldn’t write this off as not being a major crash, only time will tell on that score. It has only been two days and there is no telling how far this could drop. It may stop tomorrow or it may continue ceaselessly beyond losses of 80%.
As you have pointed out on several occasions the Fed is compelled, for credibility reasons, to sit on its hands. I’m certain the Fed will flood the markets with liquidity before the curtain is drawn but the question is: how far will the market fall before the liquidity fire hose is turned back on.
I feel like I’ve seen this play twice already and it doesn’t end well. Maybe this time it will all blow over and markets will continue higher – but I doubt it. I think this is it, this is the big one. She’s gonna blow. Thanks Ben, you have brought us to ruin.
How could Ben Bernanke believe inflating an enormous, dangerous, out-of-control asset bubble was a good idea? I think the day of reckoning has arrived – If the Fed feels they cannot flood market with more easy money the market is going to come down, and come down hard. Ben Bernanke can put that in is wealth effect pipe and smoke it.
There will always be some dip buyers:
http://www.acting-man.com/blog/media/2017/07/2-DJIA-1930s.png
For me the sun is shining and the rainbows are out. I’m buying Apple, Berkshire (hammered unfairly because of the Wells Fargo news) and dang, missed JNJ yesterday when it dipped to 122.5 for for five minutes or so.
I don’t sell for years once I buy something and this week is going to be good. If this keeps up, it’s going to be great.
I’ve been buying this dip, it’s been glorious.
One significant thing that Jim Rickards said about the next big systemic crash: it probably will be triggered by something that no one saw coming. I think that makes a lot of sense. In that scenario, the central bankers won’t have a contingency plan in place for it.
I don’t think we are there yet.
Yes, a lot of the stock market indicators were as they say “overbought”. A lot of the breadth/uniformity/confirmation indicators were “confirming” saying that the market was internally healthy.
Now, this condition has been brought to a more typical reading. The market is not showing very bad symptoms— yet.
There is now a sizable trading range for it to fit into. If history is an indication, and if this is a “top”, it will meander in this range for a few months to even years before the real problems become obvious (in the stock market indices.)
wkevinw
I am leaning toward a few months and than the liquidity will dry up as the Fed reaches the 40-50 Billion mark per month in its QE – Unwind
A few years?? They’ll have to print another 4 trillion to keep this afloat for a few years. Assuming this is not it, and they haven’t lost control, the best they can do to keep it from a catastrophic crash is one year.
Wolf
Whats your thoughts on the central banks that bought stocks if the markets continue to go down ????
There are only two major central banks that I can think of at the moment that buy stocks: the SNB and the BOJ (China excepted because they can do whatever they want).
The SNB buys foreign stocks (not Swiss stocks), denominated in dollars and euros, in order to keep a lid on the CHF. I don’t think a stock market selloff has any impact on the SNB’s actions since its concern is the CHF.
The BOJ buys Japanese stocks (ETF and JREITs) as part of its efforts to inflate asset prices in Japan. The BOJ is known to intervene when Japanese stocks drop too much. But it has never really bought large amounts. Its main focus is on buying government bonds.
Overall, central banks have other priorities than making a profit on their monetary policies. So I don’t think the profit motive causes them to do one thing or another.
√
I think that a lot of people aren’t aware of the degree of stock ownership (and more in bonds) of banks, insurance companies, mutual funds, corporations, & hedge funds. which represents their balance sheet assets or supports company pensions. By inflating assets the Fed strengthens the solvency of all these institutions – so they may not consider asset inflation much of a crime. Yes, there are feeders (PE) that suck moisture from the infusions, but the greater risk is a stock market (and more importantly) a bond market melt down. If you look at the SEC required filings of major institutions and funds, you’ll see they are heavily invested in these assets. They do not hold “cash”.
