Watch the banks.
For once, aggrieved investors can’t blame China. Markets in China are closed for the New Year’s holidays.
After a very ugly week, we expected stock markets to rise this week on the simple principle that nothing goes to heck in a straight line. But we’ve been wrong on this before, and that line could be straighter than we’d expect. So, the US and Europe are starting out the week with a rout.
Last week in the US was particularly ugly for momentum stocks, and for companies that had announced lousy earnings or given squishy forecasts, and even for startups with recent IPOs that were once highfliers and have now crashed. Not even the promise of share buybacks works anymore. Financial engineering has lost its effectiveness. Central-Bank imposed negative interest rates aren’t propping up stocks anymore. None of these tricks works anymore. That’s what markets are learning.
And today, the theme carries over. At the time I’m writing this, the Dow and S&P 500 are down about 2.4%. The Nasdaq is down 2.8%, scooting closer to a bear market: down 19% or nearly 1,000 points from its high last June.
In Europe, last week was tough: The London FTSE -3.9%, the German DAX -5.2%, the French CAC 40 -4.9%, the Spanish IBEX 35 -3.6%, the Italian MIB a juicy -7.5%. A lot of people define a bear market as a 20% decline from a (more or less recent) high. As of Friday, all of these markets, except the FTSE, were already in a “bear market.”
And on Monday, the FTSE also fell into a bear market, down 2.7% for the day. The DAX fell 3.3%, which brings its six-day loss to 8%. The CAC 40 fell 3.2%, the Milan MIB 4.4%, bringing its six-day loss to about 12%. Ugly, ugly, ugly.
Europe’s big banks are seriously listing. Italian banks, weighed down by immense amounts of non-performing loans, are undergoing a bailout of sorts at the moment. Shares of Deutsche Bank and Credit Suisse are getting crushed. Their CEOs have gotten keelhauled last year. New CEOs are at the helm now. Some of their bonds have gotten trampled. Credit default swaps are blowing out.
The Stoxx Europe 600 banking index, after declining six weeks in a row, the longest weekly loosing spree since 2008 when the sky was falling on the banks (and when it declined 10 weeks in a row), fell another 5.6% on Monday. It has plunged 39% since its peak at the end of July.
And yet, Draghi is doing his magic with all his might, wagging his tongue tirelessly, printing money with both hands, pushing the ECB’s deposit rate into the negative with his boots, in the process also pushing yields of trillions of euros of government bonds into the negative, thus creating a magnificent financial absurdity, the consequences of which we’ll find out sooner or later. Perhaps banks are the first place to look.
And this is not good.
In Asia, the totally trampled-down Shanghai Composite finally eked out a gain of 0.9% last week, which allowed everyone to breathe a little, and was mercifully closed on Monday. But at 2,763, it’s below the line the Chinese government drew into the sand last summer, below which it would not let the index drop, no matter what. The composite is now down nearly 47% from its high in June 2015.
And capital flight continues as wealthy Chinese are trying to get their assets on dry land. The People’s Bank of China revealed on Sunday that foreign-exchange reserves, after a record plunge of $107.9 billion in December, dropped another $99.5 billion in January to $3.23 trillion, the lowest level in over three years. The PBOC sells these reserves to buy yuan that wealthy Chinese have been selling in order to buy assets denominated in other currencies and situated in other countries…. The PBOC is trying to prevent a tailspin of the yuan.
The other major indices in Asia were “mixed” on Monday, after falling last week, when the Nikkei booked a 4.0% loss, despite the negative interest rate absurdity that the Bank of Japan instigated the Friday before. The rally that died after two days made one thing clear: central banks have lost control over stock markets. But on Monday, it finally managed a gain of 1%.
So here is the global bear market tracker. The Dow, though down 13.6%, is the second-best performer. A week ago, it was still the best performer. The Nasdaq, with its 5.4% loss last week and 2.8% so far today, has slipped further down the ladder and is approaching the bear market line, joining three other indexes in that neighborhood. Of the 18 non-US markets on the list, only five are not in a bear market (US markets as of this morning, European markets as of afternoon trading):
Clearly, folks are trying to bail out of equities. And they’re trying to bail out of junk bonds: CCC-rated junk bonds have plunged and yields have soared to over 20%, just as they’d done during the panic after Lehman.
And folks are piling into government bonds. US Treasuries with longer maturities have been rising and yields have been falling, somewhat ironically, ever since the Fed raised rates in December. The 10-year Treasury yield is now at 1.75%, the lowest since almost exactly a year ago. These babes are hot!
Eurozone government bonds are even hotter, with the German 10-year yield at 0.22% today. Even fiscally challenged Italy gets to borrow 10-year money at 1.70%. But wait… these bonds have plunged today and yields have jumped 14 basis point from 1.56% on Friday. And Spain’s debt too has plunged today, with the 10-year yield jumping 11 basis points to 1.76%. It seems, investors are getting a little spooked about those two countries.
