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Red alert, folks! The action in the past few days confirms several things to me:
First, the capital market is rapidly spinning off its axis. It’s swinging wildly to and fro in a way we haven’t seen since the last major bear market that ran from 2007 to 2009.
Second, the cycle of crisis/policy response/crisis is getting shorter and shorter with each passing day. Each response is also proving less and less effective, a major pattern shift from what we’ve seen since the end of the Great Recession.
Finally and most importantly, if you’re not buckled up and ready for this new market paradigm, you are going to get hurt. You can no longer count on government intervention and platitudes to save you. You need to take your financial future into your own hands, with the help and guidance of independent advisors who have no axe to grind and no hidden conflicts.
Look, we’ve had 77 long months of bull market. We’ve had 6-1/2 years where every bump was smoothed over by easy money … where every policy action proved effectual at getting markets pointed up and to the right again … and where big money investors were willing to behave like sheep, mindlessly following their central bank shepherds.
But that’s over. The news overseas is getting so bad, and the forces tugging at markets are getting so severe, policymakers are no longer able to control them.
Take the emerging markets. With all the focus on China, it was easy to miss the announcement late yesterday that Standard & Poor’s cut Brazil’s sovereign credit rating to junk. The downgrade to “BB+” from “BBB-” sent the country’s currency and equity markets tumbling.
The iShares MSCI Brazil Capped ETF (EWZ) sank as low as $22.64 today – its worst level in more than a decade. For its part, the Brazilian real fell to its lowest since 2002.
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| Brazil: Great beaches, but its currency is in trouble. |
Elsewhere in the emerging markets, the Turkish lira fell to a record low, extending its 12-month loss to 28%. And the free-falling Malaysian ringgit dropped to a fresh 17-year low. Your average wet-behind-the-ears fund manager on CNBC may not talk about this stuff, but you can be darn sure I pay attention.
Meanwhile, remember how I’ve been saying that central bank-driven rallies are petering out in less and less time? The overnight and early morning trading session offered yet another proof element of that.
A leading lawmaker in Japan’s parliament said earlier that the Bank of Japan should boost its QE program by another 10 trillion yen next month. That would bring it to 90 trillion yen from 60 trillion-70 trillion two years ago.
Never mind that all that BOJ money-printing and bond buying has failed for years to meaningfully boost inflation. The important thing for investors like you is that it only managed to boost stock futures for about three hours early this morning.
Dow futures surged to positive-160 … then completely gave it all back and fell as far as negative-100 before the U.S. market open. That’s exactly the spike-and-fade pattern we saw after Mario Draghi revamped Euro-QE earlier this month. It’s also exactly what we saw several days earlier. Back then, a quick 160-point intraday pop in the Dow Industrials from dovish Federal Reserve meeting minutes faded completely in less than an hour.
The talking heads on TV will tell you just to ride this out. They’ll tell you to keep buying stocks. Many of them probably don’t even look at the multiple other markets (See: Junk bonds) and indices (See: Carry trade) that are warning about increased turmoil, like I do.
| “You should get started. Like, now.” |
I’ll even throw another one out there: The interest-rate swaps market. In order to keep your eyes from glazing over, I’ll keep it short. Swaps are derivatives that banks, corporations, and other financial players use to hedge interest rate risk and target speculative profits.
We started to see odd moves in the swaps market early on in the 2007-09 bear cycle, and that weirdness served as a nice “early warning system” for credit quality and stock prices. Now, I’m seeing similar off-kilter moves there again – yet another troubling indicator.
So if you haven’t gotten rid of junk stocks, lowered your equity exposure overall, dumped high-risk bonds, and started adding hedges on big rallies, I think you should get started. Like, now.
Now for a few questions: What do you think of Brazil’s debt downgrade, or the fresh lows in markets like Turkey and Malaysia? Could this set off another wave of emerging market turmoil? Will that impact us significantly here?
How about the “law of diminishing returns” on central bank manipulation? Are you concerned about it or making portfolio adjustments as a result? Please do let me hear about it at the Money and Markets website.
