Epocalypse Soon: Stock market denial begins to break
I have moved from “Epocalypse Coming” to “Epocalypse Soon,” meaning the economic apocalypse that will be the second collapse of the Great Recession. I am taking about the big one just ahead where we finally discover the real depth of the Great Recession — an economic abyss that was spanned by the Fed with a paper bridge. It won’t be long, and I’ll be titling these articles “Epocalypse Now.” We’re not there yet, but you can feel the ground shaking as this giant approaches.
Last week, we saw the most rapid decline in stocks we’ve seen in weeks, following a the best rally we’ve seen in months, following the biggest stock market plunge we’ve seen in years. This volatile wing back to strong negative reaction puts us closer to that combined stock market crash and economic collapse that will form the epocalypse I predicted for the fall. The market broke through one of its most bearish barriers — for the second time in three months —  falling below its 200-day moving average. The S&P 500 wound up negative — again — for the year. The stock market has returned to looking for the bottom now, rather than reaching for the top.
I think it is especially noteworthy that this time it was not energy stocks leading the decline. The fall of energy stocks could be readily explained by the huge drop in the prices of oil and other resources in part due to China’s decline but largely due to OPECs war on US oil companies — external realities that had a large impact on the US stock market. It wasn’t mining stocks or steel stocks either that led the market down this time. Those commodity drops that led the way last time can be explained by the loss of demand from China as China’s economy struggles to find a lower balance.
Yes, all of those categories fell, too, but this time consumer stocks led the fall — businesses like Nordstrom, JC Penny, and Macy’s that dropped because retail sales are down. And that speaks to an economic malaise that is spreading broadly into the consumer market, which the US has always maintained is its driving economic strength. And it is happening just in time for the holiday season that the retail industry counts on to make its year-end profits.
Apparently, those improvements in the job market that the government has been touting and that drop in oil that was supposed to put more money in the consumer’s pocket are failing to turn into greater spending or any kind of economic expansion. I have to think that is because citizens are vastly smarter than their government and are using any additional strength — assuming there is any — to pay down debt, even as the government increases debt.
As has become the norm, the permabulls tried to blame this new drop in the stock market on the weather. Last winter, stocks were down because the winter was so cold. This fall, stocks are down because the fall has been so warm! No one is running to Nordstrom or Macy’s to buy warm winter clothes.
They sound like a bunch of weather whiners to me … looking for any excuse to explain the drop in the stock market, short of admitting that the global economy just plain sucks and that the United States is not immune to that and, most of all, that nothing the Fed has done is sustainable beyond the days of rampant money printing. It all ends when interest begins to rise.
Perhaps consumers feel the coming epocalypse and are hunkering down for a long winter, in spite of what the false prophets of profits have to say.
Stock market bull goes bust as stimulus bites the dust
The trusted experts thought the bull was back as the market rallied to test its former ceiling, but it barely touched that ceiling and now it’s falling as fast as it rose as it prices in the likelihood that the Federal Reserve will raise interest rates before winter begins. This past week’s plunge is just a taste of things to come.
We are seeing more and more now that investors in the stock market are starting to regard bad news as bad news again. That is a sea change that follows the better part of a decade in which the stock market would rise upon bad news because bad economic news meant the Fed would keep interest rates at the zero bound and keep the money pumps pumping.
Now that it finally looks likely the Fed will end its years of attempted stimulus, the declining global economy is starting to scare investors as they see no safe place to land when the money escalator dumps them off the top. Many of those who road the escalator up did so by denying all the way that the stock market was just a bubble being inflated by the Fed; but their growing fear as Fed stimulus looks to close shows they were lying to themselves and must have known at some deep level that none of this “recovery” would hold.
Market optimism has grown so thin — even after an October that was the best four-week rally in four years — that a one-week downturn is taking the wind out of the wind bags. A growing number of market cheerleaders are now admitting the game is over before the buzzer has rung and are starting to leave the stadium in defeat.
Randy Frederick, the managing director of trading & derivatives at Schwab Center for Financial Research, summed up the stock market’s rapid decline of the past week as follows:
Today’s selloff does not make a lot of sense, because there wasn’t any big economic or corporate news. It is puzzling to see such a delayed reaction to a strong jobs report in an otherwise quiet week. (Marketwatch)
The market’s decline makes perfect sense when you understand that the economy has never had any strength under it since the Great Recession began — that the whole thing is a bubble inflated by the Fed. People took a big breath and started to talk about what the jobs report meant. As they started to conclude it ended undeniable likelihood to the ending of the Fed’s zero interest, they could see by the score that the game is over even before the Fed rings the buzzer.
