posted February 9, 2018
The Global Stock Market Implosion–Some Causes & Predictions

(Article 2) US Stocks ‘Dead Cat Bounce’ and Second 1000 point Drop, by Dr. Jack Rasmus, Feb. 8, 2108

Today the US stock market plummeted another 1,000 points. As this writer forewarned after last monday’s 1175 pt. fall, the recovery would be a classic ‘dead cat bounce’. Well, the cat bounced the past two days–just not very high or for very long. And now it’s flopped again. The Question: will it roll over on its back, legs up? Or get up and run around a little more, before flopping again? Make no mistake, the cat is tired and can no longer jump. It may not even be able to get back up on its feet.

Investors’ psychology will now have changed. Now it’s clear, the financial markets’ last weekend collapse was not a ‘one off’ event. This realization will have a big effect going forward. It’s all a different level now. And all the talk by pundits this week trying to pump the market back up, i.e. go ‘buy on the dip’, now look quite stupid and self-serving. Should investors now ‘buy on every dip’ as each dip goes down further and further? It’s a 10% correction in less than a week, well on the way to 20% (and who knows how much more).

In the intervening days since last weekend, reports also began to emerge (somewhat) that the markets were responding to problems with the new derivatives–i.e. Exchange Traded Funds/Products (ETF-Ps)–that were being dumped automatically by what are called ‘quant sellers’ (aka professional investors) in big volumes. This automated selling was responsible for the big movements in price. But all this was quickly hushed up in the mainstream business media.

Last Monday’s collapse was also followed by China currency (Yuan) beginning to fall precipitously. Clearly, China investors are dumping Yuan, buying foreign currencies, and trying to get out in anticipation of more financial instability in China. Capital flight from China is ‘on again’. This could lead to competitive currency devaluations throughout Asia economies. (Shades of 1998’s Currency Crisis!).

And what about other Emerging Market economies? They are extremely fragile and capital flight will almost certain emerge there again, once the US Fed raises rates in March, as it has promised to do. (The Fed also promised to raise rates three more times this year. As I have predicted, however, if the stock markets keep falling, that will not happen, as it will almost certain result in a global credit crunch.) For eight years the Fed has propped up the stock markets with free money; it won’t abandon that fundamental policy at this point. It only backed off temporarily because of fiscal-tax cuts in the trillions taking up its (Fed’s) prior role of subsidizing capital incomes.

And what about Europe (and the even weaker UK) with its $2 trillion in non-performing bank loans? Watch out Italy.

And then there’s the junk bond markets in the US, where some estimates are that nearly a fifth of junk bond borrowing companies are ‘zombies’. They’ve been put on life support by borrowing to repay interest and principal on past debt, laying ever more debt on debt. At some point defaults will appear as the free money from the Fed lowers the liquidity level and the rocks appear in the junk bond market.

The downward momentum in US stock prices will also be fueled in the next stage by the massive buildup in margin buying of US stocks that has been occurring since 2014, and the even more rapid rise in margin buying since Trump took office. Debt balances on margin accounts has risen from an annual average of less than $10 billion a year from 2009 to 2013, to $200 to $300 billion a year the last four years. That’s the greatest margin buying bubble since 1980. Margin buyers will prove desperate stock sellers, driving stock prices even lower in coming weeks, entering yet another new phase.

(Article 1) Stock Markets Implode Worldwide–What’s Next?, by Dr. Jack Rasmus, Feb. 5, 2018

Today, February 5, 2018 the main US stock market, the DOW, fell another 1,175 points, the largest drop in its history. That followed a major decline of 665 points the preceding Friday. The total two day decline amounts to 7.5%. The other major US stock markets, the Nasdaq and S&P 500 also registered significant declines of similar percentages. Markets in Japan and Europe followed suit over the weekend in response to Friday’s US drop; and are expected to fall comparably to the US when they open for Tuesday, February 6. What’s going on? More important still, what will go on—in the next few days and in the weeks to come?

The business press and media trotted out all the experts today. The ‘spin’ and message was “don’t panic” folks. This is to be expected, they say, given the bubble price run-up through 2017, and especially since last November 2017, after which the bubble accelerated still faster. In the month of January alone, the DOW rose nearly 7%. That’s considered a good ‘year’s gain’ in ordinary times. Yet mainstream economists say it hasn’t been a bubble, while they give no definition of what a bubble exactly is—because they don’t know. But certainly a DOW run-up from around 16,000 lows in 2016 to more than 26,000 in little more than a year constitutes as a bubble.