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Yesterday’s dramatic reversal – just the latest in a series of them over the past couple of weeks – brought out a ton of comments about the market. So let’s get right to them.
Reader Chuck B. said he thinks we’re in for a lot more downside, given historical patterns. His take: “If you look at market patterns, after a big run-up like we have had, there is normally a correction of some 30% to 50% or more. We had barely 10%, and after a first drop, there is usually a small recovery followed by a bigger fall.
“It seems likely we will not see the bottom of this correction until late this year or early in 2016. The time to load up on stocks would seem to be then, after the big fall. Most should be a good deal cheaper, also.”
Reader John S. also said he’s expecting more downside, offering these comments: “I believe the U.S. stock markets will be heading lower for about five months. I’m thinking mid-January should be the bottom.”
Reader Michael B. weighed in from the bearish camp, too. His view: “The synchronicity of economic history over the past 100 years shouldn’t be ignored. All the past economic cycles are repeating in our decade. In a sea of debt, countries are in a new race to the bottom to devalue first, hoping that inflation will eventually bail them out.
“New shocks are on the way this month and ‘The wise investor will be in cash, before the crash.’ A 50% correction is yet to come, the Fed is out of tools, and the Obama administration is out of clues. An age of chaos awaits us as the great economic redefinition now comes.”
But not everyone is running for the hills. Reader Ross L. said: “When the market tanked after the Dot Bomb bust, I was licking my wounds and froze up. I ceased my dollar cost averaging method of buying similar dollar amounts of types of securities at regular intervals.
“In retrospect, that was a huge mistake since I lost any opportunity to get lower prices for my asset purchases. After some sense of normalcy returned, I restarted the method of dollar cost averaging. My feeling is that one must ride it up and down and stay in the game. I don’t want to be kicking myself for missing out on lost opportunities again.”
Reader Tracy also talked about the opportunity created by market declines, saying: “Mike, I think we are in for some tremendous opportunities as stocks head down. Nothing has really changed at this point.
“China is struggling, Europe is still in trouble, and Japan is strapped at a hundred times GDP. I do think that if things in those regions begin to tank, we will see a comeback in our stock market as money flows in to the U.S. But that will only be short lived.”
I appreciate everyone sharing their thoughts amid all the market turmoil out there. Personally, I think this is the time for caution when it comes to positioning.
I follow all kinds of things, including esoteric corners of the credit, currency, and derivatives markets, and they are signaling that stocks remain overpriced … possibly by a LARGE amount. These indicators have served me well in the past, particularly in the last major bear market. So I see no reason to just throw them out the window now.
Want to throw your hat in the ring? Then don’t forget to go over to the Money and Markets website and do so.
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Will we finally get more “perp walks” when officials at major banks or other large corporations flout the law? That’s what the Justice Department is shooting for, according to the New York Times.
Officials there are going to focus more on prosecuting individuals, rather than just corporations, when there’s wrongdoing. My take? It’s about time.
The central banks in China and Japan aren’t the only ones failing to accomplish anything by cutting rates and launching round after round of QE. New Zealand’s central bank cut interest rates for a third time this year, lowering them another 25 basis points to 2.75%. Previous cuts failed to prevent the economy from continuing to decelerate amid slowing construction and reduced demand for Kiwi exports.
The 2015 football season starts today with a matchup between my New England Patriots and the Pittsburgh Steelers. Naturally, I’m excited and ready to go, and according to the Wall Street Journal, all the bad offseason press about Deflategate and concussion woes isn’t hitting the NFL’s bottom line.
Strong sponsorship and media interest has pushed NFL revenue through the $12 billion mark. Deals with the likes of Under Armour (UA) and DirecTV, which is now part of AT&T (T) should ensure a windfall year for the rich families that own the major NFL teams.
So are you excited about the start of football season? Do you think the Chinese, Japanese, New Zealanders, and others are fighting a losing battle here against declining markets? Should execs go to prison more often, rather than just have their companies foot the bill, when there’s wrongdoing? Share your two cents on these or other questions over at the website when you have a minute.
