Why does this sell-off smell different?

In this podcast, I ask: What’s going on under the cover and further afield that we’re not seeing in the Dow? Why does this sell-off smell different? And why has there not been the typical “flight to quality?”

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  53 comments for “THE WOLF STREET REPORT

  1. Michael says:

    Because no one believes the FED. Everyone is conditioned to buy the dip. Guess who conditioned that behavior

  2. JZ says:

    Oh well, my take that “nobody has taken this seriously” is that people HAVE taken this seriously in their mind but NO action yet. They are watching what others are doing, and they want to unload without causing too much dip. But if everybody else starts to unload faster than I am, I am going to full panic.
    I think it is already broken psychologically and it is in the state it minimizing damage. Unless something happens dramatically on trade war and FED directional change, this market has little upside but lots of down side. I am going short.

    • Javert Chip says:

      As a result of my 50 years of investing, I don’t know that I’d accuse the market of having “intelligence”; I’d use the term “primal emotion”.

      Markets respond like herds (think wildebeests on an African plains): everything is ok until some ephemeral signal says it isn’t. Then the herd moves and parts of it panic. Things eventually calm down and the cycle repeats.

      Saying you’re going short and actually making money going short are two very different things. Check the price of what it costs to go short now. You also need to know when to exit the short. Going short is no protection against the greed & stupidity, which can steal profits regardless which way markets are moving.

      • JZ says:

        At this level of 2X to 2.5X overvaluation in Shiller PE10 or Tobins’ Q, there is NO investing. I am 95% sure buying treasury bills will beat S&P for the next 10 years.

        It is pure herd observing and gambling now. I am using 5%
        of my investable capital to short at this moment. We can’t keep talking about the market without making “bets”. It is time. I think the lead horse of the herd has already turned spotting cliff rather than grassland. The herd will take notice and turn soon. If I am wrong, I lose 10% of the 5%. If I am right, I win 50% of the 5%. I am NOT a gambler by nature but the f—-king central banks forced me to be one. Nothing is worth “investment” now.

  3. MC01 says:

    Italy’s FTSEMIB hit an absolutely inexplicable 23,890 back in January. At the close on Friday it stood at 19,080, after crushing dip and panic buyers relentlessly, much to my amusement. Apparently it opened in the red for Monday, but dip buyers may soon change that. I fully expect the lawsuits to start flying shortly after banks did what they have long done: pitch their stocks to their long-suffering depositors with the time-old justification “They won’t stay at this low price for long”. They surely didn’t.

    On another equally amusing front I read Netflix spent an average of $1,000 in Q3 2018 to attract a new subscriber: this means they spent one cool million to attract one thousand new subscribers and so on.
    Which would be fine if the numbers didn’t add up, quite literally. The average Netflix subscription worldwide is about $9/month, or $27/quarter, or $108/year. Combined with the fixed costs Netflix has to sustain day in day out it’s literally impossible to break even, let alone turn a profit.
    Even more so than the Church of Musk, Netflix depends on the ability to finance that deeply negative cash flow at much repressed rates, and in my opinion Netflix is where we should keep our eyes on to see how the cycle will break: while negative cash flow companies have been the norm during periods of excessive economic enthusiasm for centuries, we’ve never seen anything this size.

    Finally I agree with Wolf’s idea that we are looking at a long (10 years? More?) credit tightening cycle. It will take years merely for people to come back to their senses, let alone go back to some measure of sanity.

    • jb says:

      I agree Netflix is the “canary in the coal mine “

    • Maximus Minimus says:

      So it takes roughly ten years for Netflix to recoup the investment in new subscribers. If I didn’t detest the entertainment output of the past decades, I would jump on that Wall Street (or my pension fund) subsidized subscription.
      As for people coming to their senses, I believe, it takes a serious beating (crash) to come to that. It might not be financial, could be prefaced by environmental event. Otherwise, boundless hopium is the norm.

      • MC01 says:

        Please note the $9/month subscription is a worldwide average and is not sale tax-/VAT-neutral, meaning what really remains in Netflix’s digital coffers is actually somewhat lower.
        On top of this as the company keeps on growing the customer base and digital library its outlays increase substantially: just think about all the law studies specialized in copyright and contract disputes they have to hire around the world, from Canada to India.
        Hence I would not be so sure Netflix can ever recoup the costs of attracting new subscribers.

        You don’t need a “crash” for this model to unravel: either Netflix completely overhauls the business model (higher subscription fees, lower outlays, exiting marginal markets etc) or they won’t be able to both service their own debt and keep on growing to justify their silly stock value.