It makes sense when you accept that real economic fundamentals, such as 1) low debt, 2) high profits that are not a result of fancy accounting, 3) stock prices that are not a result of leveraged corporate stock buybacks, 4) banks that actually make money by safeguarding yours and by making loans, 5) a world free of wars, 6) a more equitable flow of income opportunities that creates a song middle class; and 7) allowing failures to fail … are all more important than statistics and manipulated stock values. That foundation for real wealth is completely missing.
In short, the rapid decline makes sense if you see it as the breaking of economic denial. Denial breaks slowly, but when it does break and people start to see reality, things can readjust in a hurry.
We saw this same kind of rapid stock market drop in August, which was the last time investors believed the Fed might really end its stimulus program. We saw it in the flash crash last fall when the end date for the Fed’s quantitative easing arrived. (The market didn’t fall entirely because Q.E. didn’t end entirely and because the stock market still had the free money of zero-interest loans to keep the expansion going.) We saw it happen during the taper tantrum when the Fed first mentioned that it would eventually end its stimulus, and interest rates spiked faster than any time in history on the mere fear that someday far down the road the Fed would officially raise rates.
So, every time stock market investors have believed the Fed was going to end its stimulus, we’ve experienced severe economic spasms. Yet, throughout this time, the stock market gurus have denied that the stock market is a bubble. You would think the market’s knee-jerk reactions to every anticipated end of Fed stimulus should have been proof that the stock market is nothing but a bubble — or, as I have called it — a hot-air balloon because it is the most spectacular bubble ever seen and it ends when the hot air goes out of it.
Stock Market abnormally erratic
It is not just the fact that the market is falling fast that leads me to believe the epocalypse is coming soon. The market has been abnormally erratic. I think this can be most easily explained by the fact that we are ending an abnormal period of nearly unlimited, nearly free money for major investors. Just as the weather becomes erratic in the fall when we change from the constant heat of summer back to the constant cold of winter, so the stock market is getting gusty because of a change from a long period of superheated monetary expansion back to a period of monetary cooling.
The number of assets registering large swings from their normal trading range is well above normal. Last year at this time, when Q.E. supposedly ended, we saw ten-year treasuries fall so fast in yield that a decline that size was given a once-in-1.6-billion-year likelihood. Volatility, itself, is becoming more volatile, oscilating  between periods of high volatility and low volatility every month. In August, when the stock market plunged 5.3 percent, the volatility index actually exceeded its peak when Lehman Brothers fell and plunged us into the Great Recession. August 2015 saw the highest spike in market volatility … ever! A few weeks later, volatility was down to almost nothing. Now it’s going up quickly again.
What was there in August that could have possibly been worse than the crash into the Great Recession? Should China’s problems have created greater volatility in the US than the disintegration of the US financial system’s spine?
All of this erratic change can be tied in timing precisely to the swings between believing the Fed is ending its stimulus and to believing it will continue a little longer. Such a precise correspondence of the market experiencing significant trouble with the times when investors believe the Fed is ending its program should prove to anyone that the market is utterly dependent upon the Fed and, therefore, just an artificial bubble.
Of course, volatility is amplified by exchange-traded funds (ETFs) where large groupings of stocks and bonds are traded as a single fund. But that is the new world we have created, and we really don’t know what peril’s its added volatility may create in terms of how rapidly and deeply a stock market can crash.
The stock-market crash is inevitable
I think at this point, as I’ve forecasted in previous months, it no longer even matters if the Fed ends low interest rates. The market is going down in anticipation because the Fed has just received the news it says it has been waiting for — its official unemployment rate (distorted as that really is) down to zero and wages on the rise. If the Fed doesn’t raise rates now, their inability to raise interest rates will only be because economic news has turned so sour between the last Fed meeting and the present one as to make the economy to0 fragile to withstand a raise even when the Fed’s job numbers match the Fed’s ideal. With denial already starting to break, that should tell many people that the Fed’s program has failed to bring economic recovery — that we are still as weak as ever.
As I’ve been saying the last couple of months, the Fed is finally entering that zone where it will lose either way as the economy proves the Fed’s stimulus has been a failure or as the tiniest interest increase in Fed history triggers the most massive landslide the US has ever seen due to the overburden of debt created by Fed programs, the world’s largest stock-market bubble bursting, and the global headwinds that I have been talking about for a year and a half, which have increased in severity month after month just as I’ve said they would.
Oso Landslide, Washington
I am not saying it will all slide this fall, but the cracks all around the mountain’s side that say it is starting to slide will grow huge and threatening; the movement of land in large pieces and trees beginning to tip will become evident, and there will probably be several large downward jolts as it begins to move in sections and the movement of one section weakens the next until the whole thing slides to the bottom.
So, get out of the way now. I’m invested in cash, not stocks. Cash isn’t safe either — just safer and likely to hold longer to give you time to hopefully see what your next move should be.
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