When stuff gets inflated like this, no one should be surprised when it gets deflated.
By Wolf Richter for WOLF STREET.
Sure, France is dealing with a complicated political situation, including snap elections, that might alter the political landscape. That’s what elections are for.
But why did French stocks spike 20.7% in the 7 months of Rate Cut Mania? What kind of crazy show was this? And not just in France.
The French blue-chip stock index, the CAC 40, dropped by 2.7% today, and by 4.6% over the past two days. Over the past six trading days, the index lost 6.7%, and it’s down a whopping stunning mindboggling 8.9% from its all-time high on May 15.
I mean, how can stocks be allowed to drop???
And so a lot of headlines cropped up today. The Guardian: “French stock market plummets amid fears of far right election win.” The FT: “French stocks suffer worst week since 2022 over fears of populist win.” Bloomberg today: “French Stocks See $200 Billion Wipeout…”
You get the idea: In France, stocks are sinking though everyone knew that during inflationary times, stocks can never sink, and that they’re the best hedge against inflation or whatever, and that rates are going to get cut, and already got cut by the ECB on June 6, and that therefore stocks would just keep on booming because of rate cuts, inflation, and all.
So now that theory has been obviated by events, shock is spreading through the media that had hyped this stuff all along?
But wait a minute. The CAC 40 had spiked by 20.7% (1,415 points) in less than seven months, from the end of October to its all-time high on May 15 of 8,240, a result of this epic Rate-Cut Mania that had gripped Europe as well. So now, the ECB has cut once, and stocks are sagging.
But wait another minute. The “plunge” of French stocks:
- Barely wiped out the gains this year! The CAC down just 0.5% year-to-date.
- Wiped out only half (737 points) of the seven-month Rate-Cut Mania spike (1,415 points), instead of all of it plus some.
- Took the index only back to where it had first been in April 2023, instead of carving out multi-year lows.
In other words, that’s not even a real sell-off just yet, just an 8.9% dip from the all-time high. It just seems like a big deal because during Rate-Cut Mania, and even before, the brains of investors and the media got fried by the illusion that stocks can never drop.
And now that French stocks dropped 8.9% from their all-time high of Rate-Cut Mania, it’s a scary thing that reality is allowed to seep through the veneer? ECB, please do something about this fiasco?
Stock markets in general – especially in the US – have gone completely nuts in recent years, and then spectacularly nuts during Rate-Cut Mania, and the media hyped it and promoted it, and now that there’s this little unwind of a spike, the handwringing starts? I mean, come on. When stuff gets inflated like this, no one should be surprised that it gets deflated.
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Most of the time its just a pump and dump based on the worst fundamentals since the Great Depression. When something is artificially pumped it eventually gets dumped.
The fundamentals of the stocks in technology markets are irrelevant. All the high soaring stocks are based on POTENTIAL FUTURE GAINS. Growth growth growth. Domination. Nvidia is worth $3 trillion because it provides the chips that AI is based upon. There is too much money chasing too few unicorns.
The unicorns the tech fans love are shy creatures; they dwell in the forest of delusions and can only be reached by the delusional.
People miss this fact and say the Fed is responsible for high multiples. . In the 1970s there were 5000 stocks in the Wilshire 5000 index. This is an index of all traded US stocks. Now there are only 3500ish but there are many more people and money chasing this limited supply. Much of the population is forced into investing in the stock market via 401ks. Most corporations are monopolies and are getting bigger and bigger and controlling more market share. .
The old adage of a 12 to 15 P/e ratio is gone. The new normal should be 22. Is that a bargain. No. But what other options do you have. Some have turned to cryptos. Wall street turned its eyes on cheaper assets than stocks and this asset is callled housing. The government agreement to back wall street mortgages is one components of higher prices. IMHO
sure, the % of homes owned by wall street is not big but the % is fairly high in areas of good middle class neighborhoods with good schools.
i think there is something to what you say, but i don’t think it’s all of it. if there was less to invest in in the public stock markets, an opportunity would arise, through public funds that would do private deals, or what not.
the real problem is that the west’s economy is not as productive as people want it to be and need it to be. so it’s not that there are fewer stocks to buy, but more of everything else, but fewer economic opportunities in general.
that’s why people are paying so much more for the remaining companies. the fiat currencies, which are a claim on assets of the issuing country, are worth less.
The basic math of valuations never ceases to apply. Even if there are only 10 shares of a stock or 10 companies, if they’re overvalued, they’re overvalued and noone is forced to buy a stock, although the secure act is questionable ethically because employees have to manually stop being auto enrolled. If something’s a rip off, it’s a mistake to buy no matter if everyone else is.
