There are no straight roads to economic ruin.
One reader asked me after yesterday’s article on the historic market meltdown whether I thought the stock market would bounce back up to nearly make a full recovery. I responded as follows:
There is still a lot of Fed money floating around, and plenty of people will do all they can to game markets up if they can. We’ll have to see tomorrow, though, if their efforts hold. Things may get volatile and bounce around for awhile; but the interesting point is not so much whether stocks crash or not but the reason for the huge stock drops today being everyone suddenly concerned about recession and about the turn in labor, particularly bringing up the Sahm Rule.
It’s the sudden swing toward panic moves over things in the economy that I’ve been bringing to everyone’s attention as the big things to watch out for. Suddenly, they were on everyone’s mind when most of these publishers were talking about the Fed having won the fight last week and being ready to ease in for its soft landing.
In a video interview with Adam Taggart below, Lance Roberts makes a number of interesting points here about the continuing stock meltdown and volatility he sees ahead where he expects major ups and downs through, at least, October or November. I expect the same thing. So a rebound today would not surprise me at all … as up is part of volatility.
One note I’ll disagree with in the video is Lance’s claim that, “Sure, the Sahm Rule says we are already in a recession but these things actually take time. There is a lag until a recession is declared.” That misses the point. When a recession is officially declared (always months after the recession began), the start of the recession is always retrodated by, at least, a half year. In other words, the timing of when the declaration is officially made is irrelevant to when the recession actually began. We are in recession now, even if it takes officials months to make a declaration. The Sahm Rule, which has never been even minutely wrong since the 70s, strongly confirms this (and only wrong by a few months in its timing once or twice prior to that, going all the way back to the crash of ‘29 and the Great Depression.)
Besides the lag time, the GDP/inflation figures that officials are using to quantify recession in this election year are so obviously rigged, just as Lance and Adam talk about with respect to the government job numbers (another discussion that makes the video worthwhile), that I doubt the National Bureau of Economic Research, which officially declares recessions, will ever declare this recession until the pig is so obvious to everyone they finally have to admit it or look like disgruntled pigs in lipstick, themselves.
Going up the down staircase
In the realm of economics, there are always ups along the down staircase. Regarding the market’s ups, downs and rebounds, Wolf Richter said about yesterday’s market meltdown:
Nevertheless, this kind of plunge, amid a whiff of panic, is usually followed by a bounce, on the WOLF STREET dictum: “Nothing goes to heck in a straight line.”
Exactly. (And he uses such Midwestern polite language.) I’ve said that many times here, too: “There are no straight lines in economics or markets.” It wouldn’t be human nature if people, coming to a view adjustment on something as painful as a recession, didn’t panic first and then catch hold of themselves as Wolf Richter describes for the “fear index” and settle down to a dull fear:
The CBOE Volatility Index (“fear index”) had spiked to 65 early in the morning, deep into panic territory, from the 16-range last week, but has now fallen back to 31, as fear is settling down into a slow smolder.
Another writer at Bloomberg described the near certainty of a market rebound today and what comes next as follows:
A ‘Textbook Turnaround Tuesday’ Doesn’t Mean Meltdown Is Over
It’s an old cliché but the phenomenon known as Turnaround Tuesday — when markets rebound from a selloff at the start of the week — is an opportunity that shows up time and again in the data. The bad news is such recoveries don’t guarantee a bottom has been reached.
Investor psychology during a rout tends to begin with jitters on Thursday, hedging on Friday and all-out selling on Monday, according to Brent Donnelly, veteran trader and president of trading analysis firm Spectra Markets. By Tuesday, the downdraft is primed for a reversal, he wrote in a note published Monday.
We shouldn’t be surprised at all to see the market bounce around eratically, recovering a lot of lost ground … or, in the very least, see it attempt to do that today. It’s what the market typically does, especially when it has been overflowing with irrational bullish sentiment of many months that takes awhile to get tapped out.
“We are setting up for a textbook Turnaround Tuesday,” Donnelly wrote in his note. “Things are so dramatically oversold, and Tuesday is such a bullish day of the week that I am looking for tactical fade trades….”
Still, even a healthy Tuesday rebound in equities is unlikely to temper the broad unease growing across financial markets. Investors that buy and sell based on quantitative measures, such as volatility, have offloaded $130 billion of stock bets the past few weeks and that process may accelerate in the days and week ahead….
Investors hoping to catch the Tuesday upswing should be aware this may be only a short-term trade.
“I wouldn’t expect this to be a durable bounce,” said Nick Ferres, chief investment officer at Vantage Point Asset Management in Singapore. “There is likely to remain volatility into October, November. Any counter trend rally today and persisting for a few weeks would be something to trim risk into….”
“The magnitude of the selling was so large — the correction over three days was roughly equivalent to what we saw in the 1987 stock market crash,” Ferres said. [Which leads to a likely large bounce, so ….] “With hindsight we should have bought a little bit more.”