Alas, the 10-year yield of Japanese Government Bonds is teetering near zero, while any maturity below 10 years wallows in the Bank of Japan’s negative-yield absurdity.
So we still expect stock markets to rise this week, being firm believers in the principle that nothing goes to heck in a straight line. But as we said, that line could be straighter than we’d expect.
And for US stocks, there has been a sea change, and this time, it’s not about oil & gas. Read… What the Heck is Going On in the Stock Market?
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Ugh
Burn baby burn. The shortest distance between two points is a straight line
I’d love to see a massive plunge back to the 2009 lows and below. There is an unimaginable amount of accounting fraud, bad debt, other financial chicanery, and fantasy valuation that needs to be flushed out of the system.
But I don’t think it will go down in a straight line.
My guess is that we see the S&P decline to the 1500s over the next few weeks, followed by a furious bankster-inspired rally back to the 1700s, and then hopefully a Wile E Coyote moment where there is a massive plunge of 30-40-50-60% over a week or two.
It’s possible that we could see a long, drawn out plunge over 6 or 7 months, like in 2008-2009, but I’m skeptical about that scenario. I think the central bankers have run out of parlor tricks – zero interest rates haven’t fixed anything, money-printing hasn’t fixed anything, and negative interest rates are an academic absurdity that cannot possibly fix anything.
It’s impossible to predict the near term direction of the market. I’m bearish, but I’m not bold enough to predict how or when the market will decline.
As I said, I was guessing, but typically markets don’t fall in a straight line.
And when there is a substantial dip, there is usually a fierce ‘snap-back’ rally.
People who didn’t get out while the getting was good always like to get a second chance. There are still plenty of delusional bulls out there. Just turn on CNBS and listen for awhile…
Sounds like plausible scenarios. I haven’t lost money, but it’s because I’m 65% in treasuries and muni bond CEFs –which have risen quite a bit.
I sold 300 of TLT today to begin to scale out of Treasuries (take profit). I’m thinking that the next move is accumulate physical gold bullion or coins. I’m going to buy a 5% allocation to physical gold coins tomorrow (2/9). I may buy more thereafter. There’s a metal dealer here in Texas, although they ship via UPS.
My 12% allocation to telecoms and utilities has held up so far. My 6 % allocation to REITs fell sharply today and I may need to sell many of them on a bounce.
Oh, those pesky counter-party risks,,,
DB is already reporting losses and is the world number one in derivatives.
Its board have waived bonuses.
Bankers didn’t think 2008 was serious enough to warrant waiving bonuses, this is serious.
Is the derivatives financial back hole blinking into existence?
A dark shadow hangs over the world, an opaque market that operates out of sight and dwarves all other markets, i.e. complex derivatives. This market is currently estimated at 1.5 quadrillion.
We become aware of its existence when it blows up problems in other parts of the world and transmits them internationally. Before 2008, banker’s said they made the financial system safer by spreading risk through the system, 2008 showed conclusively this was not the case.
In 1998, a small firm collapsed and posed a systemic risk to the US and Western financial system, Long Term Capital Management (LTCM). A small firm used the incredible leverage available through complex derivatives to place bets on activity round the world. It’s poor judgement on the situation in Russia, turned this small firm into a financial black hole and initially everyone was terrified at the extent of possible losses. In the end the problem was manageable with a huge bailout.
In 1999, the decision was made not to regulate derivatives.
In 2008, for the first time ever, a housing bust in one nation spread out across the world through complex derivatives. Again a financial black hole had been created and everyone was terrified the Western financial system would collapse. In the end the problem was manageable with unprecedented bailouts across the world.
James Rickards in Currency Wars gives some figures for the loss magnification of complex financial instruments/derivatives in 2008.
Losses from sub-prime – less than $300 billion
With derivative amplification – over $6 trillion
Complex derivatives multiplied losses by twenty times and spread them around the world.
The complex derivatives market that creates potential financial black holes has grown considerably since then.
The visible markets around the world have already lost over 1 trillion in value. The loss multiplier of complex derivatives is yet unknown. It is only when the dark star, the financial black hole, blinks into existence and everything starts getting sucked in will we realise the danger.
Third time lucky for these financial weapons of mass destruction?
(In 2002, Warren Buffett used the term financial weapons of mass destruction to describe complex derivatives
If we had listened and learnt from 1998, the 2008 crash could have been avoided).
NO ONE LISTENED.
Could a, would a, should a, might a, if only.
It’s the crooked system attempting to save itself. Over 70% of fiat based financial wealth is owned by the 1% They will do everything within their power and influence to save it. Including ultimately destroying system.
No question, the current global financial calamity will only become worse. NO ONE WILL ESCAPE it’s consequences. They have been ignored for far too long. Much too late now for redemption.