Until next time,
Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
{ 37 comments }
I think the Fed is actually going to do it next week. I think that no matter what the play is the TBT, triple short long term bonds. China is and will continue to sell treasuries to prop up their economy and the velocity of money coming our way with an increase will allow the Government to keep on borrowing because they have no clue how to have fiscal responsibility.
By the way our next President can void the Iran deal and there are valid reasons for not doing it. However, there are Iranian elections looming and their new President can do the same thing. With $150 billion in their coffers they can tell us where to stick the snap back sanctions. Russia, China and North Korea must laugh themselves silly at us as Iran will be a $150 billion arms purchaser. Of course they would then have the bomb anyway. The only good thing is that the ignorant, inept and incompetent politicians who voted for this will be exposed for what they are and the world will be a far more dangerous place for our children and grandchildren.
If Iran wants the bomb, and is willing to pay the bill, there is really nothing anyone can presently do to prevent it besides war. China got the bomb. Israel apparently got the bomb. India, Pakistan and N. Korea got the bomb. They all know the possible cost of using it. Even the Ayatollahs are not totally stupid. I hope.
With that extra 150 billion they are going to receive because of this deal they can BUY several nuclear devices of various types. Hell, with all the money they’ve spent so far building all those nuclear installations I wouldn’t be surprised if the inspectors found, during one of those “snap inspections”, several more nukes. Iran has had a nuclear program since,at lease 1993 – the year that Netanyahu first began warning the world about Iran’s nuclear potential. I mean, how long does it take to build “The Bomb”?
“Will we finally get more “perp walks†when officials at major banks or other large corporations flout the law? That’s what the Justice Department is shooting for, according to the New York Times”.
Isn’t it interesting that the Justice Department reached this state of resolve just as the statute of limitations ran out on those complicit in the last set of financial atrocities that brought the system to the brink? Is it any wonder voters are looking outside the usual candidate streams for future leadership?
Excellent point, GMA!
Even outside the usual political hacks, you get people like that Boobus Americanus who presently leads.
He claims to be the most militant. Give him a gun and a ticket to the Middle East.
I am typically a buy and hold investor. I have several positions with nice gains and I am in the highest tax bracket. Any sale generates a 23.8% tax. And if I wait out the carnage for 6-9 months I miss the dividends representing another 2-5% in lost income. So, if I am absolutely positive my stock will drop 40% then I would sell, otherwise I will continue to ride it out.
Bad idea to ever sell at any time. That is, unless you own something that should not have been bought in first place!
The markets have been out of kilter for so long, nothing is for real. If you start tossing anyone in jail for wrong doing, you would have to start at the top, The Pres. of the US, the Fed, the bankers, wall street, never gonna happen. We the sheep will continue getting sheared, it’s a fact of life, our reward comes in the next life.
Isn’t it interesting how quickly a person can be thrown in jail over marriage equality and yet the ones who plunder our markets with their important inside contacts, get to retire on massive pensions. No jail time for them.
I guess the jails are already full!
Have a great time in your “next life”!
Loss Aversion and Risk Aversion are issues I need to learn how to handle quickly.
This morning Jared Dillion said “The best investors in the world don’t make any of these errors. My favorite, Stan Druckenmiller, talks about being a pig in the trade. He’d rather make a Type I error than a Type II error. Find his speech at the Lost Tree Club on the Internet for more details.” So I’ll start there.
I am surprised to see a reference to Jared Dillion here. He is way beond this group!
I think there is always a good time to make $$ in the markets. The Dow may go lower for a while, but quality will still go forward. Silver is very attractive. 2016/7 is its natural 6 year peak. Penny stocks may be temporarily questionable, but hey; who doesn’t get excited on a roller coaster. Be careful, be wise, go with God.
God Luck with that!
It’s difficult enough now to get banks and financial institutions to commit to venture proposals or even normal finance operations. Can you imagine what will happen if executives are subject to the prospect of a “perp walk” if some overzealous bureaucrat embarks on a witch hun?.
