It took sixteen months to build the exceptionally steep Trump Rally, and just one week to eliminate a quarter of it. While I wouldn’t call that jolting reversal a stock-market crash in the ordinary sense, the largest one-day point fall in the history of the market (by far) certainly marks a massive change in market conditions. From this point forward, it won’t be the same market it was.
Those who are critical of my belief that the US stock market would crash by January 2018, may try to dodge the significance of these tumbling days by saying that eleven-hundred-plus points aint what it used to be. While true, I’d point out that, even on a percentage basis, the Dow hasn’t fallen this much in one day since the belly of the Great Recession. That, being one of our greatest economic collapses in history, is a pretty low benchmark to match up to.
My detractors could crow that this was all the robo-trading algorithms’ fault, but I’d just say, “I told you so.” I have often written that one of the great perils of this present stock market is that no one really knows how those algos work if they suddenly get crammed in reverse and try to start bidding the market down, instead of bidding it up. I’ve said throughout my predictions of the coming global Epocalypse that I suspected the robo-traders would play a major role because they are a massive accelerant to any action. Hopefully, the market brains have them all unplugged now so they can put irrational people back in charge, but I’m certain they don’t.
As for my statements that I believed the stock market would likely crash in January, 2018, though (I gave myself a buffer until mid year when betting my blog on economic collapse), this great disruption, which quickly shattered the fatuous market confidence of the entire world, did begin in January. (No crash, of course, happens entirely in one day nor rarely all in one week. I’ve also said the Trump Tax Cuts do create extraordinary levity that should help lift the market back up, and that novel lift is why I gave myself a buffer until mid year. It looks, however, like my blog will be hanging around awhile longer.)
Bonds bust out of bondage
I’d also note to any crows on the wire that pretty well all commentators are agreeing that the stock market’s rocket-ride downhill in the last few days has been due primarily to bond interest rising. That, also, is exactly what I have said many, many times would precipate our economic collapse when it happens (and certainly any stock-market crash that plays into that).
I’ve not been sure whether the bond market would crash first, but my central thesis has always been that a rise in bond interest will be our undoing because the entire recovery was built over a cavern of debt that is continually caving in from the sides and falling away at the bottom. The abyss is, in other words, getting unstoppably larger at a frightening rate … if you’re paying attention and not maintaining delusions and denial by being dismissive. And that is exactly where the last week is a revelation of the coming collapse. That is its significance — not how far it the market has fallen nor even how it surprised so many, but all the reasons for which it fell and the exact timing of the fall, as I’ll lay out below.
Even one of the big Fedheads admitted today (Tuesday as I’m writing this) that this market gyration is largely due to the Fed’s movements: “Fed’s Bullard Calls Market Rout ‘Most Predicted Selloff’ Ever.” That’s both the cause and the timing part.
Now that the event has happened, there is not a lot of disagreement on the primary cause, but what I find remarkably telling is how minuscule the trigger turned out to be. There are certainly other dynamics and secondary causes involved than just the little bump in long-term bond interest, but that little bump created an avalanche that went all the way around the world for several days … and may continue to reverberate in the days ahead.
I’ve explained in my predictions of this event why bond interest, which has long been held in a narrow and low band, would break out, when it would rise (maybe late 2017 but most likely January), and why that would be such a disaster when it happened. So, when all of those things do, in fact, precisely line up … all over the world … in an event like this, maybe people should take note. Detractors could call one or two matches in how things played out a coincidence, but when everything matches, it is their criticism that seems stretched.
So, to lay out the precise details for the crows, let me note that the interest spike that has everyone riveted happened on the long-end bonds, which is where I said it would — the tens and thirties. And I’d note that the blip upward in interest that triggered this obvious panic was an even smaller blip than I thought it would take to get things sliding, which shows markets are even more rickety than I’ve indicated, in spite of the fact that many people have been claiming for years that the markets are stable and resilient. (Resilient to other shocks, maybe, but not at all to interest increases in long-term bonds. We haven’t even hit 3% on the ten-year yet! The big interest moves will come later in the year, which is why I felt safely hedged with a mid-year bet. What we see happening in global markets now is mostly speculation in anticipation of what is coming — a beginning attempt to figure it out and price it in.)