        Netflix is a true junk bond queen. On September 30 2018 they announced their long-term debt, mostly bonds with 5+ years maturities, had gone from $4.89 billion to $8.34 billion, or up 71%, in just one year. Move along Japanese government.
        On top of this Netflix also has veritable mountains of off-balance-sheet obligations coming due “short term”, meaning under five years: latest figures put these short term obligations at an eye watering $10.2 billion. Ellon Musk? An amateur!
        The icing on the cake is a $2 billion bond issue Netflix is presently negotiating, no doubt to take advantage of overheated junk bond markets while they last. But with US Treasuries finally starting to become attractive it may be the last huzzah: when Netflix will move into the Reverse Yankee market you’ll know it’s the beginning of the end.

        • Saltcreep says:

          Shhh, keep it under wraps. I hope Netflix hangs in there for as long as possible with their current model. You get a lot of entertainment for your money so long as their charitable creditors are subsidising that entertainment. Long may it last, I say!

        • Goudey says:

          Don’t they make a ton of money with original series such as House of Cards? And $9 a month, isn’t that the minimum subscription? I am sure they will be just fine. The $9 subscription is one of the best deals between all the streaming and cable services.

  4. L Lavery says:

    ” And why has there not been the typical “flight to quality?” ”

    What, in the current state of the market, is “quality”? Anyone know?

    • roddy6667 says:

      You beat me to it. I was going to ask, “What isn’t in a bubble now”?
      Besides, ya know, all those gold coins we all lost in tragic boating accidents.

    • Kenny Logouts says:

      There is no quality to fly to, as it’s an everything bubble.

      The secret is finding what’s been the least inflated and/or will survive with value post correction.

      I’ve this feeling that modern, but not ultra-modern, agri gear will do well.

      Super flash tractors on lease are just a liability.
      Old good stuff is inflated and before that loads sold to poorer countries.
      90s and early 00s.

      • vinyl1 says:

        Well, there’s always 6-month T-bills….

        • Mickey says:

          Actually there are no 2 month treasuries, if thats where you were headed.

          Amazing that the Treasury, knowing that rates were headed up, would not , or perhaps could not lock in the low rates a year or two ago for long term issuance, and rather it now has to look forward to mega bucks of rollovers from short term stuff.
          Thats why the total interest paid can escalate rather quickly, but whats a few hundred billion more added to the debt growth level-each year.

          If you are looking for quality, then thats a heck of a task. Think outside of USD and even then the choices are difficult given the state of the global economy and markets.

          May we live in interesting times.

        • mickey says:

          I meant to say there are “now” 2 month treasuries, and add on what I said that by going short term in a rising rate environment the govt is kicking the can some more.

          Big thud coming. There is no Powell Put like the Greenspan, Bernanke and Yellen puts.

    • flashlight joe says:

      to L Lavery-

      I can make a guess – raw wildlands which have not been bubbled up by credit. Buy the land. Enroll it in a conservation program for low property taxes. Consider it gold in the bank. Let wildlife thrive.

  5. Peter says:

    Nikkei 225 history

    @Wolf, do you think that SP500 can go the same way? Like, are we now in 1989 on this chart? As you described recently, inflation shouldn’t be an issue, even if the FED will print even more $ and actually, like BOJ in Japan, the FED can start another QE and it doesn’t mean hyper-inflation at all, maybe even deflation.

    To me, it looks that the EU is more like Japan in 1989 than the USA, they need to print money or they will default. Also, EU countries are in similar demographic situation as Japan a few decades back.

    • MC01 says:

      The big difference is in the 80’s the Nikkei 225 was almost exclusively the playground of local banks, insurance companies and other assorted financial entities.
      These days the NYSE is where the world is fleeing to seek returns or merely to escape domestic monetary policies. Just think all the people from Brazil who own AAPL stocks or US treasuries.

      Also the EU is not “bankrupt”, apart from morally. It’s a complicated situation which I’ll try to reduce to minimal terms: on one side the ECB has allowed a veritable army of zombie companies (read: negative cash flow long term, the kind that a decade ago would have been liquidated or restructured) not merely to exist but to grow and inflate nominal GDP figures. Think about all the no-frills airlines.
      On the other the euro has allowed German and to a lesser extent Dutch exports to fellow EU members (especially France and Italy) to grow to enormous proportions. If France and Italy stumble, Germany feels the weight of the fall through a reduction in exports.

    • Wolf Richter says:


      There is nearly always some inflation in the US, unlike Japan. So 2% to 3% a year on average, for 20 years, cover up a lot of sour grapes in the stock market.

      There are some countries in the EU that are in fiscally bad shape, but not as bad as Japan. Italy and Greece are on top of that list. There are other countries that are in fiscally good shape. So it’s a mix.