NFL starts tonight.. Is Buffalo Wild Wings BWLD a good hold to Super Bowl Sunday. Stock is at $ 197.00
bob
Do you advise buying gold and silver??
What happened to Mikes love for the oil sector ?
On hold, I guess. One day it will probably pay off. ‘May be awhile, except transporters and refiners, which are doing better than many people realize.
hope fully after every pass by new england patriots , they check the ball . Would not want them to win on questionable technicalities !
as for the central banks of the world , maybe the world governments should print the money , pay off the banks and ban fractal banking . I think this would be a start of inflation , especially since politicians do not know how to budget and would have to keep printing [ but hay , no interest charges this way !]
As for the perp walk , how many politicians and justice administrators and other Gov officials will be taking this walk also since they allowed it ? [malfeasance ! ]
Even if they caught them cheating again….nothing would happen. Seems that is the message of late.
Every ball in every game should be checked by officials. Then the officials should be checked. Ha-Ha.
Hi Mike
I wonder how the players are doing with margin calls?
Mike, much of what you are saying, and many of your readers are saying, smacks of market timing to me. Many academic studies (actually all studies) have proven repeatedly that successful market timing is not possible!
OK, here’s what he said. We’ve had several years of perverse interest rates near 0 and all the money that wanted a safe home has landed in flop houses and crack hostels financing hookers and blow (embellished). When rates start to rise, (will it be next week?) a lot of trillions of dollars of wealth in the world is going to leave the flop houses and crack hostels where it’s not ever been safe and will rush to safety.
I interpret his speech as saying that we need to be ready to use cash to purchase triple-leveraged bond funds, or something like that.
Bonds seem like a rather poor value. If rates start rising, and you need to sell before maturity, you lose. With inflation, if it also rises, even holding to maturity loses value.
Send the bum execs to jail. With some you can throw away the keys. They’re bad actors.
I share your concern, Mike. Everyone should be very wary right now and position themselves for this “new market paradigm” as you so aptly put it. There are many converging forces in play at present that are on a collision course. Unfortunately, it’s no longer a question of IF, it’s a question of how soon.
As I see it, the only temporary stop-gap right now would be if the Fed stays pat and doesn’t increase rates next week. World markets would then get an interim reprieve. But Fed increase or not, the financial world as we know it will still start unraveling very shortly, beginning with the interest-sensitive derivative markets. Imo, next week’s release of the Fed decision (Thurs. 2pm ET) will be the most important it has ever made.
That was good information, thanks Mike. I’ve been noticing many of the small oil servicers, tankers, drillers, etc are showing real dread and fear. DRYS exec is selling all dryships; Petrobras (Brazil) has been cancelling LT contracts with drilling servicers and the market is guessing who’s next on the chopping block, just look at what happened to VTG! Its more than supply, dry bulk shipping has been declining, just look at the Baltic Index. The market indices aren’t warning people, but a look at the smaller players is shouting deflationary depression from the mountain-tops. This all spells lots of debt defaults just around the corner. Once debt declines.. its Katy bar the Doors!
I am overwhelmed and under-educated in this arena.
I had the pleasure (?) of living and working in Brazil. Consumer debt is among the highest anywhere. Brazilian stores finance purchases of items selling for $30.00. I met many lovely people in Brazil but if you google “world’s 50 most dangerous cities” you will find that 20% of them are in Brazil. I have traveled and lived in many places throughout the world including the Middle East, Asia, Europe, and the Americas and have been involved in armed conflicts. I feel very uneasy walking the streets of Rio. I have no desire to work, live or invest in Brazil
91/6 is coming. From some of the comments I’ve seen, it will be, in financial circles, the equivalent of 9/11 politically. Most likely it will be nowhere as tragic. I hope.
Seems to me that the champion New England Patriots are also champion cheaters.
After receiving no punishment for deflategate they think they are impervious to & mess up Pittsburg’s
phone communications.
Regarding the next downturn in the economy, many are suggesting to get rid of real estate before the crash. I have several rentals(singel family homes) that maybe I am wondering if it would be good for me to sell them before the “big boom”. What are pros and cons?