Everyone slams the FED but, they averted a collapse of the whole banking/asset system in 2008. Critics have either forgotten or do not know that banking had frequent “runs” and collapses before the Federal Reserve existed. I’m not condoning mistakes that they have repeatedly made, but, really now, what can take its place? Congress (largely corrupt), the White House (…), or Bitcoin jockeys? And for those who think that any govt. or private agency can “orchestrate” things, get some coffee. If conspiracy theorists think that they really know what they’re doing, would we have had wars (some on-going) and political turmoil that seems to have no end? No. They’re just humans making some good mistakes, some really tragic ones.
√
Thank Wolf I appreciate your Feedback !
To that idea …
Re the Swiss: If you stop to think about it, their cost basis for all equities is $0.00. While you or I would have to consider our purchase price and calculate a loss or gain from that point, the Swiss print their money out of thin air. Their cost basis is effectively $0.00 since they can always print more. We earn our money, they print theirs. Big difference.
They print CHF, exchange it for Euros, for example, then use the Euros to buy US Equities. They can sell the equities for ANY amount and make money, keeping the dollars or Euros received and using them for any purpose.
In reality, their only problems are social and from a bookkeeping perspectives.
1) stark embarrassment for losing so much printed money, nominally, on what they thought was a sure thing.
2) stark embarrassment from admitting they didn’t lose anything since the money used to purchase the equities was actually recently printed and cost them nothing, save for the effort to generate it.
3) The need for some new creative bookkeeping methods. For example, create some new accounts in the ledger that recognize the cost basis is $0.00, yet look and are titled with official names that sound like high level monetary central bank accounting is involved.
The Swiss National Bank, printing money to buy equities is different from Joe Blow doing it in that it’s illegal for Joe Blow to do it. The Swiss can BS and bully anyone who makes that comparison and force then to go away.
I strongly believe a dose of massive public ridicule for an extended period is called for here. That’s about the only sanction available for that scam. I’m for it.
Same with the Japanese and their EFT purchase, except they had the good sense to keep their printed money scheme re: equities all local … it’s my understanding they pretty much own the Japanese EFT markets and own little to no foreign equities.
No doubt the Swiss will reel in the face of US ridicule.
It will be an official crash when the markets suspend trading.
Re: “markets suspend trading” –
1) Several trade systems for futures traders were shut down tonight.
2) Reports are saying that the Bid/offer stacks in futures showed total flight of the HFT “liquidity” providing community.
“Calvinball” rules are now in effect – retail investors will be surprised to see that the system doesn’t work the way they thought.
If this means counterparty risk (or even hints thereof) is on then it’s game over.
I wonder if Sir Isaac Newton has any tips?
Well played!
Well, if his judgement regarding the South Sea Corporation is any guide, he’d prolly be telling us to go all in on Cryptos…
Was today’s dip because the new guy was a Trump pick?
I’m waiting for the flood of super-mining computers to market. Should be any minute now. going over to ebay now to check.
What goes up hard and fast comes down harder and faster. What was abnormal on the way up will be abnormal on the way down.
The hundreds of billions in etfs will exacerbate the selling as all gets sold
The xiv and svxy etfs that short volitility
Blew up after hours and are down 80
Percent. Hedge funds are going to blow up
Huge losses. The most heavily entered position with a total synthetic
All bets are off on supports
Serious comment: “Cash on the Sidelines” is a marketing myth. There is ALWAYS cash on the sidelines.
In today’s markets, when any stock, bond, mutual fund, ETF or derivative changes hands, one person pays cash but the other RECEIVES the cash. It doesn’t go away.
Similarly, “money flows into funds” is also nonsense. Funds are just baskets of shares. But someone always has to own those shares. So if someone buys a fund, and the fund buys shares, somewhere else there is someone else selling those shares, and getting “money flowing” OUT of their stock portfolio. There’s no net flow.
So whenever you hear someone talk about cash on the sidelines or money flowing in some direction, add them to your list of clueless market shills, not to be trusted.
There’s no net flows of money in trading, except maybe from losers to winners. There’s only prices floating up or down due to the balance of supply and demand.
Yes, but not quite.
