For a while now, there have been fears that a recession was coming, and for people like me, or my brother, who pay attention, the signs have been evident and clear. The only thing that hadn’t been clear till last night was when it would finally come.
My brother is the big financial guy of the house, and he manages the families finances, and watches the markets like a hawk. So when he heard that the Shanghai Shenzen CSI 3000 Index tanked nearly 250 points early last night, tripping the breaker system that suspended trading in China, and the CNBC notification came in, he knew what the next day would bring.
So what did today bring? As I write this, the Dow Jones Industrial Average is down 1.7% ($286.60), the Nasdaq down 2.31% ($111.96), and the one my brother was really concerned with, the S&P 500 down 1.89% ($37.68).
A recession is defined as a period of declined activity across the economy, and that’s exactly what many of the major news outlets are saying we’re coming into. For example, Bert Dohmen points out in his article over at Forbes:
Let me discuss one major error of most analysts you see in the media. It is about the Fed rate hike. There is a great misconception.
The majority of analysts tell you that the 0.25% rate hike by the Fed is not important. They obviously know little about how the Fed works.
But this is much more important than just a small rate hike. One has to know what it compels the Fed to do to achieve its goal. In order for the Fed to get the rate up to 0.25% from virtually zero, it has to drain reserves from the banking system. It does this via “reverse repos,” which means it sells Treasurys to banks, and is paid via the bank’s reserves. That means ‘tightening’ liquidity in the banking system.
On December 31, 2015, the Fed did almost $475 billion of reverse repos. Of course, this is not permanent, but usually measured in a few days or less. But it does reduce the ability of banks to lend to each other for that time. The above was a record amount, exceeding the prior record of $339.48 billion on June 30, 2014, 1.5 years ago.
On Jan 5, 2016 the Fed did a reverse repo of almost $170 billion for one day. The Fed has to continue doing this in order to keep the Fed Funds at or above 0.25%. Draining liquidity has always been considered negative for stocks.
Our “Theory of Liquidity & Credit,” presented at the New Orleans Monetary Conference in 1977 for the first time, states that a rise in liquidity and credit leads to higher stock prices, and a reduction in those two leads to a declining stock market, often a bear market.
I called it “the secret key to the investment markets.”
Justin Spittler, who wrote this article over at Casey Research, points out that things are beginning to mirror a similar time not too long ago:
• The U.S. stock market is rotting from the inside…
Financial website The Reformed Broker reported on Sunday:
Consider that the equal weight S&P 500 closed -4.11% vs. -0.73% for the cap-weighted version, the worst underperformance of that index since 2007.
Unlike the regular S&P, the equal weight S&P 500 weights all stocks the same. It gives the same weight to Apple (APPL), the largest stock in S&P 500, as it does to clothing retailer Urban Outfitters (URBN), one of the smallest.
When most investors talk about the market, they are referring to the S&P 500 Index. But the equal weight index can give a more complete picture of what’s really happening in the market. That’s why we consider this one of the most important charts in the world right now…
As you can see, the regular S&P and the equal weight S&P moved closely for most of 2015. But in the last couple of months, the equal weight S&P has lagged. The growing gap between the two lines shows that fewer large stocks are propping up the index.
• The same red flag appeared in 1999…
A handful of hot technology stocks pushed major U.S. indices to record highs…even as most stocks struggled.
By 2000, the S&P 500 peaked then plunged 48% in 32 months. The NASDAQ crashed 78% over the same period.
In a healthy bull market, many stocks “participate” in the rally. Today, only a handful of giant stocks are doing well. And even the leading stocks are struggling lately…
• All four “FANG” stocks dropped yesterday…
FANG is a nickname for four big, high-flying U.S. stocks that have been propping up the market. It includes Facebook (FB), Amazon (AMZN), Netflix (NFLX), and Google (GOOG).
Netflix was the top-performing stock in the S&P 500 last year. Amazon was the second best. Google was the tenth.
On Monday, all four stocks fell more than the S&P 500. Facebook and Google fell more than 2.3%. Netflix fell 3.9%. Amazon was the worst performing stock in the S&P. It dropped 5.8%, for its worst day since August.
Typically, it’s a bad sign when the leaders of a rally start to stumble.
And to make things worse, oil hit a new 11-year low, with OPEC further saturating the market after agreeing to end it’s cap of 30 million bpd and being on track to make 32 million, a new record.
Peter Schiff, who heads Euro Pacific Capital, predicts that nothing good is going to come, and that “stocks are overvalued, and companies are overleveraged.” To further warn us, he warns that there may be a dollar crisis coming in the future.
As F. McGuire’s Newsmax article:
Peter Schiff, CEO of Euro Pacific Capital, warned Newsmax TV that the U.S. stock market is in a freefall, and such a death spiral will ultimately pull down the rest of the sputtering economy.
Schiff explained that you only have to look at the plunging U.S. stock indexes to see the economy’s future. “It’s very dangerous right now in the market,” he told “Newsmax Prime” on Newsmax TV. “We are already in or rapidly heading into a recession,” he said.
Schiff bluntly says the immediate future doesn’t look good, in an economic sense.
“Corporate earnings are already falling, stocks are way over valued, and companies are way over leveraged,” he said.
“There really is nothing to support this market until the Fed acknowledges how weak the economy really is and admits that it’s not going to be raising rates, but lowering them back down to zero and launching another round of quantitative easing,” he said.
“But absent that, I really don’t see what prevents the market from continuing to decline,” he said.
Schiff contends that the economy never really recovered from the last recession. All the fuss about the central bank’s strategy to put the economy back on its feet was all an illusion done with smoke and mirrors, he says.
“The Federal Reserve engineered this stock market rally and there’s nothing real behind it. It was just their attempt to create a phony wealth effect,” he said.
“That phony wealth [effect] is going to go away, just like the phony wealth went away and the housing bubble or the dot-com bubble. We never had a real recovery, we had a Fed inflated bubble,” he said.
“The Fed is going to save the market, but sacrifice the dollar in the process,” he predicted. “The real crisis of coming is not going to be a repeat of the financial crisis, but something even worse, a dollar crisis and even a sovereign debt crisis.”
Peter Schiff is more bullish than ever—on doom, that is.
Schiff, the chief executive of Euro Pacific Capital, told CNBC late Wednesday that the Federal Reserve is playing a “dangerous game” with benchmark interest rates that is likely to end in tears for stock-market investors.
“I think it is a very dangerous game the Fed is playing because the I do think the economy is already decelerating…and the Fed still has rates at zero,” Schiff said during the interview.
Schiff’s comments came after minutes from the Fed’s October policy-setting meeting offered the clearest signals yet that Janet Yellen’s central bank is close to ending a nearly decadelong period of ultraloose monetary policy.
On Wednesday, Schiff told CNBC he isn’t convinced that the Fed is prepared to lift rates in December, though Wall Street has priced in a 68% probability of a rate increase next month. He described the Fed’s talk about raising rates as a pretense to mollify investors.
I recommend watching the full interview for his more in-depth predictions and analysis.
I’m not an expert in financial markets. I just hold a few stocks, and follow the news. But with that being said, I think it’s time that people really paid attention to the markets, and to what the Fed is doing with the monetary policy, and moving forward, in both realms of possible future Quantitative Easing (QE), and their policy towards the US Dollar.