But the media talking heads parading in front of cameras today sing the same song, “don’t panic”. It comes in various keys: “It’s a welcome pullback”, a “constructive sell off”, an “opportunity to buy on the dip” and other such nonsense. But when asked why now the collapse, they have nothing to add.

What it represents, however, is professional institutional investors decided to ‘take their money and run’, leaving the small investors to take the losses. And more are coming. The professionals realize that the central bank, the Fed, is going to raise interest rates 3-4 times this year. That has already begun to send the bond markets into a tailspin. And now stocks are following suit. The stock markets have risen to bubble territory for several reasons:

One is the 9 year massive injection of free money by the Fed and other central banks. More than necessary to invest in real production, so it flows into financial markets in the US and worldwide. Corporate profits since 2010 have nearly tripled, and capital gains taxes have been steadily reduced by trillions of dollars since 2010 as well. Corporations have kept a steady flow of money capital to their shareholders with 7 years of stock buybacks and dividend payouts—averaging a trillion dollars a year for seven years! Profits, dividends, buybacks, capital gains tax cuts resulted in trillions flowing into financial markets. Add to that record levels of margin buying of stocks by small investors (always a sign of bubbles) and that’s the source of the record price appreciation of stock markets. And, of course, let’s not forget the Trump business-investor tax cuts of more than $4 trillion (not $1.5) that are coming on top of it all—that will subsidize profits with an immediate 10%-31% profits boost, on top of the record profits that US corporations had already attained. Massive money capital injections surging into stock and other financial markets. That’s why the bubble.

But what of the bust? Why now—not before or later? It’s because of changes in the markets themselves: the advent of what’s called ‘momentum trading’ by big institutions like quant hedge funds and others; by the shift to passive investing and what’s called index funds; by derivatives like ETFs driving stock prices as well. All the above result in rising prices sucking in more money capital just because prices are rising….which results in still more prices rising.

Until of course the central bank convinces them that the ‘punchbowl of free money’ is being drained. Then the professionals take their money and run, leaving the ‘herd’ of small investors holding the empty bag.

What’s most interesting is that the Fed’s interest rates haven’t even reached 2% and the system has cracked. In 2007, Fed rates had to exceed 5% before the credit crash was set in slow motion. But this writer predicted that would be the case, i.e. that the Fed rates could not rise above 2-2.25% (and the 10 year Treasury bond much above 3%) without precipitating another credit crisis.

But the stock crash of February 2 and 5 is not the beginning nor the end of what’s coming. There may be a further decline in coming days but it will stabilize. There will be a recovery or sorts. But it will be a ‘dead cat bounce’, as is always the case in such events. Some weeks, or even months later, the real contraction will begin. And that will be the real one.

To recall events of 2008, it was the collapse of Countrywide Mortgage and Bear Stearns investment bank in early 2008 that were the warning signs. Recovery temporarily followed, until Fannie Mae and then Lehman Brothers set the real forces in motion. The precipitating events may not even originate in the US but outside. Japan and Emerging Market economy stock markets are especially vulnerable. But financial markets are global and tightly integrated in today’s capitalist system. Contagion is built into the system globally. And investors move their money around worldwide in an instant. They will eventually pull back, wait and see, and the markets temporarily restabilize. Is it an opportunity to scoop up the losses of the smaller herd investors that will have lost trillions this week? That’s what the professional investors, the big institutional investors, the hedge funds, private equity, the big capitalists will now be asking themselves. Or is it the real contraction that will drive the markets down at least 20% in coming days and weeks? They will also ask themselves will the Fed hold to its plan to continue to raise rates? If it does, the they’ll decide the great stock bull run of 2010-18 and its bubble is over and they’ll move to the sidelines for the foreseeable future, not temporarily. They’ll take their trillions of dollars and run. And when they do, the real contraction will begin….and the road to the next recession.

In the meantime, watch the dead cat as it bounces. How high. And when it lands will it flop over dead or get up and run again?

Dr. Rasmus is author of the 2017 book, ‘Central Bankers at the End of Their Ropes: Monetary Policy and the Coming Depression’, Clarity Press, August 2017, and Systemic Fragility in the Global Economy, Clarity Press, 2016

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