Here’s where you’re correct: “cash on the sidelines,” when it is being deployed to buy securities, is not being added to the market. It just replaces the cash that the seller takes out of the market, down to the penny (minus fees).
But this “cash on the sidelines” does exist — and this is important in a selloff because it keeps the market liquid when everyone is trying to sell. For example: If I have $100 sitting in my otherwise empty broker account, and if I’m going to wait until the market dives 20% before I invest it, this is “cash on the sidelines.” So imagine hedge funds, designed to profit from a crash, have $100 billion in cash waiting to be deployed. That’s “cash on the sidelines.”
You’re correct that cash cannot be taken out of the market or be put into the market. Your “cash on the sidelines” allows another investor to sell you his securities and take his cash out of the market while your cash goes into the market. So overall there is no change. But there is liquidity — that’s what “cash on the sidelines” provides during a selloff.
Isn’t there a change if I bought it at X two years ago and have to sell it at -33% of X today? Wealth is, at least theoretically, destroyed, and if someone was dumb enough to lend me money based on 100% of X, then I and the person I owe money to are in big trouble.
√
More interesting is what happens in Junk (and junk Addicted entities) going forward.
IIMHO the SWHTF (Or at least start to) when those addicts cant roll their Junk.
I bet millions of emails have today been sent by fund managers to all their clients saying ” now is a good time to buy.”
Question.
In 5 weeks we get to commemorate the 10th Anniversary of the (effective) bankruptcy of Bear Stearns – March 15, 2008.
What have we learnt since then and how have we fixed our ways?
There are a couple of factors I haven’t heard in this thread. The first is that many of the late buyers in this market remember 2008. There wasn’t enough time to save their 401K’s, markets eventually restored those losses, but the fact remains that it can happen quite fast. Also, the list of (web)sites that went down were likely going to take “sell” orders of the consumer market, and not hedge funds. They will surely be back first thing in the morning to re-submit those orders. We are also seeing the futures markets down a large number, and Asia is down 3-5%, everywhere BUT China, so if the route continues across Europe, it will likely hit the papers early and I doubt you’ll see any dip buys coming from the consumer market.
Too many people have been waiting for a reset, going on 4 years, once QE stops. And once the swan flies it’s already too late to get out. All my cash is now physical silver… Just in case all these rosy theories implode
Just one question – Does the Cryptos, Bond and Stocks crashing simultaneously put a constrain on Hedge funds from being dip buyers? They may be losing money in all three fronts and additionally the Reverse QE is also going on!
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Wolf, when a bank takes money from the Fed, and in the meantime the rate adjusts to a higher value does it work retroactively? Let me rephrase, the volume of cash induced ,with low FED rates, on the market is there to stay?
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I’m not totally sure I understand your question. So here’s a shot:
Currently, the banks have about $2.1 trillion (with a T) in excess reserves deposited at the Fed, and the Fed pays them 1.5% in interest on those excess reserves. So these days, there is no need for banks overall to borrow from the Fed.
During an emergency, the Fed acts as lender-of-last-resort to the banks (during a bank run, financial crisis, etc.). Then affected banks (in theory, only those that are deemed to be “solvent”) can borrow from the Fed, but this is short-term until the crisis is over, and the rate of interest charged would be irrelevant in the overall scheme of things.
During the Financial Crisis, there were a number of these programs underway. But I don’t remember the details. Currently, this is not an issue.
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Sorry for the badly formulated question, your answer was spot on.
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Banks deposit money they took from the Fed, and take an interest from the government??? I thought it was the other way around. What a scam…a perpetual bailout. Did not know this…2.1 Trillion. I need a glass of vine.
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Banks traditionally borrowed from each other before the fed took that business away from them by paying for excess reserves. It used to be an overnight rate, the federal funds rate. Now it is still overnight but the fed also sells a 7 day note to the banks, as far as I know.
There were actually a lot of dip buyers on Monday, and they got slaughtered.