There are fewer publicly traded companies due to private equity. No hassle of dealing with the SEC and no double taxation of c corporations
What if everyone is betting on all things “private” and not government’s control over “law”…..at least at this period of time.
Still confused and have slight headache from reading article below….and or senile.
Or as dustoff suggested back in CPI article, have wrong VR goggles on, or even lack a set?
Inflation rate was 5.6% in July 2008. By December 2008, it was 0.1%
The Fed quickly dropped rates to 0. The economy and housing still took years to recover
Yeah. My stocks here in the good old Usa doing the same—just not to the % degree—yet.
Give it time. It’ll accelerate. We’re months behind France on elections and rate cuts.
NASDAQ is up ~150% and S/P ~100% in the last 5 to 6 years. House prices are up 50% in our neighborhood compared to 5 years ago. We had the worst pandemic in the last 100 years but stocks and asset prices are pumped up daily into unimaginable levels, whether the economic news is good or bad. If the news is bad, Wall Street pump the stocks hoping rate cut is coming. If the news is good,
they say economy is good and pump it up again. That has been the case for the past 1.5 years. US and world stocks are due for 1980/2000s crash to reset everything.
Sacrebleu!
We just accepted the lie that growth is better than performance.
If you cannot make a widget and make a profit, why would you want to make thousands?
Believe as you wish, but no stock is worth more than 12 to 14 times earnings.
China just passed us in workdwide auto sales. I am sure their cars are just as good as ours and a whole lot cheaper to produce.
We can go protectionest and it may work for awhile, but in the end we loose.
Quel frommage!
Zut Alors!
Wolf,
Did you see Charlie Munger’s final interview in 2023?
He talked about this phenomenon, and about valuation reversions, along with the Buffet Indicator and other matters.
Have you been surprised that the Buffet Indicator keeps getting more overbought even with QT? Stocks pull back and just rocket higher, over and over?
I was personally surprised that the lows of the SPY in 2022 were 1 standard deviation ABOVE long term trend– meaning it didn’t even hit trend and start rising. Almost back to 2 standard deviations overbought.
This is the first time this has happened– bubble starts popping and just reinflates (normally would pop, plod along a bit then start reinflating a la 1990, 2000 and 2008).
How do you think about valuations in this context?
“…surprised that the Buffet Indicator keeps getting more overbought even with QT?”
Nope, Buffet’s indicators stopped working with the start of QEs, he never adjusted indicators for excess of LIQUIDITY from QEs. Actually, he’s been accumulating cash in linear fashion since QEs started.
On the other hand, there was no TIGHTENING yet!
Quick OVEREXTREMLYSIMPLIFIED analogy: You buy and eat max 10 bananas every day.
QE – Jerome prints a banana a day for you, you eat 10 bananas and buy only 9 bananas.
QT – Jerome takes a banana a day from you, you need to tighten eating only 9 bananas(while buying 10) or buy (11 total) 10+1 more banana for Jerome.
Shadow QE – Jerome prints 100 bananas in a day and another 60 bananas in next 30 days, then he starts removing 1 banana a day from the pile, while you can access the pile of bananas every day. THIS IS NOT QT!!! You do not need to skip 1 banana a day or BUY a banana for Jerome!
We are still in SHADOW QE mode, there is no tightening only removing of excess of bananas.
Even Buffet later walked back the “Buffet Indicator” because simple minds would treat it like some guaranteed predictive tool.
The “Buffet Indicator” has been trending up for over 40 years for whatever reason. How many decades does it take for people to realize some ultra-simplistic, off-the-cuff formula, does not actually model the entire USA economy perfectly?
Let them eat cake
Macron is a super “Elitist” and a super nationalist but only for the elite & totally unresponsive to the farmers & “yellow vests.”
He’s so arrogant (like most Frenchmen) that he just can’t believe he lost!
Me thinks he is really going to regret his decision to shut down the National Assembly and ask for “snap elections.”
I don’t feel any empathy at all for the Elite French & yes Wolf you are right..it’s not even a real correction..just a dip but I’m sure the French think it’s 1929.
I lived in France for 2 years, so I kind of know the French arrogance and how they play both side of the street.
James,
If I was French I would argue with you about that one. Hah.
My neighbours are French. They have lived here 65 years and still complain constantly, even about the politeness of Canadians. Imagine, they complain people are too polite. One day I asked my oldest brother, a French citizen and Paris resident for more than 30 years, what was going on with all the negativity? He said it was just a national trait and gave some hilarious examples. But according to my neighbour, (when I tease her about it), she says Hungarians are worse. It will be interesting going forward.