Then I’d note that the sudden rise in bond rates happened for the very reason I said it would happen — as a reaction to the Fed’s Great Unwind in that the slide began in the first week the Fed finally got serious about its balance-sheet reduction and actually unwound the amount it has been promising it would (but which it had not done until last week). Proving that this was not an anomaly, a similar interest bump happened again on shorter-term debt with today’s treasury auction where the three-year yield moved up to the highest its been since 2007 (2.28%)!
Blip or Kaboom?
While today was volatile, the market did seem to be catching its balance. Maybe the Fed has let it fall as far as the Fed is comfortable with, and is now sending in the plunge-protection team — their fellow central banksters who buy US stocks directly (like the Swiss National Bank) as well as the members of their own cartel, whom they lead with nudges in futures. As of Tuesday evening, however, futures and foreign markets are still pointing the way to hell.
Monday was, in the very least, a game-changer for the stock market for months to come. It will be a different market when it does begin to rise again. Here’s a good summation from someone else of what happened:
“While the roots and drivers [of the selloff] are sure to be discussed for days, it looks to emanate from a perfect storm of reasons including, but not restricted to, a strong 2017 rally extending into January, low volatility, low interest rates, over-optimism and complacency, over-leverage and financial engineering, all coming to a head as investors react to the possibility of higher/faster interest rates rises with bond yields creeping higher to jeopardize the current market situation,” said Mike van Dulken, head of research at Accendo Markets, in a note. (MarketWatch)
Yes, fundamentally, a lot of flaws are built in to how the markets operate in a “financially engineered” manner, but it blew for the simple reason that interest rates nudged upward at the end of January as soon as the Federal Reserve got serious about its quantitative squeezing. That strongly supports my central thesis of this blog that this economy, built on caverns of debt and riddled with market design flaws, is too fragile to absorb any reduction in the Fed’s balance sheet. And that’s why I was able to time when the first crash would be likely to hit. It’s simple: When is the Fed scheduled to start getting serious in its Great Unwind? January. What week did they actually do it in? The last week of January. Kaboom!
The Fed cannot ever unwind. It will try because it believes it can, but kaboom! We’ll find ways to recover from this first shock over what happens to interest when they stop rolling over government debt. The government will adapt. It will find other buyers. But the cost will go up. And the kabooms will keep happening. I’ve always maintained that the failure of the recovery is baked in by design and will show when the Fed’s artificial life support is actually withdrawn. (Whether it is there by intentional design or design flaw, I’ll leave up to one’s conspiratorial imagination, as it doesn’t matter to me; both get you to the same place: kaboom!)
Some bigger voices than mine are saying the same thing:
Carl Icahn says he expects stock markets to bounce back after the massive sell-off Friday and Monday, while warning that current market volatility is a harbinger of things to come…. The volatility of recent weeks is cause for concern, Icahn said, adding that he doesn’t remember a two-week period as turbulent as this one. He said the problem is that too much money is flowing into the index funds, where investors don’t know what they’re actually investing in. “Passive investing is the bubble right now, and that’s a great danger,” he said. Eventually, that will implode and could lead to a crisis bigger than in 2009, he added. “When you start using the market as a casino, that’s a huge mistake,” Icahn said. (“Carl Icahn Says Market Turn Is ‘Rumbling’ of Earthquake Ahead“)
The fact that the market has completed its de-evolution into a casino, rather than a place to buy ownership in a company, is part of the rickety framework I’ve described for our economy — part of what makes it easy to shove over with a nudge in interest because the entire economy has been made utterly dependent on low interest.
Global stock rout
After witnessing Wall Street’s carnage on Monday, European stocks closed Tuesday at five-month lows. The Stoxx 600 logged its largest one-day percentage drop in twenty months. Hong Kong got a King-Kong-sized kink on the head. I write of global economic collapse, and this event certainly showed how instantaneous global contagion is across market classes and nations — bonds, stock, even some commodities, got clobbered almost everywhere.