I reckon the bond market is where we should be getting our cues for what will happen to stocks, and unless something fundamentally changes, I expect a rough ride for stocks going forward.
As government funding requirements balloon through runaway deficits, and the Fed scales back its balance sheet, other purchasers are going to have to absorb a lot of bonds over and above what they do today, and the question is at what price? And if other central banks also significantly scale back their QE, that will leave other governments also competing to a greater extent for the same, narrower, sources of funds.
In this environment I can easily envisage interest rates going quite a bit higher, which should spill over into declining stock markets, and I guess it may eventually even force policy change in governments and central banks as debt service costs rise and asset prices significantly decline.
For further clarification of my position, I’ll add that I’m not much of a believer in the growth story being bandied about. In my view the so-called growth in recent years is just our economies consuming themselves in order to produce increasing turnover figures, by destroying their balance sheets through rapid exponential debt growth and resource depletion. Once debt growth on aggregate significantly tails off I suspect we’ll pretty quickly be in rapid contraction, with all the exciting stuff that will do to debt servicing capabilities across sectors.
I think the coming months might turn out to be pretty interesting!
In my view the so-called growth in recent years is just our economies consuming themselves in order to produce increasing turnover figures, by destroying their balance sheets through rapid exponential debt growth and resource depletion
Bingo. You can’t fool Nature. This will be a baffling and much-resisted lesson for The Powerful.
The end of the bond bull market was heralded at, what, 2.60%-2.65% yield in US 10yrs?
What we await now is some soothing words from Mr Fed so that the lid is kept on fixed income, we can deduce a false breakout, and everything party back to new all times highs on new whiffs of easy money.
After all, didn’t everyone argue US financial conditions were tightening because of the weakening USD and rising stock mkt? What gives?
((typo: conditions easing, obviously))
Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.
You might like to hold off on the dirges for a while. A bit of dip buying and some soothing assurances from the Fed and the markets could easily reverse course and head right back up again.
Anybody starts quoting from ABBA’s ‘Waterloo’ and I’m going to seriously hurl.
Yes, and from the same author (W.B. Yeats):
“… We pieced our thought into philosophy,
And planned to bring the world under a rule,
Who are but weasels fighting in a hole…”
This sell off has been well orchestrated. Note all the recent talk of high valuations by any/all talking heads. Follow CNBC; they’re the secret mouthpiece of the powers behind the curtain.
They want to make is look scary. It wouldn’t be effective otherwise. And if they succeed in crashing China’s market, all the better.
But rest assured, the Fed and powers behind the curtain will NOT let the US stock market fall much below 15-20%. They have worked too hard over the past decade to massage it up to curren tlevels and it remains THE most significant economic indicator to them for the “little people” through headline news.
The Wells action was more Fed window dressing to convince us they are serious about malfeasance. It didn’t cost them much and will help put the other banks on notice to not get to carried away.
All the QT talk and beginning action is window dressing. Of course they’ll try and unload as much as they can but realistically they know it will be extremely difficult to do without crashing the economy. Same thing for tightening. I would guess that the 10 year will stabilize out somewhere north of 3%; that is about all the economy could handle and certainly they cannot create an avalanche of bond selling.
Everything else is bells and whistles from the folks behind the curtain. Frankly, to me it is amazing to watch how successful hey seem to be with all of this. But most people have know idea how much they control the financial markets.
If you haven’t seen blood gushing down the sidewalks of the streets, then you haven’t cruised through the right neighborhood. Over in Volatility Estates, life was easy. Barrons’ Steven Sears notes in a piece penned Dec 9 of last year: “Selling volatility—in other words, shorting the VIX—will remain one of the greatest trades in the world until it stops. “. Well it stopped yesterday and the blood flowed, especially after hours, as Credit Suisse (the owner of one of many of the short-vol instruments – VIX) tried to stop the bleeding. Now volatility is BACK, and Risk Parity mechanisms will need to beat back into shape. Montier: “Using VaR is like buying a car with an airbag that is guaranteed to fail just when you need it, or relying upon body armour that you know keeps out 95% of bullets! VaR cuts off the very part of the distribution of returns that we should be worried about: the tails.” My version: In a land of behavioral finance, the statistician should be viewed with distrust and suspicion as being Taleb’s IYI.
