FacebookTwitterGoogle+RedditEmail

Could This be “The Big One”?

by

shutterstock_240002407

Everyone take a deep breath. This isn’t 2007 again.  The banks aren’t loaded with $10 trillion in “toxic” mortgage-backed securities, the housing market hasn’t fallen off a cliff wiping out $8 trillion in home equity, and the world is not on the brink of another excruciating financial meltdown.  The reason the markets have been gyrating so furiously for the last couple weeks is because stocks are vastly overpriced, corporate earnings are shrinking, and the Fed is threatening to take away the punch bowl. And to top it all off, a sizable number of investors have more skin in the game than they can afford, so they had to dump shares pronto to rebalance their portfolios.

What does that mean?

It means that a lot of investors are in debt up to their eyeballs, so when the market tumbles they have to sell whatever they can to stay in the game. It’s called a “margin call” and on Wednesday we saw a real doozy. Investors dumped everything but the kitchen sink in a frenzied firesale that sent the Dow Jones bunge-jumping 565-points before clawing its way back to a 249-point loss. The reason we know it was a margin call as opposed to a panic selloff is because there was no noticeable rotation into US Treasuries. Typically, when investors think the world is coming to an end, they ditch their stocks and make the so called “flight to safety” into US debt. That didn’t happen this time. Benchmark 10-year Treasuries barely budged during the trading day,  although they did stay under 2 percent which suggests that bondholders think the US economy is going to remain in the toilet for the foreseeable future. But that’s another story altogether. The fact is, investors aren’t “rotating”, they’re “liquidating” because they’ve hawked everything but the family farm and they need to sell something fast to cover their bets. Now if they thought that stocks were going to rebound sometime soon, then they’d try to hang on a bit longer. But the fact that the Fed has stayed on the sidelines not uttering a peep of encouragement has everyone pretty nervous, which is why they’re getting out now while they still can.

Capisce?

Here’s how CNBC’s Rick Santelli summed it up on Wednesday afternoon:

“We basically have a global rolling margin call that’s been going on since the 3rd Quarter of last year. It’s gotten a bit more intense since the Fed announced it was ‘normalizing’ because, in essence, a quarter point (rate hike) doesn’t mean anything, but the mentality that we are about to turn the corner on the ‘Grand Experiment’ means a lot.” (Closing Bell Exchange, CNBC)

In other words,  investors are starting to believe the Fed will continue its rate-hike cycle which will put more downward pressure on stocks, so they’re calling it quits now.

Santelli makes a good point about “normalization” too, which means the Fed is going to attempt to lift rates to their normal range of 4 percent. No one expects that to happen mainly because the wailing and gnashing of teeth on Wall Street would be too much to bear. Besides, the Fed just spent the last seven years inflating stock prices with its zero rates and QE. It’s certainly not going to burst that bubble now by raising rates and sending equities into freefall.  Even so, many investors think the Fed could continue to jack-up rates incrementally to 1 percent or higher. And while that’s still below the current rate of inflation, the shifting perception of “easy money” to “tightening” makes a huge difference in investors expectations. And as every economist knows, expectations shape investment decisions. No one is going to load up on stocks if they think things are going to get worse. That’s the long-and-short of it.

So is the recent extreme volatility a precursor to “The Big One”?

Probably not, but that doesn’t mean that stocks won’t drift lower. They probably will, after all,  conditions have changed dramatically.  We had been in an environment where hefty profits, low rates and ample liquidity were more-or-less guaranteed. That’s not the case anymore.  Stocks are no longer priced for perfection, in fact, valuations are gradually dipping to a point where they reflect underlying fundamentals. Also, for whatever reason,  the Fed seems  eager to convince people that the hikes are going to persist. So here’s the question: If you take away the punch bowl at the same time that earnings are start to tank, what happens?

Stocks fall, that’s what.  The only question is “how far”? And since the S&P has more than tripled since it hit its lowest level in March 2009,  the bottom could be a long way off, which is why investors are taking more chips off the table.

It’s also worth noting that one of the main drivers of stock prices has been AWOL lately. We’re talking about stock buybacks, that is, when corporate bosses  repurchase their own company’s shares to reward shareholders while boosting their “windfall” executive compensation. Here’s the scoop from FT Alphaville:

“China is slowing, the oil price is getting hammered, the Fed hiked too soon: all reasons for the ignominious start to the year for the world’s stock markets.  Here’s another bit of meat for the pot, courtesy of Goldman Sachs chief US equity strategist David Kostin: share buybacks.

“One reason for the recent poor market performance is that corporate buybacks are precluded during the month before earnings are released. Any destabilizing macro news that occurs during the blackout window amplifies volatility because the largest source of demand for shares is absent.”

Share buybacks in the US are on pace for their biggest year since 2007, he adds, estimating $561bn for full-year 2015 (net of share issuance) and a decline to $400bn in full-year 2016.”

Share buybacks, the markets miss you“, FT Alphaville

By some estimates, buybacks represent 20 percent of all share purchases, so obviously the current drought has contributed to the recent equities-plunge. All the same, G-Sax Kostin expects a robust rebound in 2016 to $400 billion. As long as cash is priced below the rate of inflation, corporations will continue to borrow as much as they can to ramp their own stock prices and rake in more dough. Greed trumps prudent investment decision-making every time.

As for the trouble in China: While it’s true that China’s woes could have been the trigger for the current ructions on Wall Street, it’s certainly not the cause which is the Fed’s failed monetary policy. Besides, the whole China thing is vastly overdone. As Ed Lazear told CNBC on Wednesday:

“A major recession in China that lasted ten years would cost would costs the US 2 % points in GDP. So you’re not going to get a market fall like we’re observing right now based on that.”