France and Hungary. Two peoples who have made deeply profound contributions to human civilizations. Two nations ultimately ground into subordination by the nature of man. Let them have their negativity. They earned it.
Hungary is, by-and-large, a flood plain, which has been overrun by nearly every major civilization since the beginning of history (no high ground to defend). Their negativity was hard-earned.
So you mean to tell me that maybe, just maybe market participants have already front run the supposed rate cuts and that if and when they finally do come, stocks could possibly come down rather than boom forever????
…mebbe they just got used to using, then felt entitled to using, that two-headed coin…
may we all find a better day.
We are different. We print the world currency. Our stonks and assets can only go up (unless we end up with something similar to French revolution, guillotines etc.) /s
If you are always negative, you’ll miss all the gains.
It will happen here too. AI mania and another huge tech bubble. Just since May 31–just two weeks ago– the QQQ is up 6.4 percent.
6.4 percent in TWO WEEKS!!! The Dow is LOWER since May 31. The Russell 2000 is LOWER since May 31. The price of the QQQ is now almost 90% of the SPY. That is the highest in history.
Just three mega-cap tech stocks are now valued at almost 10 TRILLION DOLLARS. That is $1250 for every man, woman and child on the planet.
Very few people on the financial news channels are concerned about these divergences and valuations. The talking heads and AI pumpers are making so much money now, they don’t see the bubble. It’s just like in the movie “The Big Short.” It is a house of cards. The Nasdaq is an accident waiting to happen.
It’s gone on for so long that it’s hard to imagine now.
That’s dramatic. Who cares, most stocks have been down the last week. Since the Fed started tightening all sorts of bear markets have appeared under the hood.
Although the current dip in French equities isn’t earth shattering, the perception of instability will continue to be politicized and amplify volatility.
Furthermore, I suspect that if there is any policy shocks ahead, like the UK’s Liz Truss period, with unfunded mandates, this little stock correction this week, may look very tame.
Additionally, this blip is influencing currency devaluation and dramatic bond dynamics, so, as usual something to keep watching.
Even if you had all the money in the world you wouldn’t have enough to buy the US stock market, hmmm
The French market will claw back soon, 8.9% is nothing for the French. They’ll do some spicy home cooking and suddenly an extra 10% appears. The spicy meatball sandwich for 5% and another 5% for the creme brulee.
French don’t do spicy. You’re thinking of NOLA.
No soup for you.
Looking at Wolfs chart going back to 2021, this latest correction is in line with 2 other corrections in this time frame. So, this isn’t the “luxoburger”, just a reg burger.
Now if another 20% drop is added then it will be the luxo….w/French fries.
The same thing is happening in used cars right now. Used cars were appreciating for a little while and everyone expected it to continue. Now all the Youtube stars are saying the used car market is “totally collapsing!!”
Please tell the people who are still asking inflated prices for used cars.
“When stuff gets inflated like this, no one should be surprised that it gets deflated.”
Not so when Wall Street and others want ONLY a north-bound journey for Stocks. The Fed since Greenspan days have ensured it will remain so. Even now if the stocks get disinflated we can be sure the Fed will come riding in to save it.
Correct me if I’m wrong, but I believe that mortgage rates dropped further in France than almost anywhere else during the era of loadsamoney madness. If that’s so, and despite a small cut by the ECB, is French real estate going to tank as rate-cut mania fades away?
Also the yield on French debt recently aligned with Portugal.
The French annual deficit is about to exceed their debt servicing costs and its at a level that debt servicing costs will rise if they borrow any more, so the situation for France is that, at the end of the road, government cuts must be made.
In which case the country will halt under strikes. When the French aircraft controllers go on strike, thats it even for over-flights for example. France is going swiftly to “sick man of Europe” as happened to the excessively socialist UK back in the 70s. E.g. three day weeks.
Also von der Leyen of the ECB cynically cut rates to support her bid for the European Commission Presidency. Inappropriate monetary policy (coincidentally like the UK now removed from the electorate in case they vote against printing).
Plus everybody has already been stiffed on European debt. Greece private creditors took an enormous haircut while the ECB received in full. Swiss private creditors got stiffed after an over the next day change in the law. Europe is running out of places to stuff their IOUs. France and Europe generally starting to look like a an over-indebted industrial disaster zone with the population voting for far-right solutions.
The French government -regularly- spends well over 50% of GDP it can never work.
1. “Also the yield on French debt recently aligned with Portugal.”
The French 10-year yield is 3.11% currently, after all this, over a full percentage point BELOW the US 10-year yield of 4.23%, LOL.
2. “The French annual deficit is about to exceed their debt servicing costs …. at the end of the road, government cuts must be made.”