THIS! The short vol players are being carried out on stretchers. These are not retail players. I’d not be surprised to see DB or WFC to be among them. Give it a few months to see who are the new zombies.
The funny part is even if an investor can stand a correction, the central banksters do not seem to be able to stand any correction. I expect them to come out of the woodwork, shooting their mouth off, one calling for QE4EVER, one calling no hikes in 2018/19 should the market fall another 2%. The central banksters have gotten too big for their boots, taking on the mantel of ATLAS to the world.
Yup!
For me, this was mean-reversion quants working off the S&P offset relation to the 50/200 + some element of short squeeze involving everyone and his uncle Bob being long-term short the VIX. Mean-reversion starts it. Then the quants keying off the VIX freak out because of the short squeeze. And/or cause it . Enough jargon?
Should end up like the August 2015 China-related freakout where everything gets massively jumbled amongst all the dueling machines for a month or two.
Twist again like we did last couple of summers?
Someone else seems to be thinking of the central banksters too!
You can’t help but wonder if this deepens into a full blown financial crisis in stocks and bonds, might it cause Central Banks to press the “Do Anything It Takes” button.. Lower rates? Reopen the QE gunnels? Right back into the distortions of the last 10-years and another nail in the forehead of market driven economies.
(https://www.zerohedge.com/news/2018-02-06/blain-trump-might-think-crash-fed-plot-discredit-him)
This correction is a shot across the bow, not yet a bear market. Market tops take time to play out. Buying the dip here gets more dangerous and you better have nerves of steel buying dips during the market topping process. This is a time to start looking for lower lows and lower highs in various indexes, and trend changes in credit spreads and employment figures if you want to time your exit.
As a general rule when even banks are saying “buy this” is time to sell. You might lose the peak but you still earn money and is a know fact that ehen everyone is buying the crash is not that far away.
Business fundamentals haven’t been affected! We are bumping along just outside recession and a new greenspan-type character at the Fed? Q.E. soon! Its 1987 and we already have plunge protection actively BTFD like its 1987!
Cash on the sidelines is a myth, always has been always will be. If you live in Mom’s basement and Mom gets foreclosed you won’t be buying stocks with your cash. This market isn’t about speculation it’s about the global monetary float, the US market is not the only market going up. Money goes into speculative investments when there isn’t enough ATT stock to go around. Credit has to contract and that will take some time, and if you are a bear you should have plenty of endurance. It will be rewarded.
If your a bear? Everyone who had a stop under their position is a bear? Online down and everyone liquidated? The Fed did enough! If you expect your fathers interest rates you have not be watching? Reverse mortgage anyone?
BTFD
“markets are not there yet.”
http://www.nanex.net/NxResearch/NxLiquidity/
I wonder if ” van_down_by_river ” has checked out the markets today… LOL
Note to all for future references to this guy’s comments: he was wayyyyy off. Every thing he said: off.
So I studied Politics and Economics (minor) in the UK. I have re-engaged with macroeconomics recently and discovered this fabulous website. At present I am reading Stiglitz’s book on the Roaring Nineties and Robert Shiller’s book on Irrational Exuberance. To think this is the end of the correction seems highly questionable. The fact that the same psychology mistakes are being repeated seems pretty dumb at the very least.
There it is…
St. Louis Fed President says strong labor market doesn’t mean a spike in inflation is around the corner (https://www.marketwatch.com/story/feds-bullard-tries-to-calm-markets-inflation-fears-2018-02-06).
Was his speech at or around 2 pm since Market up 700 point from 2 pm. Looks like the market heard him!
Will this mark the Bullard Low of 2018?
Why do the central banksters feel the need to speak up every time the market sneezes?