Making Sense of Recent Market Gyrations

Which triggers are driving the action? What’s next?

During the stock market selloff last week, I appeared on “Off the Cuff” with Chris Martenson  of PeakProsperity.com. While I’m a fairly regular guest on Off the Cuff — thank you, Chris! — these podcasts are normally reserved for premium subscribers of PeakProsperity.com. But this time, Chris released it to the public.

Below is a transcript of a small part of what I said. Below the transcript is the podcast for the entire show (52 min):

The emerging market stock index is down 22% from January. So they have gotten hit pretty hard. There’s this trend from the outside toward the core. So when something deteriorates, it starts at the outside and moves toward the core, the core being the higher quality US financial instruments. So that’s probably a dynamic that has already started. And I agree with you. The central banks removing liquidity is a big thing, and it has a big impact.

And people have said, for years, well, QE didn’t cause stocks to go up. So when that goes away, it’s not going to cause stocks to go down. But that’s just not true. The purpose of QE, as Bernanke himself explained it in a Washington Post editorial in 2010, is to create the wealth effect, to bring asset prices up so that the wealthy feel wealthier and spend more money and then this someone trickles down. So this was an explicit central bank policy that other central banks, especially the ECB and the Bank of Japan, imitated. So now, this is being unwound.

We’re in a new era, I think, and the financial markets have to come to grips with it. And the central banks have expressed concerns about high asset prices, repeatedly, for two years now, and especially at the Fed. Including high commercial real estate prices, there’s some problems in the housing market.

They occasionally mention the stock market. They have fretted publicly about the leveraged loan market and some parts of the bond market. So they’re purposefully trying to bring down those asset prices. That’s something that investors will have to keep in mind. It’s not that the Fed has stepped away from supporting the markets. The Fed is actually trying to tamp down on asset prices because that’s gone too far and because these leveraged assets are putting the financial system at risk when the prices are too inflated.

So they’re trying to drain some of the risk out of the market. This is a big recognition. Once market players realize that this is going on, I would imagine that they are somehow preparing for this.


 

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  32 comments for “Making Sense of Recent Market Gyrations

    • Alistair McLaughlin
      Oct 17, 2018 at 12:27 pm

      There exists a sizeable contingent of fund managers, financial advisors, and talking heads, who seem to believe that the primary responsibility of central banks is to prop up asset prices. It’s easy enough to see why. Ever since 1987, when Greenspan slashed interest rates by 2 full percentage points the day after Black Monday in order to rescue financial markets, central banks in general, and the Fed in particular, have moved to re-inflate asset prices.

      Greenspan did the same thing again in 1997 to prevent the so-called “Asian contagion” from infecting US markets, and again in 1998 to rescue the market from the reverberations of the Long Term Capital Management collapse. Then there was his response to the 2000 tech crash (slash rates) and the 2001 tech recession (really slash rates) and the period of stagnation that followed (really really really slash rates). The Greenspan put was a reality. It was followed up by Bernanke and his insistence on QE long after the worst of the GFC was over with, with the stated goal of inflated asset prices. We’ve had 30 years of direct, intentional Fed actions designed – implicitly and explicitly – to support the market.

      I suppose in that light, one can hardly blame the fund managers and financial news yakkers for believing that current Fed actions are “dangerous”. They’ve spent their entire careers working over a giant Fed safety net, one they believed they were absolutely entitled to. One they believed, and still fervently believe, was in the best interests of America. You can imagine how shocking it is for them to suddenly discover the Fed has a purpose other than making them richer.

  1. Unamused
    Oct 17, 2018 at 12:12 pm

    Nice appetizer. Can’t wait for the plat prinicipal, chef.

    The DJIA dead cat bounced 547 points yesterday. Looks like Mr. Market got over his sad and doesn’t want the punch bowl taken away.

    I’m waxing metaphoric today. Maybe a nice dessert will help me get over it. Hint hint.

    • Oct 17, 2018 at 6:32 pm

      One stock trader said when the money went into gold that the money wanted to go back into stocks, and so far that trade seems valid, although it assumes that this is a zero sum event, while we all know that the stock market is a shark that has to keep swimming, and needs new money to keep rising. When does the flow of new money stop?

