Wolf Richter with Jim Goddard on “This Week in Money“:
Was the selloff in stocks just a brief correction or a sign of greater significance?
The dollar has fallen 12% over the past 14 months and 5.3% over the past three months, according to the 18-currency dollar index. What will the Fed do? Read… The Dollar Spirals Down, Hits Lowest Point Since 2014
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“Was the selloff in stocks just a brief correction or a sign of greater significance?”
Just a brief correction. Expect the DJIA to go to 30k in the next few weeks or months.
With all the deregulation and all the goodies the government is shoveling at their corporate masters there’s really no reason for the stock market to go down, and every reason for it to continue to soar. Certainly the Fed, with its tiny incremental rate increases, has signalled that it’s not serious about reigning it in.
You need to look at the larger picture. The market is 100% overvalued. Nothing unusual about that. It forms bubbles very decade or so. That’s because the business cycle is like the cycling of a person’s moods. The market is either on its way to an upper extreme or slower extreme. Debt-fueled speculation feeds on itself. The cycle is at its peak now with unemployment at rock bottom, so the market will inevitably make its way back down to the bottom.
I am not so sure about that. I don’t mean to be obtuse, or contrary, or disagreeable, but it seems to me that it is different this time. Indulge me for a moment.
If the so-called ‘business cycle’ (a concept which itself is debatable) were now following the ‘normal pattern’ the stock market should have crashed by now. I think you may be able to agree that many of those of us who observe such things are a bit nonplussed that it has not crashed already, given the extremity of the distortions. Short-sellers are anything but stupid, and they’ve been having their asses handed to them.
And yet, it has not crashed. Many have been at something of a loss to understand why it has not crashed. And it can only be that the distortions are even more extreme than our conventional understanding supposes. Something else is going on to support the markets. I’ve addressed this in earlier comments. The markets seem to be supported on a mountain of debt, which is being used to actively prevent it from crashing. There’s a huge amount of money sloshing around out there, and in the absence of wise investments that could ordinarily be made, the money is going into foolish ones, like the already-overvalued markets.
Notice that the markets have been able to recover and soar even as the real economy remains stagnant (looking past the dubious economic statistics). The markets and the underlying economy have little, if any, relation to each other. I believe the oligarchy has found ways to contrive the circumstances to achieve precisely this effect: they get richer no matter what happens to the real economy, and regardless of Fed policy, by successfully rigging the markets to stay up.
I could be wrong. But I doubt it.
“If the so-called ‘business cycle’ (a concept which itself is debatable) were now following the ‘normal pattern’ the stock market should have crashed by now.”
Why? It’s been typical since 1961 for expansions to last 9-10 years. We’re heading into the 9th year now, and the unemployment rate is about where one would expect it to be at the peak of the cycle.( The current bottoming of the initial and continuing claims charts is strongly pointing to a cycle peak).
Given the ’emotive’ , self-reinforcing nature of investor behavior, if I knew nothing about the particulars of the economic situation other than that we were in the 9th year of an expansion, I would predict that the market was 70-100% overvalued now.
Because it is always 70-100% overvalued at the end of a long expansion. The behavior of the market you’re seeing is as much collectice mood(Shiller calls it narrative) as it is reaction to particular economic statistics. Watch the mood change along with the continued bottoming of unemployment. Then watch out on the way down.
Margin is about to really explode ( no matter valuations? Easiest and cleanest shirt) ? San Fransisco commercial real estate has never had a 10% correction? Stocks just puked bigly? I want to see a bottom and watch stocks go parabolic for about six months and really push the limits? O.P.M never spent so good in the summertime!
This depends on how you define ’employment.’ The figures show that most jobs created after the ’08 ‘correction’ have been part time, low wage and with minimal benefits. This is no way to sustain a healthy consumer economy. The financial economy may be doing well, but for how long without a strong national economy for it to feed off of?
part time, low wage….yes, many retail places have “Help Wanted” signs out, but not much prestige or longevity at a dog-washing salon.
I would update the old adage about “everyone employed, doing each other’s laundry” to “everyone employed, making each other’s lattes.”
Josh….I would direct your attention to your own advice….look at the LARGER picture.
WHICH MARKET are you referring to? Because each market is affected by its own dynamics and cyclical concerns. Only RARELY do markets move in tandem….and even when the stock and bond market do….other markets typically move in the opposite direction.
Money flows are the key here….as well as knowing the general SIZE of each market. The global equity markets are large….but BOTH Bond markets and Currency markets are MUCH larger. Even the US equity market isn’t necessarily moving at the same pace or direction as European (or Asian) equity markets.
I frankly think that we see MUCH higher equity values in the U.S over the next couple years….even though I agree they are overvalued on a fundamental (traditional P/E) basis. There is TOO MUCH VALUE (?!!?) trying to ESCAPE OTHER MARKETS….(primarily European and Asian bonds)…looking for ANYWHERE that looks ‘safer’. (Return OF assets trumps Return ON assets….but only when certain conditions where return of assets is truly at risk….like the near future for public bonds.) This is part of what has already driven U.S. markets into an ‘overvalued’ condition….but the REAL PAIN in the EU hasn’t even started yet. When it does….the markets there will collapse…triggering a move by the ‘late dumb’ money to the U.S. dollar….especially as long-term rates in the U.S. compare so favorably to the collapsing Euro-denominated bank-rates.