Nevertheless, those who are starting to get it still don’t get it:
“We are not there yet but the chances of this selloff turning into full blown bear market have increased dramatically. If investors look at underlying earnings growth and the fundamentals of the global economy, there is reason for optimism. However once this kind of stampede starts it’s hard to stop,” said Neil Wilson, senior market analyst at ETX Capital, in a note. “So if the fundamentals are OK, then this looks like a technically driven selloff — therefore one that should not herald Armageddon.” (MarketWatch)
They can envision how quickly this could go completely bad, yet they don’t even begin to understand the fundamentals. While the above comment shows how precarious some analysts feel this situation really is, it also reveals how fundamentally flawed the understanding of economists and analysts is when it comes to understanding “the fundamentals of the global economy.” No, the fundamentals do not provide reason for optimism. They provide reason for grave concern. As I’ve been writing all along, the greatest fundamental that is exerting pressure right now is the massive debt that the entire global economy is built on.
That cavern of debt does not provide a foundation for anything. Profits may be up for many corporations, but people are also in debt to their eyeballs, and the slightest raise in interest will start wiping many out. So, are many corporations (though they, at least, may get bailed out by Trump’s tax cuts). That is why the market was so (on the surface of things) overreactive to the tiny change in long-term interest that we just saw. Moreover, that pit of debt is a fundamental that cannot be changed, except by default. We can never grow our way out this much debt nor ever pay it off; and we can only keep rolling it forward if we pin interest rates to the floor; but even that leaves us with no capacity to take on more, and taking on more is the only way we’ve kept the economy afloat.
We now see that just staring to play out. Taking on more debt is requiring the government to make greater bond issuances, and those are no longer able to find enough buyers without a raise in interest. That will get worse quickly as the Fed increases its unwind.
That’s why global economic collapse is certain. This market riot does herald Armageddon, but it probably is not going to be Armageddon today. Monday was a foreshock that proves how extremely sensitive all of the stock markets of the world are to the tiniest rise in US long-term interest rates because those floored rates are the only reason we’re still perking at all. The entire recovery was built on them.
To show you how blind the experts can be to what is really happening, here is another quote from the same article
Steven Andrew, multiasset fund manager at M&G Investments, said his response to the plunge would be “to add equity exposure. “From a fundamental standpoint little seems to have changed. Increasing wages should ultimately be a good thing for the U.S. economy and corporate profits. These considerations, and the rapid nature of price suggests that there may be some nonfundamental drivers of this price action,” he said in a note.
True, from a fundamental standpoint, nothing has changed. That is the problem. The important fundamentals were not changed at all during the economy, but the problems with them were greatly exacerbated in order to try to create an easy recovery. (Easy compared to all we really needed to go through and get done.) The fundamental that hasn’t changed and that counts is that nations of this world, and the people and the companies are still just as deeply mired in debt this week as they were last week. But that is not the fundamental most people are looking at, so they don’t see what’s coming.
Rather than add a list of all the global markets that tanked after the US went down, let it suffice for me to say, most of them did! (Or you can click here to get a list of what many others were saying about the global stock market rout.)
So, one more thing that is fundamentally bad about the global economy is the very high risk of contagion when all debt-based economies are in this deep and are subconsciously this concerned about rate increases and are this intermarried in trading.
The mechanized meltdown — machines rule and drool
“Dow Drops 900 Points in 10 Minutes as Machines Run Amok on Wall Street”
Risk parity funds. Volatility-targeting programs. Statistical arbitrage. Sometimes the U.S. stock market seems like a giant science project, one that can quickly turn hazardous for its human inhabitants. You didn’t need an engineering degree to tell something was amiss Monday. While it’s impossible to say for sure what was at work when the Dow Jones Industrial Average fell as much as 1,597 points, the worst part of the downdraft felt to many like the machines run amok. For 15 harrowing minutes just after 3 p.m. in New York a deluge of sell orders came so fast that it seemed like nothing breathing could’ve been responsible. The result was a gut check of epic proportion for investors…. “We are proactively calling up our clients and discussing that a 1,600-point intraday drop is due more to algorithms and high-frequency quant trading than macro events or humans running swiftly to the nearest fire exit….”