  6. JoAnn Leichliter says:

    So called “quantitative easing” in the U.S. has given the stock market an artificial lift for almost a decade. Now there are alternatives for those looking for a return on their investments. It is natural to see a decline in stock prices. Many other factors are involved, of course, but the return of alternatives should not be ignored.

    • James says:

      What are the alternatives for ROI in case I win the 1.6 billion tomorrow.

      • Nate says:

        Buying your own cadre of politicians always pays off big. I’d go with both sides of the aisle like your soon to be contemporaries do…

  7. Augusto says:

    In China overnight the market rose 4% after the government went on bubble blowing extraordinaire-tax cuts coming, market support, even President Xi got into the action. China is no different than here in the West. The reason we have “fake” is because the masses want it. Getting rich is more important than being self sufficient. Being a financial wizard better than just an ordinary investor. Hero’s, wizards, masters of the universe, that’s the goal, the dream, the ultimate that’s what’s important. If today our market went up 4% because Trump promised new tax cuts (which he just has), and Powell danced “the whatever it takes”, the “market” would be in La-La land. No reason, we are already there. To Wolf, this party is too good, the crowd is too high, all is possible by pulling the levers, marking the numbers up…they are not into anything “safe”, stocks or whatever….until investors realize they are partying on the Titanic, this will go on, and on, of that I am increasingly convinced…we are in for the biggest cold water treatment of all time….

  8. Javert Chip says:

    There are basically two types of buyers in the market, and it’d be interesting to know how each of them are behaving:

    1) Wholesale buyers (mutual funds, hedge funds…basically the pros) – I assume, but am not sure, these guys represent 60-70% of ownership of the market

    2) Retail (aka individual) buyers – These guys own the remainder of the market (about 30-40%)

    • Unamused says:

      No. 95 v. 5. Most of that 95 are proxies. And trades are 95 – 98 robotic.

    • Max Power says:

      Ummm… you forgot the biggest buyers in the market: Corporations buying their own stock!

  9. chris Hauser says:

    well, i guess revisiting the concept of the marginal buyer might be something to think over, and who that might be…….

  10. vinyl1 says:

    I just put all the prices into my stock spreadsheet.

    I still don’t see any stocks that are surprisingly low, even though prices continue to drift downward. Utilities and preferreds have held up surprisingly well, but they’re bound to take a hit eventually.

    What I think will happen is that selling will gradually accelerate, and we’ll get a typical bear market. It will end in a sharp downturn when retail investors finally dump their holdings. Then you can buy the top names at knockdown prices. That’s what I’ve always done in the past, and it has always worked.

  11. Bobber says:

    We’ll see how much “cool” the market really has if and when the S&P 500 breaks below its 200 day moving average. That’s typically when things fall apart. It’s teetering there now. I wouldn’t be surprised to see a 10% down day in this situation, followed by another 20-40% drop. But I also wouldn’t be surprised to see a temporary bounce, that would likely be shorted back down within a week or two.

    Given Fed policy, it seems pretty clear stocks need to go down significantly before they can go back up, and the ride back up may be very slow given the debt problems we face as a nation. Austerity ahead.

    • JayVee says:

      Given the propensity for the stock market to tank on Tuesdays, tomorrow looms like a dark storm.

  12. Escierto says:

    There is one obvious sector that has been beaten down so far it can only go up from here and that is the mining stocks. It may not happen and they may stay in the toilet for a while longer but they have already been in a huge bear market. They showed signs of life when the market was getting hammered but that’s eased off. If the market gets the beating it deserves gold will come back and along with it the mining stocks. When is anyone’s guess.

    • Buckaroo Banzai says:

      The crazy thing is, while gold mining stocks are currently in the crapper, many gold mining companies are quite profitable even at today’s depressed gold prices.

      Profits, it seems, are profoundly out of favor at the moment. Strange times.

  13. Max Power says:

    My gut feel is that we haven’t seen the top in the stock market yet.

    What we are seeing recently is a respite due to the earnings season buybacks embargo.

    Once the embargo lifts there will be a floor under the market again, provided by buyers who is completely insensitive to the stock price/value.

    I think the true downturn in equities won’t start until around 2Q2019.

    • vinyl1 says:

      Are you saying that the management of these companies are total fools, and will buy back the stock regardless of price?

      If so, then I agree!

      • Max Power says:

        They’re more selfish then foolish. Juicing up the stock price via buybacks activates or increases the value of their stock options. Why invest in plant and equipment or give raises to line employees when you can line your own pockets?