      • Unamused
        Oct 17, 2018 at 8:00 pm

        ->When does the flow of new money stop?

        So you’re going to make me work. Okay then.

        One could say the flow will stop when the cost of money increases because the Fed is raising rates, or when the market is expected to fall because some significant negative event occurs.

        But that answers the question ‘why’, and not ‘when’, doesn’t it? As we know, the market can rise even when rates are rising, and a such a significant negative event can be unpredictable. The question devolves to the market timing problem.

        Cascade event theory can reliably tell you how or why the conditions are right for an avalanche, a migration, a stampede, the collapse of a dune, or a systems failure, but less so when some triggering event may occur which sets off a few, with the herd following. A triggering event may not initiate a cascade if conditions aren’t right, and the right conditions cannot guarantee the occurance of a triggering or initiating event. I’ll defer the applications in quantum mechanics.

        A deliberate triggering event is predictable, like firing a shot to start a stampede, but how often does that happen with the stock market? That’s why market timing always involves recognizing the conditions for price changes, but less so for predicting exactly when changes will occur. Individual stocks can be manipulated, like Musk did with Tesla, but manipulating entire indexes isn’t something Elon is up to.

        For geopolitical events there are usable techniques that get you in the ballpark, and sometimes on second base, like extrapolated, coordinated, and intersecting trends, but these don’t usually apply well to precise stock market timing. But sometimes, they do.

        Long story short, you’re all a bunch of lemmings. And I’m not going to discuss The Year of the Jackpot.

        Too much information? Good.

      • Paul
        Oct 18, 2018 at 5:41 am

        The amount of money that has gone into gold is totally insignificant.

    • Juanfo
      Oct 18, 2018 at 5:18 pm

      cake!

  2. raxadian
    Oct 17, 2018 at 12:45 pm

    QE didn’t cause stocks to go up but cheap credit and zero % interest rates sure did.

    Rates are rising and Junk Bond Stars are if not falling then having money problems.

    Coincidence?

  3. JZ
    Oct 17, 2018 at 12:48 pm

    If central banks do NOT feed these animals, they will eat each other alive and threaten to bring the economy down with it. Just watch.

  4. Ishkabibble
    Oct 17, 2018 at 12:58 pm

    The most facinating thing I’ve seen over the past 28 years (the post-Soviet-collapse era of US history) is the desperate behavior of the US federal government to invent enemies for the US’s vitally necessary MIC to fight, along with the desperate behavior of the congress and Fed to fund them; then, since 2008, while desperately trying to keep the perpetual wars going, the increasingly desperate behavior of the Fed in very careful coordination/concert with other central banks and “financial authorities”, doing “whatever it takes”, to try to meet the mandatory, IMO INHERENTLY-IMPOSSILBE goals of section 2, the “Purposes” of TARP:

    =====
    SEC. 2. PURPOSES.

    The purposes of this Act are—
    (1) ………
    (2) to ensure that such authority and such facilities are
    used in a manner that—
    (A) PROTECTS HOME VALUES, COLLEGE FUNDS, RETIREMENT ACCOUNTS AND LIFE SAVINGS;
    (B) PRESERVES HOMEOWNERSHIP AND PROMOTES JOBS AND ECONOMIC GROWTH;
    =====

    IMO 2A and B of the above REQUIRE that the “treasury” PREVENT private “home values” (presumably, prices) and the “value” (prices) of shares in the private stock market from falling, as well as, presumably, preventing the “value” of “life savings” in banks and “retirement accounts” (whatever that means).

    We can now see with 20/20 hindsight that, as a direct result of the actions of the Fed and other central banks over the past 10 years, that, indeed, those 2A and B goals have been marvelously fullfiled. Great accomplishment, right?

    (Now, just exactly WHERE does “inflation” fit into this well-thought-out plan/mandate to maintain “value”?)

    I can’t help but think of Greenspan, Bernanke, Paulson, the FOMC and the Congress (of morons) as Wicked Men of La Mancha. They dreamed …….the impossible dream. They fought a defenseless foe (US taxpayers). They ran where ethical men dared not go. That was their quest. To follow their greed. To follow that (death) star, no matter how far. They fought for the Elite, without question or pause. They were willing to march every common person into hell for that hellish cause.