Economist Dean Baker basically agrees with Lazear and says:

“Even a sharp downturn in China would not send the U.S. economy plummeting, our total exports to China are only about 0.7 percent of GDP. China’s weakness will have a major impact on other trading partners, especially those heavily dependent on commodity exports. But even in a worst case scenario we are looking at a major drag on the U.S. economy, not the sort of falloff in demand that puts the economy into a recession.”

(“Wall Street Rocks!“, Dean Baker, Smirking Chimp)

As for the plunging oil prices, there’s not much there either. Yes, quite a few high-paying oil sector jobs have been lost, capital investment has completely dried up, and many of the domestic suppliers are probably going  to default on their debts sometime in the next six months or so. But are these defaults a significant risk to Wall Street in the same way that trillions of dollars in worthless Mortgage-Backed Securities (MBS) and CDOs were in 2007-2008?

Heck, no. Not even close. There’s going to be a fair amount of blood on the street by the time this all shakes out, but the financial system will muddle through without collapsing, that’s for sure. The real danger is that falling oil prices signal a buildup of deflationary pressures in the economy that isn’t being countered with additional fiscal stimulus. That’s the real problem because it means slower growth, fewer jobs, flatter wages, falling incomes, more strain on social services and a more generalized stagnant, crappy economy.   But as we’ve said before, Obama and the Republican-led Congress have done everything in their power to keep things just the way they are by slashing government spending to make sure the economy stays weak as possible, so inflation is suppressed, the Fed isn’t forced to raise rates, and the cheap money continues to flow to Wall Street. That’s the whole scam in a nutshell: Starve the workersbees while providing more welfare to the slobs at the big investment banks and brokerage houses.  It’s a system that policymakers have nearly perfected as a new Oxfam report shows. According to Oxfam: “the 62 richest billionaires now own as much wealth as the poorer half of the world’s population.” (Guardian)

Wealth like that, “ain’t no accident”, brother. It’s the policy.

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.

More articles by:

CounterPunch Magazine

minimag-edit

bernie-the-sandernistas-cover-344x550

zen economics

Weekend Edition
January 20, 2017
Friday - Sunday
Paul Street
Divide and Rule: Class, Hate, and the 2016 Election
Andrew Levine
When Was America Great?
Jeffrey St. Clair
Roaming Charges: This Ain’t a Dream No More, It’s the Real Thing
Yoav Litvin
Making Israel Greater Again: Justice for Palestinians in the Age of Trump
Linda Pentz Gunter
Nuclear Fiddling While the Planet Burns
Ruth Fowler
Standing With Standing Rock: Of Pipelines and Protests
David Green
Why Trump Won: the 50 Percenters Have Spoken
Dave Lindorff
Imagining a Sanders Presidency Beginning on Jan. 20
Pete Dolack
Eight People Own as Much as Half the World
Roger Harris
Too Many People in the World: Names Named
Steve Horn
Under Tillerson, Exxon Maintained Ties with Saudi Arabia, Despite Dismal Human Rights Record
John Berger
The Nature of Mass Demonstrations
Stephen Zielinski
It’s the End of the World as We Know It
David Swanson
Six Things We Should Do Better As Everything Gets Worse
Alci Rengifo
Trump Rex: Ancient Rome’s Shadow Over the Oval Office
Brian Cloughley
What Money Can Buy: the Quiet British-Israeli Scandal
Mel Gurtov
Donald Trump’s Lies And Team Trump’s Headaches
Kent Paterson
Mexico’s Great Winter of Discontent
Norman Solomon
Trump, the Democrats and the Logan Act
David Macaray
Attention, Feminists
Yves Engler
Demanding More From Our Media
James A Haught
Religious Madness in Ulster
Dean Baker
The Economics of the Affordable Care Act
Patrick Bond
Tripping Up Trumpism Through Global Boycott Divestment Sanctions
Robert Fisk
How a Trump Presidency Could Have Been Avoided
Robert Fantina
Trump: What Changes and What Remains the Same
David Rosen
Globalization vs. Empire: Can Trump Contain the Growing Split?
Elliot Sperber
Dystopia
Dan Bacher
New CA Carbon Trading Legislation Answers Big Oil’s Call to Continue Business As Usual
Wayne Clark
A Reset Button for Political America
Chris Welzenbach
“The Death Ship:” An Allegory for Today’s World
Uri Avnery
Being There
Peter Lee
The Deep State and the Sex Tape: Martin Luther King, J. Edgar Hoover, and Thurgood Marshall
Patrick Hiller
Guns Against Grizzlies at Schools or Peace Education as Resistance?
Randy Shields
The Devil’s Real Estate Dictionary
Ron Jacobs
Singing the Body Electric Across Time
Ann Garrison
Fifty-five Years After Lumumba’s Assassination, Congolese See No Relief
Christopher Brauchli
Swing Low Alabama
Dr. Juan Gómez-Quiñones
La Realidad: the Realities of Anti-Mexicanism
Jon Hochschartner
The Five Least Animal-Friendly Senate Democrats
Pauline Murphy
Fighting Fascism: the Irish at the Battle of Cordoba
Susan Block
#GoBonobos in 2017: Happy Year of the Cock!
Louis Proyect
Is Our Future That of “Sense8” or “Mr. Robot”?
Charles R. Larson
Review: Robert Coover’s “Huck out West”
David Yearsley
Manchester-by-the-Sea and the Present Catastrophe
FacebookTwitterGoogle+RedditEmail