The higher rates in the U.S. are needed to prevent the pension (and insurance) crisis from blowing up…..so money WILL flow to the U.S. dollar, regardless of the Trump admin’s recent talking down the dollar to help trade balance. However, the higher rates will also detonate various public entity balance sheets ….causing a reset in public (vs. private) bond risk. So we have a lot of money trying to find a home in the U.S. dollar….but having very limited options on WHERE to go. The public debt market will be seen as HIGH risk of eventual default as interest rates normalize….Real estate will get cut in half as lending is curbed as banks will need to recap…and private debt will just try to be treading water given the need to roll over….leaving U.S. equity markets are one of the FEW places which remain viable. Think of what happens when global markets all try to crowd into ONE TRADE…it inflates that asset class much larger than anyone thinks possible (i.e. gold in 1981, US tech in 2000) while OTHER markets are undergoing the REQUIRED RESET….returning THEIR markets to something sane. Only after the reset of these markets can the water/money flow back out of the then overcrowded and overvalued market, collapsing it.
So while I agree that U.S. equities WILL COLLAPSE….the decline we have seen thus far is only a prelude to the exponential ramp UP. Right now most of the public (and most money managers) is HUGELY skeptical of the value of the U.S. equity market….and that is EXACTLY what is needed to push the market higher (as people are willing to beat on the decline). Remember the crowd is USUALLY WRONG.
“Right now most of the public (and most money managers) is HUGELY skeptical of the value of the U.S. equity market…”
You really think that if so far into a bubble there is this much skepticism, that’s going to change if the market soars ever further?
Each bubble is different. Irrational exuberance characterized the dot.com bubble, but what about the 1937 bubble, which peaked at Shiller p/e that it didn’t equal again for 23 years?
That bubble, caused by government stimulus, produced a 50% crash, but do you think than there was investor euphoria during that depression -era bubble? I’ll bet there was as much skepticism then as there is now.
All expectations are already discounted in prices. If it is so obvious that there is no reason for the market to go down, then there is little upward potential. Sooner or later some good reason to go down will jump out of the blue … As always.
The specific “Good Reason…out of the blue” over recent years have been:
1. Swiss unhooking the Franc from the Euro
2. China devalued the Yuan
3. BREXIT
4. Trump unexpected win (overnight futures all down 5% Limit)
You said the magic word ‘goodies’. That’s going to cause a lot of inflation. NPR, a bias news source if I’ve ever seen one, mentioned a lot of deflationary forces in the economy, like retail cutting prices to compete with Amazon/e-commerce. Right! As they go bankrupt; no mention of cannibalization.
Globally credit is contracting. The Fed rate hike policy is swimming against the current, part of that flow is THEIR money, invested in our stock market. As long as THEY print more, and BUY more you will see YOUR numbers, it only contributes to American hubris, and that is a fantasy which is going to be shattered.
Great info, sound quality eeek..
Agree about the sound. Phones do that. We need to switch to a different method. But that hasn’t happened yet.
Phones do that, because carriers find it more profitable to provide data bandwidth, and very little bandwidth to “voice”. Your equipment won’t matter…it is the carrier bandwidth.
On my rinky-dink community radio station, we tell call-in guests to be sure to use a landline. It makes a big, big difference.
barefoot charley,
At my house, we gave up on a land line 10 years ago.
We need to switch to a broadband connection, such as Skype, and we would have long ago, but there is a limitation on his end that makes this hard for me to do. We’re going to work this out eventually.
Excellent comments and information, and fantastic insight from wolf unfortunately some need to criticize almost anything and everything, just listen and gleen the information, and stop worrying about the sound
Not complaining really, just stating a fact that Wolf graciously agreed upon…the better the sound the ease of understanding for future reference…Have a great day Tom and I trust the sound issues will be resolved shortly for the benefit of all, especially Wolf – allowing his insights and knowledge to be better received.
There are ways to fix the sound after it has been recorded but it requires a minimum of skill and knowledge. Basically you record a fragment of the “noise” without anyone talking or music, then use a program like Audacity to remove said noise using the sample. That has helped me to clean audio I got from VHS and cassettes.
Anyway thank you Wolf, nice interview.
Mutliple $Trillions wished into existance out of thin air by the Fed & Congress, Multiple $Trillions of inflated stocks & bond prices created digitally to soak it all up. The two sides trade a fiction for a fantasy and about 30 years worth of all of our retirement money is actually vaporware.
Deficit Dollar Heading Toward Worthless
Backed by D- economic infrastructure,, blotted borrowed defense budgets, selling and buying of just
paper stocks and bonds, backed by hot air, heading to 21 trillion in national debt, and $600 billion a
year trade deficits with no end in sight. Equals one tremendous economic explosion very soon!
There are some trends to play according to another 2008 reflation trade, but one suspects that this time the CBs will do nothing. the opposite of whatever it takes. Why? You have to pick your fights, they know the size and depth of the margin calls, and the derivative unwind, and they aren’t going to throw good money after bad. Printing copious amounts of cash does little to restore confidence. I also believe they will be cautious about reflating after the crash. Sound money types will take over. It will be a long slow recovery.
When inflation takes off, as it did in the late 1970s, gold will likely replace crypto when it crashes. But will gold provide any more safety from sudden collapse?
http://2.bp.blogspot.com/-_OL7fbpOsEo/TpIXnf2Mx3I/AAAAAAAAAjA/uYsK7BBBNM8/s1600/Gold_price_in_USD.png