    Think of Richard Nixon as the original “plate spinner”; the petro-dollar as the sticks and the post-TARP central banks around the world as other plate spinners trying desperately to keep more and more debt-plates spinning while dropping none (preventing loss on investments, homes, savings, etc.). Here they are and what’s going to happen in the near future:
    https://www.youtube.com/watch?v=tzkLq2cgXL8

    Yes, “push” is finally coming to “shove” in the USA, folks. For just one example among many, an extremely-Civil War II in the US is being fought as I type. But, unlike the Civil War of the 1800s, the Elite warriors in today’s war are impeccably-coiffed and richly-dressed in custom-tailored suits and dresses. THESE warriors are “educated” in the “finest” schools.

    Never in history has so much been spent by so few on personal appearance and dental hygiene.

    Not only are many careers at stake in this war, but so too is the future of the USA’s “place” in the so-called “international community”.

    For another example, the US’s vitally-necessary war industry has got to some how, by “whatever it takes”, start generating much more profit, so the US has to decide in the near future whether it’s going to escalate its attacks on Syria and Afghanistan and whether or not to attack the DPRK and Iran. However, the latter two potential conflicts could lead to all-out nuclear war, so the Elite’s tried-and-true, normally-straightforward, profit-based decision process is getting a bit bogged down on the issue of survival of the human species. No doubt saving face and protecting the reputations and “legacies” of very old, astronomically-wealthy people and their TBTF banks will finally decide those matters.

    And speaking of TBTF banks, there have been several fatal errors in US history, but IMO the most egregious was the recent de facto creation of, or at least the official recognition of, the so-called too-big-to-fail (AKA “systemically important”) banks.

    Carefully ponder how dangerous that single act/acknowledgment truly was/is to humanity’s future. Start off by answering the simple question “What happens after a TBTF bank repeatedly, irresponsibly makes bad decisions and repeatedly loses a lot of money?” Only Answer Allowed: The US government, purportedly on behalf of US taxpayers, will do “whatever it takes” to keep any TBTF bank “in business”.

    AFAIK, the ONLY things in the world that the US government considers to be TBTF are itself and those banks. Human beings and even the planet itself can suffer and die, but that government and, by extension, its banks (of herd-control) must be rescued, no matter what. Therefore, they, not us, will be the last men standing.

    • Unamused
      Oct 17, 2018 at 5:33 pm

      ->Therefore, they, not us, will be the last men standing.

      He who dies with the most toys wins, and in the end, there can be only one, and one, even a few dozen, cannot be viable. And then the great game will be over.

      It must be expected that any species sufficiently advanced to pursue interstellar travel will also gain the ability to exterminate itself, and will sooner or later avail itself of an opportunity to do so. This is probably why no trace of any alien species has ever been identified in 50 years of searching by SETI, despite their ability to make out a deactivated cell phone on Jupiter from a quarter-watt energy signature.

      Nice rant, btw.

      • R Davis
        Oct 18, 2018 at 10:39 pm

        Planet Earth has been fertile for billions of years, more.
        I firmly believe that the aliens we talk about are us.
        Not that we came from out there somewhere, but maybe we did.
        I cannot believe that there was no human life on this planet & it was so fertile, it defies common sense.
        It was all here but we weren’t ??
        We continuously outsmart ourselves & as a result, wipe ourselves out.
        Physics holds that the universe never forgets.
        Also, that energy cannot be created or destroyed.
        We were here in the beginning & will be here to the end, if there can ever be an end.

        “He who dies with the most toys wins”
        How ??
        You can’t take them with you.
        You can’t put them into storage & come back , if we can come back.
        It sounds great though.

        Interesting article
        Canadabis? Recreational Cannabis Use Now Legal In Canada.

        After reading this article I wonder if Uber is a good investment ??