“What was frightening was the speed at which the market tanked,” said Walter “Bucky” Hellwig, Birmingham, Alabama-based senior vice president at BB&T Wealth Management…. “The drop in the morning was caused by humans, but the free-fall in the afternoon was caused by the machines. It brought back the same reaction that we had in 2010, which was ‘What the heck is going on here?” It may never be clear what accelerated the tumble — people still aren’t sure what caused the flash crash on May 6, 2010. Unlike then, most of the theorizing about today’s events centered not on the market’s plumbing or infrastructure, but on the automated quant strategies that gained popularity with the advent of electronic markets last decade. Particular suspicion landed on trading programs tied to volatility, mathematical measures of which exploded as the day progressed…. (Newsmax)
There is some basis for saying, “this looks like a technically driven selloff,” but this is another problem for which there is no solution, and one I’ve written about here in the past. No solution because they cannot even identify the problem back in 2010! You cannot solve what you cannot identify. The machines that now run the stock market are out of control. They do the bidding for us, but their algorithms have been designed by college sprouts who have never seen a falling market. They try to trick each other, and try to bid the market up. They’re an accelerant. Most dangerous of all, they’re self-programming. They rewrite their own algorithms based on their successes and failures so that even their programmers no longer know why the machines are doing what they are doing. Even if one group of programmers does know exactly what its own algorithms are doing, they certainly don’t know what is in all the others and, therefore, how they might interact to self-reinforce wrong actions.
They don’t exist in one room where you can pull a circuit breaker and disconnect them from the market. They exist in office buildings by the hundreds of thousands all over the world. Even the decisions and bids that are made by humans doing their own thinking are placed through the machines, so there is usually no way to know if a single bid coming through is by a human or is machine generated. Therefore, there is not really any way to shut the machines entirely off if they get out of control because their disjointed, convoluted, false-bidding, intentionally tricking, interacting and over-reacting zillions of intercommunications per second all around the world add up to a sum that is far more evil than its innumerable mischievously and deviously conceived parts. The system is built from the core out factious parts intended to trick each other upward, but what happens if this amalgamated beast starts tricking itself downward? Who has the authority or the controls to stop the collapse in the microseconds in which it may originate and climax?
So, FUNDAMENTALLY, the market system, itself, is deeply and inexorably flawed by intentional human design. It wasn’t designed to destroy the world. It was merely designed with its own sinful machinations because of the flaws of its designers. The whole beastly thing is of a corrupted nature because of all the people who hoped to use their machines to out-game all the other people’s machines. It is a network of sparks and tricks. However, because it can multiply its devilish intentions millions of times per nanosecond, we have no idea how much market carnage it might create if all the algos one day just happen to line up in the wrong direction (wrong direction for humans, anyway).
The fifteen-minute, 900-point drop on Friday was a mere foreshock of that, too. We’ve already had a few flash-crash foreshocks that none of the experts can understand, but it hasn’t slowed us from moving deeper and deeper into the machines’ labyrinth. Nor have we even begun to try to work out some of the design flaws that caused those initial flash crashes.
Other problems with the machines emerged when trading became so frantic that the sheer volume was frying the brains of many computer networks, causing the financial services of several trading companies to go offline.
Investment firms T. Rowe Price Group Inc. and Vanguard Group apologized to customers for sporadic outages on their websites during the Dow industrials’ 1600-point downturn…. Online brokerages TD Ameritrade and Charles Schwab also experienced issues. (Newsmax)
The computers couldn’t handle all the other computers.
If the market technowizards have actually managed to get all the robo-traders unplugged or quickly reprogrammed, maybe the slide will stabilize before it becomes an all-out crash. They attempted that with some success today by stopping all volatility trading before the market opened, which I’ll get into below. But, even if they’ve gotten the ill-programmed robots off to the side or have fixed their sizzling little heads, the market that opens tomorrow will be a whole new market — no longer one that hyperventilates on the fumes of hope, but one that has relearned how to fear risk.
Volatility shorts out
Right now you hear of other talk of financial Armageddon, too. The following article from MarketWatch is titled “‘Short-volatility Armageddon’ craters a pair of Wall Street’s most popular trades, could roil market”: (Clearly the headlines, even in straight financial publications lean heavily toward my being able to call this a crash when they choose words like “Armageddon” and “craters.”)