  14. hotairmail says:

    I personally believe the extraordinary parabolic rise in stocks into January was essentially the ‘Top’. It looked like the ideal time and way for larger traders to dispose of their positions and sit pretty. Yes, the US has put in a new nominal high but many markets of the world made their nominal highs in January.

    The latest correction from the high gives us the opportunity to contrast and compare and essentially there are multiple negative divergences. Such as the fall in stocks above the 200ma between the January and September tops. Such as which sectors have been performing – there is definite rotation into defensives, small cap has been crushed compared to large cap. Economy-wise we have ‘Trade Wars’/China weakness, strengthening dollar and rising rates making debts expensive to emerging markets et al. The housing and car markets (the two biggest) show weakness.

    So I would say we have definitely been in a Topping process since January and we can just make out the potential signs of an economic slowdown in the latter half of 2019. Of course, policy changes could alter this picture.

  15. There will be huge fortunes made by market timers in leveraged inverse ETFs, for as long as their managers can manage these securities without having a nervous breakdown. Market timing will be difficult and critical. Good news is that in typical market selloffs deleveraging evaporates wealth, but if enough people go short that money will just change hands. The NYSE is really more of a commodity market. The idea that they could build a perpetual motion machine where the bears had to borrow shares from the bulls in order to go short, that fiction is over. At the other end of this crackup, when money doesn’t disappear you have inflation, while asset prices reset.

  16. Spiff says:

    Hey Wolf, I could tell you were uncomfortable doing the whole podcast format, but I found it very informative. Please keep it up, you’ll be a youtube star in no time.

    • Wolf Richter says:

      That’s funny. I’m not at all uncomfortable. I’m having a total blast doing it, and I’m doing it a little differently. I’m developing my own brand of podcast. It’s going to take a while until I get it to where I want it, but I love it. I wouldn’t do it otherwise.

  17. Wendy says:

    To quote Sir Templeton;

    “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”

    Despite what people may claim, we have not gotten to euphoria, so despite the correction, we have a longer way to go. The other day, I had an impulse to flee the market, and since I am always wrong, I consider this a good sign for a further upswing.

  18. Mean Chicken says:

    It could be a skunk, the garlic harvest occurs sometime in late June.

  19. KFritz says:

    Plenty of commenters are citing past market and economic events and patterns to do their sighting ahead (pun intended). This is a fairly good idea, since the only practical use for history is to learn from experience.


    The Fed/and sometimes Treasury role in the creation of this bull market–which has never been done so deliberately before, suggests that the unraveling/decline of this market may have some new and interesting wrinkles.
    Somebody-besides-Mark Twain once said that ‘history doesn’t repeat, but it does rhyme.’ Don’t look for tight rhyming ahead–be prepared for blank verse, perhaps lots of it.

  20. Laughing Eagle says:

    Wolf, would you clarify the comments you made about the junk bond market and the leveraged loan market near the end of the podcast about the numbers. I think you said there was $1.2 trillion in the junk bond market and the leveraged loan market was bigger, yet you gave a total of over $2 trillion for both markets. What is the size of the leveraged loan market? And also what was the total of stock buybacks by corporations since the Trump tax cut?
    Thank you for the great work you do and aleays look

    • Laughing Eagle says:

      Always look forward to your analysis.

    • Wolf Richter says:

      Currently, leverage loan issuance is growing in leaps and bounds, while junk bond issuance is in the doldrums.

      There is a huge amount of investor demand for leverage loans because many come with variable interest rates (Libor-plus or now occasionally SOFR-Plus as Libor is being phased out), that rise as short-term interest rates go up. These floating-rate loans protect investors from rising rates. By contrast, rising rates cut the value of bonds, including junk bonds.

      The S&P/LSTA Loan Index, which tracks most (but not all) US leveraged loans, topped the $1 trillion mark in April 2018 for the first time, doubling since 2010. Year-to-date, US leveraged loan issuance for institutional investors reached $540 billion. But some loans also matured and were paid off. So the total outstanding is now just over $1.2 trillion.

      Junk bond balances outstanding are now declining slightly, as new bonds being issued don’t quite replace the amounts that are maturing. Current balance outstanding is about $1.2 trillion

      I think I said “combined over $2 trillion,” and they are, coming in at about $2.4 trillion.

  21. Ronnie says:

    Excellent presentation. As always the grownup in the room.
    At Uni in 1978 I predicted the collapse of the USSR. When it happened I was shocked. I also predicted the collapse of America….when Ford, GM and Chrysler go broke. They have all hit the canvas, got up and punched on. Question, to they lose the title on points or a knock out blow that no one saw coming.
    Curiosity killed the cat and Greed Killed the Pig. Sell pigs buy dogs.

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