    • Robert
      Oct 18, 2018 at 12:19 pm

      Well said! 2,400 years ago, the women of Greece finally got tired of their era’s MIC (today it’s the MSM-Hollywood-MIC- could there possibly be more FBI/Seal Team/Special Forces/War 24/7 shows on TV/movies?), and, according to Aristophanes, in his play Lysistrata, called an end to it by withholding sex from the men. (This might be problematic with today’s rape first-ask-questions-later mentality), but it may be true that the women will have to come to the world’s rescue, if they can ever stop watching The View and redirect their ire from LGBTQ issues to the real issues. The men don’t have the guts to take the MIC on.
      And they might do it- there is a growing number of women running for office, and although the MSM directs very little attention to the issues of true underlying inflation from food to health care, these women do the shopping and know how many schools, day-care centers, and affordable houses could be built for the cost of a single $billion dollar B-2 bomber.
      The mid-term elections are going to be a real referendum on whether America really supports the boorish cad war-monger who can easily overlook a journalist being cut to pieces alive as long as the perpetrators keep buying from Boeing and Raytheon, in the name of “making America Great Again.”

      • Iskabibble
        Oct 18, 2018 at 3:00 pm

        WOMEN are going to save the planet?! To that I will devote as few keystrokes as possible. Hillary, Susan, Samantha, Jessica, Nikki and, finally, the Elite’s elder stateswoman and Queen of “American Values”, Madeleine “we think the price is worth it” Albright
        https://www.youtube.com/watch?v=RM0uvgHKZe8

  5. Gandalf
    Oct 17, 2018 at 1:40 pm

    Wolf, your next article should be on the massive and very poor quality junk bond debt that has built up as a result of this asset inflation. Bad debt blowing up financial institutions has long been the trigger for market panics and economic recessions. I do see this as the “next” thing coming

    Prior to the Great Depression, this sort of oscillating cycle of periodic over speculation followed by collapse and economic hardship occured regularly every 20 years in the U. S. for some 130 years.

    With the Fed coming to the rescue and inflating massively every time there is a collapse, it seems that the period cycles have shortened to about 10 years or so.

    The Shiller PE hasn’t been below 15 since the 1987 crash, a historic aberration which I think is based on the Fed and other world central banks constantly coming to the rescue every time there is a crash. This just encourages another bubble to quickly build up however…

    Which goes back to the question of why inflation hasn’t gone up with all this money inflation. I’ve posted my thoughts on that before and won’t repeat it here

    • Juanfo
      Oct 18, 2018 at 5:48 pm

      The official rhetoric is that there is no or low inflation but any ordinary person knows that is not accurate. Prices down here are way up. Everything from dentists to groceries. I don’t understand why you claim that inflation hasn’t gone up at all.

  6. John Henderson
    Oct 17, 2018 at 2:02 pm

    Just think how poor Mr W.Buffet would be without all the FEDs help.

  7. Angry Renter
    Oct 17, 2018 at 2:53 pm

    How does one preserve wealth in this new dynamic? Stocks down, real estate down, bond prices down yields up, emerging markets down…

    Short ETFs aren’t good to hold more than a day. Maybe try to get lucky and short a specific company that I think will fail? That’s not really my skill set.

    What to do? I invest in building out my own business, I can at least bet on me. But with the rest…is there anything smarter than to just move to cash and/or short duration T-bills and ride the interest rate hikes up, then move back into stocks in a year or so?

    • Nat
      Oct 17, 2018 at 4:11 pm

      “How does one preserve wealth”

      Usually the defensive for this is Money Market funds. While bond prices are tanking, buying short duration bonds (say 1–2 year treasuries) and just holding them until they redeem is a perfectly safe way to preserve wealth in the current situation. Others prefer PMs like gold, but those are risky and don’t correlate as cleanly in going up with the current type of market situation as well as their proponents imagine PMs do. One thing doing well recently that should continue to do so is $AGND – a bond fund that uses some of the would-be-dividends to short the bond-market giving a bond-latter average of effective NEGATIVE five years of duration allowing it to go up as bonds fall. I am not really a fan of $DYB – if your read the prospectus for $DYB it sounds fantastic and exactly like what you would want for this, but in reality it is mostly just moving sideways (maybe things will change with $DYB if and when things really hits the fan, but I wouldn’t know).

      Just some thoughts, I hope you find something you like.

  8. Maximus Minimus
    Oct 17, 2018 at 3:02 pm

    “wealthy feel wealthier and spend more money and then this someone trickles down.”
    I hope, you meant somehow, not a macabre “someone”.

  9. Kasadour
    Oct 17, 2018 at 4:59 pm

    So, the FED is de-risking (de-leveraging) by implementing even more policy mishaps? Talk about cutting off your face to spite your nose.