One of the most popular trades in the market, betting a period of unnatural calm would continue, may have amplified selling pressure in the stock market on Monday market participants said. At least two products tied to volatility bets were severely whacked with the hemorrhaging that could pose challenges to the exchange-traded notes.
These kinds of trades have almost no real-market reason to exits. They are in the market entirely to turn Wall Street into a speculative gambling casino. One of the biggest reasons stock markets can be such a disaster is that they barely exist any more for their original intention of creating a place where ownership in companies can be bought and sold. So, the markets, themselves are a major FUNDAMENTALLY flawed part of our economy.
Even one of the inventors of the VIX says he has no idea why VIX trading is allowed to exist as it has no legitimate market function:
Fifteen years ago, Devesh Shah was still in his 20s when he helped invent the stock market’s current barometer of fear. It was a new version of the Cboe Volatility Index, a gauge of expected price swings for the S&P 500 Index. The VIX, as it’s known, has become the talk of Wall Street after Monday’s record surge, sending many products tied to it into disarray…. “In my wildest imagination I don’t know why these products exist. Who do they benefit? No one, except if someone wants to gamble -– then, OK, just go gamble… And who exactly made money? The VXX from its inception in 2009 is down, what, 99%, even after this move… It’s kind of sad that these products exist in the first place, but it’s hard to stop it. If you stop this, something else will come up. Bitcoin will come up.” (Bloomberg)
And the markets are riddled with that kind of rubbish. So, fundamentally, all is well in a market filled with rubbish? How can people argue the fundamentals are fine when the markets themselves are so fundamentally flawed in such grave ways that even the inventors say some of these things are destined to fall from their inception?
With volatility trading, people are just placing bets on how wild or calm the market will be, but it comes with enormous downside risk:
The VIX uses bullish and bearish option bets on the S&P 500 to reflect expected volatility over the coming 30 days, and it typically rises as stocks fall. The XIV, meanwhile, was designed to allow investors to bet against a rise in volatility and such bets had been a winning proposition until recently, when equities accelerated a multisession unraveling fueled by fears that the Federal Reserve will be forced to raise borrowing costs faster than anticipated due to a potential resurgence in inflation, which had pushed Treasury yields higher. Monday’s stock-market drop may have been amplified because those making bets that volatility, as measured by the VIX, would remain relatively subdued, were caught wrong-footed…. Both the XIV and the SVXY as they are commonly referred among traders were halted in premarket trade on Tuesday, with investors questioning whether they will be liquidated. Shorting refers to a bet that an asset will fall in value, with traders making a profit from the difference of that asset when it is returned. But when a surge in price occurs it can translate into extreme pain since an asset’s price can rise infinitely, while a declining asset can only go to zero.
After months of languishing at a swampy bottom, the VIX soared over the past week, causing those who shorted it to lose fortunes. Suddenly, the long-languid volatility was being written about with such adjectives as “staggering.” So, they pulled the plug on those plays today before market trading opened because they thought that entire roomful of high rollers in the casino could instantly melt down in flames, setting the rest of the casinos in the world on fire.
I call that fundamentally flawed, but that is because I am looking at things that truly are fundamental to how our markets perform. Highly leveraged trading that has no legitimate market reason to exist quickly leaped to the edge of creating all-out disaster for its participants. (I’d be happy to see them flushed away, just as I’d be happy to see all that kind of marginal trading ended. It has nothing to do with a sound economy and everything to do with providing paths to get very rich very quickly that hammer the rest of us when they malperform. But it’s not going to go away. The players are addicted, and they own the casinos.)
Notice that even financial writers, refer to these actions as “bets” rather than “bids” or “investments.” Said on XIV trader in another MarketWatch headline today: ‘I’ve lost $4 million, 3 years of work and other people’s money’.
The VelocityShares Daily Inverse VIX Short Term ETN XIV, -92.32% was created to give traders an opportunity to bet against a rise in volatility — the calmer the markets, the more profitable the trade. And it’s been one of the best plays out there amid the bull’s long and steady assault on new highs. All that changed, however, when the stock market began to seriously flame out last week. The ultimate gut-shot landed Monday when the Dow Jones Industrial Average DJIA, -0.26% was smacked with a record-setting retreat.