That is exactly the scenario for stocks that Lance Roberts suggests in the video, too. It is also exactly what we saw during the dot-com bust, which I’ve claimed this bust is likely to look like:
Look at how long it took for that market crash to play out. From the start of 2000 all the way to 2003. There were some horrendous plunges along the way, some attempted recoveries, a couple of major back-to-back “bear-market rallies” and then a lot more ups and downs on the way down the staircase.
That, of course, was without the kind of massive Fed and government rescues that began in the next Fed-fueled crisis, known as the Great Recession, where I finally decided to start writing about this stuff. All of that Fed interference only makes it more complicated because the Fed has trillions of dollars in firepower, as we’ve seen, to try to jack things up. That much hot-air, balloon-inflating money is not likely to go unfelt.
So, yes, the Nikkei took its biggest plunge yesterday since the “Black Monday” crash of ‘87, but it also achieved its biggest rise today since 2008. The point of the articles quoted above, and the video with Lance Roberts is that this is no surprise. It is what should be expected. The road down, even though you can see there were a few elevator trips down in the dot-com bust, mostly looks like a steep waterfall of rapids, versus a plunge over a cliff; but there is a lot more down than up as things unwind on the down staircase.
It is economic/market climate change
Whether stocks frost over or not (because a stock market crash was never specifically part of my predictions for 2024, though I have certainly seen it as likely), the point I was making yesterday is that the massive change in market dynamics reveals the extent to which the blinders came off about recession and some of the fantasy about soft landings disintegrated. It’s what happens when people who are living in delusions about their economic environment are suddenly faced with frigid reality. That makes it a different world now in terms of mass perception than where the world sat in hope-filled delirium a week ago.
One of the big unwinds that is happening because of fears that the Fed is about to start cutting rates, is the largest global carry trade in history:
Rapid interest rate cuts from the Federal Reserve could make matters worse for the global “carry trade” unwind, according to economists at TS Lombard.
The warning comes as market participants seek to aggressively roll back on carry trades following a dramatic global sell-off in risk assets….
An August stocks slump has been partly driven by weaker-than-expected U.S. economic data at the end of last week. The readings led investors to worry that the Federal Reserve may be behind the curve in cutting interest rates to fend off a recession.
“The natural reaction from the Fed to soft labour market data and fresh recession risks would be to cut rates and to do so relatively rapidly. But this would exacerbate any carry trade unwind,” economists at TS Lombard said in a research note published Monday.
This carry trade between currencies, wherein one borrows in one currency and buys in another, became particularly strong between the Japanese Yen and US dollar; so, a big part of the market’s reaction to recessionary news was a rapid unwinding of those trades, which are not expected to perform well if Japan continues to be as hawkish as it just was while the Fed shifts back to a looser monetary stance of cutting interest rates.
Zero Hedge, yesterday, referred to this rush out of the Yen-Dollar carry trade being run in stocks and bonds as the “Japanic.”
Already investment folks are begging for bailout types of measures (a little extra largesse to carry the carry trades through the transition to tighter central-bank policy so as not to bust banks and brokers, etc.):
“Then if the carry trade unwind really is a problem, we’d hope these central banks would take steps to introduce some form of quantity measures [think quantitative easing] that would help prevent Japanese and other investors that have run on yen carry trades from having to sell assets, and facilitate the Fed cutting rates in due course without exacerbating financial fragilities,” economists at TS Lombard said….
Traditional safe haven assets, such as the yen and Swiss franc, surged on Monday, fueling speculation that investors were seeking to quickly unload profitable carry trades to cover their losses elsewhere….
Kit Juckes, chief foreign exchange strategist at Societe Generale, said in a recent research note that “the big carry unwind is underway.”
“You can’t unwind the biggest carry trade the world has ever seen without breaking a few heads. That is the impression markets give us this morning,” Juckes said on Monday.
These are new risks building in one-sided markets where a sudden change in Fed policy, such as the emergency rate cuts market participants started begging for yesterday, will upset trades that depended for their success on the Fed’s tighter policies. So, heads will get broken, especially if the Fed shifts at emergency speed, forcing rapid offloading of certain bets, which is the fear that comes with sudden realization that recession has, for months, been crouched right at our doorstep.
This, of course, is why we have the Federal Reserve—to maul things around with massive creation of money, followed by massive monetary reduction, and to lower interest to absolute zero then raise interest and then lower it again in ways that assure longterm, massive bubble formations followed by rapid bubble implosions.
You can’t argue with me on that. It HAS to be why we have them because that is exactly what they’ve been doing for the last two-plus decades, and we keep them employed! They have clearly made business cycles far more erratic, spasmodic and exaggerated than we ever used to see. So, that must be what they were created for. It is certainly what they aim for and achieve on a predictable basis. And we give them control over our national currency and the ability to make massive incomes for themselves in exchange for them helping us like this.