    The FED was test-flying when it started QE and it’s test-flying now. Clearly this demonstrates that it never has had full control.

    Nothing trickled down, and asset bubbles were inflated in every asset class and type.

    The FED wants the public to believe it can some how gain (not even regain) control by implenting more policy errors, but we are smart enough to understand that those who control the economy stand to benefit the most from it. It’s true then and now.

  10. Laughing Eagle
    Oct 17, 2018 at 5:31 pm

    If one examines our economy and stock market, I believe Congress, The Fed, and the Supreme Court, when they all change policies or laws they reflect keeping our country the idol of other countries and to insure ours is the best on the planet. Because if it is not, then confidence in US Treasuries and the dollar will fade. That is a National Security issue and reasons why many FOIA requests are redacted to prevent the truth from emerging.

  11. Beverley L Kennedy
    Oct 17, 2018 at 6:09 pm

    Add to this an aging boomer group soon to be reliant on deflated assets for longer due to expanded lifetimes……does not bode well

  12. Oct 17, 2018 at 6:42 pm

    The Fed is losing control of credit, like it did in 2008. Private credit supply was off the boards, now the global economy has the multiplier effect. Two courses remain, the daisy chain gets broken and things grind to halt, or credit contracts through ‘multilateral’ efforts by all the CBs, with oversight from the IMF, to make a controlled landing. A global recession becomes inevitable, so we work together to make it less difficult, or we engage in trade wars and sanctions, and cry every man for himself. The Fed is less of a central bank than when Yellen asked for congressional approval for “expanded powers to buy a broader ranger of assets.” Should the Dems win control that approval is one step closer, and QE: stocks, bonds, everything.

  13. Mark Stein
    Oct 17, 2018 at 6:56 pm

    Really love this Wolf!
    Do you think you’ll talk about the Universal Postal Union our (possible) and its ramification, I know its awfully early but best be informed!
    AR
    Armando Rubio

  14. Oct 17, 2018 at 7:11 pm

    Wolf – I love you and your Blog – been a reader for years and will remain so – I especially value your observations about US business and economics. But Wolf – your predictions of equity crash, debt crisis, real estate swoons, EU banks going belly-up have not materialized despite years of dire warning. Eventually you’ll be right. God help us when you are.

    • Oct 17, 2018 at 8:17 pm

      I’m already right on part of it :-]

  15. Crysangle
    Oct 17, 2018 at 10:19 pm

    I have to wonder if it is not the other way round, where market gyrations are designed to make sense of people.

    • Setarcos
      Oct 18, 2018 at 8:14 am

      You are on to something …

      • Crysangle
        Oct 18, 2018 at 10:31 am

        …they try, but they can never be… (as he looks both ways)…. The Invisible Hand.

  16. Oct 18, 2018 at 10:38 am

    I tell my grandson the DOW will be coming back up to the 20,000 mark when he’s my age. That’s how overvalued the major U.S. stock market indexes are today.

  17. ML
    Oct 19, 2018 at 1:54 am

    Trickle down only works as intended when those down have pro-rata means. When they don’t but want to replicate the only alternative is to trigger the law of unintended consequences.

    For example, a person wealthy to begin with can borrow on the strength of existing security to buy more and become wealthier. A poor person without any security can also borrow but the lack of existing security restricts what can be bought. Instead, the poor person buys experiences which are in effect intangible and addictive. Unable to kick the habit, the intrinsically poor person takes it out on him/her-self generally by comfort over-eating.

    Obesity is a way of telling us that society having become greedy is now addicted to greed. To wanting more and more. No wonder so many people are fed up; envious of the wealthy, the masses are up in arms but not having the courage of their convictions they take to social media complaining in the hope that someone somewhere will take pity and do something about it for them. So that instead of taking personal responsibility and doing something about it for
    themselves they can shiift the blame whilst continuing to scoff another bag of crisps.

    No wonder the wealthy do not have any time for the poor and needy – it’s just not worth it.

    But there is a solution to the mis-match which is beginning to work. When the poor stop buying and reduce spending, and instead re-prioritise, the sellers suffer. Which is precisely what is happened to a multitude of retailers and ilk.

    Trickle down works both ways. Trickle up.

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