The ONLY remaining two directions this will proceed are;
1/ True, fair, equitable, global systemic financial reform.
2/ War.
Increasingly looking like it’s option #2 after which we can only pray there is enough left to reform!
The Euro crisis, a conflict with Russia and on top of that the migrant crisis which has driven Communists and Fascists to fight in the streets (I’m not joking), all we need now is a financial collapse and a Weimar Republic 2.0.
Europe is a cursed continent.
In such an event, it’s more than likely EU relations would strengthen with massive bailouts and mutual security assistance. Hey, Greece really tried to leave the EU…no one leaves the EU.
point taken.
I don’t worry much about derivatives. It reminds me actually of one time I was playing our weekly penny ante game of poker with some friends: back then it was 25 cent per hand and you could raise by 10 cents at minimum. People would come with their change jars from the week and have a good time. The upside was that it was hard to lose more than $10 or $20. The downside was it was hard to win that much.
Until this one week when two of the guys at the table started winning all the hands, and their bets got bigger and bigger. They priced everyone else out, because they could easily raise on every hand to force an all in for the lesser player with the usually better hand. The low money player then had to win every time, 10, 12, 30 hands in a row, to even start to reach the orders of magnitude to be able to bet with the big boys. Nobody’s luck could hold out for that long and the game became no fun.
So everyone else dropped out and the two guys with the money just started playing one on one with higher and higher stakes. They were getting pretty drunk by the end of it the last hand I heard them bet was $10,000, a crazy amount for a penny ante game, one that would take years and years to pay back. Of course they didn’t have that kind of cash on the table they were furiously scribbling IOUs for each hand. I don’t know what the final tally was on the last big hand but I do know that such a ridiculous amount of money was owed to the winner that it had become non-money.
Of course the winner wanted the money paid right away. An argument ensued that was broken up by other people at the table. Once a few days had passed, however, sobriety returned. The winner realized that his friend could never pay back the IOU’s and that it would ruin their friendship to pursue the matter. The IOU’s were written off as a drunken experiment and both men returned the 25 cent minimum bets at the poker table the next week.
I’m pretty sure that’s what’s going to have to happen to derivatives. Of course what they did in 2008 was the equivalent of the winner calling the police, showing the cops the IOUs, and then having the policeman tell everyone at the poker table “You’re going to have to pay for this man’s losses.”
Good and thorough article, Wolf. Thank you so much for your efforts. You are one of the few economic experts I trust.
regarding:
and “capital flight continues as wealthy Chinese are trying to get their assets on dry land.”
Vancouver house markets increased 30% last year!!!! There are protests about perfectly good/great homes being torn down for the wealthy Chinese to construct behemoth monstrosities.
20 years ago many in BC were chortling about the capital flight as Hong Kong reverted and funds found their way to Vancouver. From the news reports it isn’t so funny anymore, unless you are a property agent making the sales.
Be careful what you wish for. Personally, it doesn’t affect me as I never travel to Vancouver, but it is a shame to see the city turn into what it has become. Too bad we couldn’t turn back the clock and restrict the inflows of capital somehow.
My question: Is the Chinese leadership totally involved and compromised with this capital flight? Or, are they hamstrung and unable to cope? They speedily fix criminal enterprise with summary executions in a matter of hours, yet the country is being pillaged from within. I always think that every dollar spent on some over-priced west coast home has been purchased with dislocation of commoners and outright theft. The Chinese people have real tears to cry as this unfolds.
I hear angry voices in the not too distant future.
regards.
“A new round of ‘creative destruction’ is coming globally and ZIRP, QE and NIRP will not stop it.”
Federal Reserve bond purchases, coming soon to an economy near you…
Yup
………..When the blood runs in the streets ……………….
Expect dead cat bounce to sell into as bank handlers will demand that CB gang of 3 (Janet, Mario, Kuroda) soothe the market with more QE, NIRP and hey economy is doing well mantra so that the banksters can get out of the sinking ship 1st – never mind women and children…
Bank of America down another 6% as I write, on big volume again. I have a bad feeling about this, glad I closed my ML offshore account in 2013. Yes, too early, but better safe than sorry.
Wolf, recall we just had a big bounce from 1800 to 1930, so the measly drop to 1880 was hardly a straight line fall after such a huge bounce.
Even after today’s losses, we still haven’t even retraced that bounce, and since this market is going down, not up, why would we expect a bounce before even taking back the previous bounce?
Bonds? At 1.75% who would tie up money for 10 years for this?
Lot of folks when the CB cabals are introducing NIRP.
Let’s see – Japan, Switzerland, Denmark, EU, etc. and Janet’s last bullet to boot
“The PBOC is trying to prevent a tailspin of the yuan.”