Only if the EU forces them to. Otherwise they just do it like the US is doing it, by borrowing more.
3. “The French government -regularly- spends well over 50% of GDP it can never work.”
Not ideal, but it has been working for decades, and will continue to work. They provide lots of services in return, including very low-cost healthcare like we cannot even imagine in the US, lots of subsidized housing, passenger rail infrastructure and services like we cannot even imagine in the US, etc. And so they collect a lot of taxes too, and by US standards the deficit isn’t all that bad. It’s just that France is being compared to Germany, not the US.
France is the most generous country in the euro area, spending the equivalent of 2.3% of its GDP to support the unemployed
Is GDP growing in France?
“Is GDP growing in France?”
Yes. Faster than Germany’s
France: +1.3% year-over-year
Germany: -0.2% year-over-year
“Is GDP growing in France?”
Only because government is spending like hell the money we don’t have,which the germans dont do.
Any government can create fake growth numbers just by borrowing more and spend more.
It’s not true to say we have the best medical free system:no doctors can be found anymore,only works if you know somebody who can help.
The whole public services are in bad shape.
This includes medical sector,schools,police justice army etc….
gerard,
Your statement/complaint…
“It’s not true to say we have the best medical free system: no doctors can be found anymore, only works if you know somebody who can help.
The whole public services are in bad shape. This includes medical sector, schools, police justice army etc….”
… is funny 🤣❤️ in light of Paul’s comment above, in reply to James:
“My neighbours are French. They have lived here 65 years and still complain constantly, even about the politeness of Canadians. Imagine, they complain people are too polite. One day I asked my oldest brother, a French citizen and Paris resident for more than 30 years, what was going on with all the negativity? He said it was just a national trait and gave some hilarious examples. But according to my neighbour, (when I tease her about it), she says Hungarians are worse. It will be interesting going forward.”
Wolf,of course i understand how you can see the parrallel with Paul’s comment.
I have lived studied and worked in the US several years.
I even went to school in the Us when i was 5 years old.
Not the same athmosphere at all.
There is a reason why people have such negativity.
The primary banks, the regional banks and the shadow banks buy o/n and charge 25%/30% interest on your daily C/C balance. They are not waiting 60 days. They charge every month on the daily o/s loan balances. Stock brokers charge o/n on margin loans. The accumulated interest reduce your trading account by the end of the month, each month. The banks charge what they want, according to your risk profile, not what the Fed, the ECB, or the BOJ want.
Look at the spread between French and German bonds. Fear seems pretty high right now. Those right wing politicians ar worse than COVID, lol.
No, look at the actual yields.
That German 10-year yield is a ridiculously low 2.36%, below the German inflation rate!! It should never be this low.
The French 10-year yield is a ridiculously low 3.11%, just 80 basis points above the French inflation rate!! It’s still way too low. Inflation rates have started rising again for both countries.
The US 10-year yield is 4.23%, and that’s still way too low. The French yield should be at least 50 basis points higher than the US yield.
When fears were spreading about Greek bonds, their yield went over 20%. THAT is fear.
Given how low the French yield still is, there’s near zero fear.
I agree that yields are low compared to inflation. The problem is, most people will just take the yield they can get, even if it does not compensate fully for inflation.
In the EU yields usually are very close to each other in the Euro countries. So if yields in France show a relative increase, even small in absolute terms, it’s interesting. The French fear a right wing government, that’s all. France and Germany are both core Euro countries and should have almost the same yield. Imagine how high the yield of Italy would be if they would not have the Euro.
Excellent article. It’s the same old same old. There always has to be an immediate “cause” that the media talking heads can point to for every gyration in the stock market. Heaven forbid that anyone bothers to do a deeper structural analysis of how things got this way in the first place. Thanks, Wolf, for again taking a deeper look at things. Always appreciated.
Feels like there is always a desire to see fundamentals in everything. As economic systems move to more wealth inequality the money has to go somewhere as it just isn’t all spent and much of what is spent flows into wealthy hands elsewhere. Sure, they move assets from here to there and so this or that goes up and down so timing or luck is the key, or worse, being that those in power see it first or make it happen. There is no desire to address the inequality gap and quite the opposite so hard not to see things just going up, with money bring pulled out simply to wait for the next unnecessary, but evitable event that concentrates wealth further. I don’t see any clear signs of this pattern changing.
But I thought low rates mean stocks go to the moon 😂
The major equity markets have been screaming bubble for the past couple of years. When viewing the history of bubbles, the stories were different each time, but the ending was always the same. All bubbles end the same way, badly. And based upon what we have seen so far, it’s very hard to believe that we aren’t in a major bubble that includes commodities, equities, bonds, crypto, and real estate.