Oh, the humanity! The fundamental problem is that when these people play their get-rich-quick games on the sidelines of the market, they are dealing with real underlying market products, and their needs to quickly liquidate assets create huge holes in the market that can open without warning. The person who made the statement in the title of the article above asks, “Should I kill myself.”
Probably.
Well, at least, kill the kind of speculation vehicles that amplify the market’s problems for others solely for the purpose of helping people speculate recklessly in order to get richer quicker. Fundamentally flawed … by design … and by everyone’s acquiescence.
Actually, the man quoted above, started with 50 grand, and flew with wax wings into the sun with his relatives’ money as they trusted he knew what he was doing because, for a while, it was working very well. Icarus syndrome:
“The amount of money I was making was ludicrous, could take out my folks and even extended family to nice dinners and stuff,” he wrote. “Was planning to get a nice apartment and car or take my parents on a holiday, but now that’s all gone.”
Indeed, it was ludicrous. Get-rich-quick schemes in major markets are always fun while they last, but they’re not really any better, “fundamentally” speaking, than Ponzi schemes. And that is why Babylon will fall. The Wall Street apparatus is designed by people trying to outgame other people, and the whole collection of schemes has risen to the height of the original tower of Babel. Fundamentally, everything is wrong by design, so what could go wrong? More like what could go right?
These kinds of highly leverage trades are one of the reasons I’ve said so much that is so rickety that mere odds say it has to fall. It is so built on pure speculation and built so high, that disaster can come quickly. The more structures you have like that built around each other, the more likely one collapse will take the others down like dominoes.
As of today, some market experts are referring to this mass of volatility trading schemes and machines as a “poison pill,” but one good thing came out of all this event:
Yesterday’s historic VIX move already destroyed an entire asset class: the inverse VIX ETN are no more, meaning retail no longer has a handy, convenient way to short vol, which incidentally is for the better. Unfortunately, what it means is that retail will now simply short VIX ETNs like VXX, exposing themselves to unlimited downside risk but that’s what natural selection is all about. “Yesterday’s move has certainly generated a lot of damage for all implicit short volatility strategies, including trend followers,” said Nicolas Roth, head of alternative assets at Reyl & Cie…. “Most systems are designed somehow to capture trends and this sell-off appeared out of nowhere for a quantitative system.” (Zero Hedge)
Where will the next “out-of-nowhere” come from in this mechanized casino?
One firm that according to preliminary reports was the closest to a near-death experience, was Option Solutions LLC. The hedge fund that trades equity options lost as much as 65% after it was forced to sell holdings overnight, according to a Bloomberg report…. “The market became completely illiquid as volatility increased far in excess of the market movement,” Paolo Compagno, a partner at the London-based firm, said in an email to investors seen by Bloomberg News. “We were forced to liquidate throughout the night and morning.”
Sounds like they stopped 35% short of where I wish they would have gone (except that a lot of innocent people were probably hurt in this, so for their sakes, I don’t actually wish it).
While this is a long article, it is a most abbreviated summary of the blisteringly quick action that scorched the markets of this world in one day that was part of an otherwise very bad week. So, whether you consider it a “crash,” it was certainly a hair-raising drop that shook the entire world and broke several records in doing so. I’d, at least, say something that shakes markets around the world and turns them on their head by reigniting normal fear that has been non-existent for two years and that reconnects stocks and bonds into their original and almost forgotten diametric dynamic … I’d, at least, call that somewhat in the category of a “crash.” It certainly accomplished more than just a correction in prices, given the long-dead dynamics it finally managed to fire back up.
And that is just a foreshock of the Epocalypse, which will become clearer later in the year now that those moribund dynamics are, at last, re-engaged. For accomplishing that, this event was epochal. It marks the end of the “recovery” years during which stocks and bonds moved in queer and unnatural lockstep and a return to old reality where they are reforming an equilibrium as competing forces. That’s epochal, and “epoch” is one of the roots in my word “Epocalypse” by which I also mean an “economic apocalypse” as well as an “epoch collapse.” Why should you believe this is that? Because the foreshock happened when I said, where I said, involved what I said and unfolded how I said and why I said. And pretty much everyone agrees on those details.
Excellent article.