I’m not sure I can swallow this, otherwise why would there be capital flight? Some say shorting the Yuan is dangerous but I dunno, seems like history proves them incorrect and maybe they’re talking their book?
The Chinese with the ability to move money out of China now certainly ain’t stupid. They know the shit is hitting the ground and their foreign reserves on a per capita basis is really nothing when 1.1 billion Chinese scrambles to move their savings out of the country.
Besides, that $3.2 trillion foreign reserves are very likely to be far more illiquid than the PBOC wants everybody to believe.
FIGHTING BACK.
The worlds 5 largest miners, including Rio Tinto, have resigned en masse their memberships in the LBMA.
This is “blow back” from the LBMA’s criminal “fixing” of the silver price at 6% below the paper spot last week. The world’s largest silver producer KGHM vehemently protested to the LBMA of this action. Not a peep has been heard from the LBMA on this.
Now 6 days later 5 oF the worlds largest miners resign their memberships en masse from the LBMA!
This is the tip of the iceberg! Watch ALL the smaller miners follow suit, along with their investors. This will do nothing but cascade, ending in the LBMA becoming nothing more than an empty, criminally infected hollow. Their pronouncements of innocence and protestations will fall on deaf ears, as they are ignored and ostracized.
Liars standing over a hole, most miners have perfected the practice of producing metals for fun and no profit. LBMA has just been helping them.
No longer true. The LBMA has been helping itself.
It has very little bullion.
Its the miners who have the gold and silver.
Safely locked away in ‘Mother Earth’!
Bankers are slicker than two eels mating in a bucket of lard, so beware.
Could it be push back from past metal streaming deals?
I assume these 20% falls from recent highs are entering territory where margin calls gain momentum and begin a self feeding price decline and an accelerated race to the exits.
Hence the term ‘Bear Market’.
Disaster averted for another day. ;)
Wait til the NYSE margin debt starts getting down to previous lows. We’re not there yet. Too bad it’s report with delays. Equity will be down when the margin debt is down.
I’m still waiting to see what will happen to banks, hedge funds, and the shadow banking industry as a whole, when the fracking-based derivatives, volumetric production payments (VPPS), blow up in mass. Exciting times are coming.
the numbers do seem, um, attention-getting.
think i’ll just keep working.
What ushered in 2008 debacle was US banks Lehman and Bear Stearns.
Sounds like EU banks are in deep trouble even the stalwart DB mired in bowl of CDS spaghetti (like Lehman/BS) with banks in PIIGS close to comatose…
Yep we learn history as it does REPEAT
It appears the Plunge Protection Team (PPT) went into action the last hour and half of the markets today. For example, the Dow retracing 225 points.
Today’s drop confused me a little, so I took the opportunity to sell to close some TSLA puts during the mid morning. Maybe because everyone expected a rise, it didn’t happen.
With the election-year cycle in the US, I still suspect the FED and others have just these kinds of market-dropping adjustments planned for the year. Endless bull markets breed inefficiencies, and a ‘healthy’ recession can do wonders to weed out the unproductive firms, thereby liberating their human and financial capital. IF that’s the plan and this drop is actually wanted and orchestrated by someone, it’s working perfectly: The loss-leading Silicon valley startups and junk-firms are crashing spectacularly as the rest is fairly stable. My puts (part hedge for my long positions such as in RKDA, part active trading strategy) are doing very, very well. Another risk of excess monetary stimulus is of course commodities rising and inflation; again, what’s happening looks like it effectively counters those threats.
The FED isn’t stupid, and it CHOOSE to raise rates knowing full well what the effects would be. And the case for inflation in the US always seemed ridiculous to me; there may be deeper, international factors at work here. Perhaps someone hopes that the taper and raising rates will cause a small, healthy recession in the US but forces other countries to sell their crown jewels to us for debt relief. Or maybe it’s just a zero-sum game: we only win when others lose.
I mean, this whole market crash just has a very controlled, inevitable feel to it. The panic gauges aren’t blinking red and the fear index is a more optimistic than during August’s crash. Of course I’m still watching for signs that things are getting out of control or that my pet theory is wrong, but so far everything is generally happening as I wrote it down in my notebook months ago. In the meantime I’d give good odds on another interest rate hike in March (as opposed to the streets current consensus), for bubble stocks to implode some more and politics to serve its usual functions: A fount of hope (giving people ‘new hope’ in case things DO go wrong and the US has a nasty crash), and to actually give us a democratic choice on how we as a nation wish to proceed. There could even be another huge rally eoy / 2017 as we digest the spoils of economic war. Even the biotech bubble may resurrect itself just like the tech bubble after the 97′ Asian financial crisis.
Any comments on what this might be related to in the scheme of things? I have never heard of it before.
Reverse Repurchase Transactions with Fed Reserve of New York:
https://www.newyorkfed.org/markets/expanded_counterparties