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Stock Market Collapse Continues to Unfold in Turbulent Fall

Yes, the economic headwinds all over the world are growing, and a subconscious awareness is spreading that there is no recovery. It is now starting to look like the stock market is banging its head on a glass ceiling. Consider just the events of this past week:


Stock market collapse seen in second correction?


What? The stock market is correcting again … already? That’s what some people are calling it. The Dow just had its worse weekly loss since 2011. And that’s after a worst biweekly loss that just happened in October. How can you have a correction after what was just billed as a correction in October?

It was only a week ago that the market bulls were bellowing about the market getting ready to top 18,000. Instead, one trillion dollars was erased from the value of equities in just one week.

So, for the stock market, it has been fall after fall this fall, which has put the volatility index back up 84% — its fastest rise in four years. Remember me saying that the most notable about this fall would be economic volatility? I predicted that would begin to reveal to everyone that there is no recovery in our recovery. My blog hangs in the balance of that prediction.

Why does a stock market that has just seen a “correction” needs another correction? Everyone (but me) declared the last drop was a correction, but I have been of the mind that it is more than that. I believe it was the first tremor with more and bigger quakes to follow in a market that is now busting its head against the top.

That’s why I haven’t conceded yet when I bet my bet my blog that a stock market collapse would happen this fall. I have been waiting to see how the rest of the fall would play out. The autumn storms are continuing to build up force. The overall picture, to me, looks like a market that is topping out. It looks like a rounded curve formed by new summits that are getting closer and closer together, bull runs that are getting shorter and shorter, followed by drops that are getting deeper. This looks to me like something big starting to break up.


Is this a stock market collapse or a skid across the oil slick?


Many commentators are saying the present nosedive is simply due to the concurrent drop in oil prices. If that is true, then why is the current plunge led, not just by oil stocks, but by Visa and other companies that have very little to do with oil? (See “Stocks Fall Most in Two Months as Oil Hits Fresh Five-Year Low.”) Even the Dow’s transportation stocks dropped 3.2%, yet the transportation industry should benefit immensely from a drop in oil prices. So, there is more at play here than the fact that oil has gone off a cliff.

I think we are going over the big hill on the global economic roller coaster. It graphs out differently than the collapse of a normal bubble. In this case, the entire stock market is a bubble (or, as I’ve said, a hot-air balloon), so a stock market collapse may not come in that v-shaped steep plunge and rise that it typical of a bubble correction. This is much bigger, so it may look more like a series of plunges and rises that grow closer together. In the end, will we see that fall is where the market topped out when the U.S. government’s stimulus of the stock market ended. Will there from this quarter on begin a great unwinding back into the belly of the Great Recession?

So, just as I didn’t claim victory on my bet over my predictions when the stock market seemed to crash in October, but said “wait and see,” so I didn’t concede loss when the market rebounded in November. This is still all playing out. A turn this big is going to lurch before it utterly gives way.


Is the oil slide the triggering event for a stock market collapse?


Yes, concern about the flushing away of oil prices is a significant factor in this week’s events; but, if this week’s market drop were driven just by oil, then the stocks leading the way down would be oil producers followed by companies that support oil production. This is far broader than that.

In fact, the S&P 500, which covers many industries, completed its biggest weekly drop since 2011, which was, incidentally, the last time I predicted that the stock market would crash while all the bulls were bellowing optimistically. Two weeks later, we had the biggest plunge we’ve seen since the Great Recession began — twice as big as the loss that happened in October.

The collapse in oil pricing is good for a lot more companies than it’s bad for. Everything gets cheaper when oil goes down. All companies see multiple expenses drop when oil drops. That’s great news for consumers, too. As treasury secretary Lew said, oil’s fall is like a tax cut for consumers. It’s economic stimulus. So, there are as many reasons for the stock market to be excited about the huge drop in oil prices as there are to be concerned about it.

Oil is playing the role in this December’s market drop that Ebola played in October’s. It’s the surprise factor I talked about last spring and summer — that one thing that would suddenly pop up out of nowhere during a time of great uncertainty and drive the fear factor over a cliff, but it’s not the cause. There are far deeper problems at play here.

The fear, itself, comes from a deep and (as yet) unadmitted realization that the economic headwinds we are facing are a formidable storm. It’s that acid drip in the stomach that forms when one starts to subconsciously recognize that the recovery has not been a recovery at all — that all the same old problems are all around us. They’re not going away, and we’ve already exhausted ourselves in trying to recover from them. However, that realization has not quite broken through the consciousness of the market’s stubborn bullish denial. What you see is the process of it breaking through.

That’s why the market is heaving up and down this fall, which is exactly what I predicted last spring and summer — turbulence so bad that people would begin to realize there is no recovery. These are the paroxysms of a larger stock market collapse that may play out over a larger arc.


Stock market guru Laszlo Birinyi says the oil price drop is what the markets have been waiting for—a “black swan” event. “What we’ve seen is something people have been talking about for two, three, five years and no one is talking about it now,” said Birinyi, founder of Birinyi Associates. “It’s just a black swan.” (CNBC)


A black swan is that unexpected event in turbulent times that tips the balance right when things are fragile.


Consumer confidence not as confident as they say


While the benchmark for consumer confidence has improved a little, it seems to have an unseen undertow. Home Depot co-founder Ken Langone says,


“I think we’re going to have a very tepid recovery…. The consumer is more cautious now than I’ve ever seen them.” (CNBC)


The undertow is made up of these currents of bad news all over the rest of the world that U.S. consumers are beginning to become concerned about.


“Consumer confidence numbers look good and retail sales were pretty strong yesterday, the domestic picture is encouraging. But one school of thought is that the rest of the world is going to drag the U.S. down with it,” said John Carey, a Boston-based fund manager at Pioneer Investment Management. (See “Stocks Tumble to Cap Dow Average’s Worst Week Since 2011.”)


Eurocrisis back in the news of umpteenth time


Once again, Greece is in the headlines because it is falling all apart, which means all rescue attempts have ultimately failed. It’s the same old news buy zolpidem sleeping tablets we’ve heard throughout the Great Recession. In fact, all of Europe is the same old news we’ve heard throughout the Great Recession with some countries going “into recession” for the third time since the Great Recession began. I say “since it began” because I see the Great Recession as the ongoing event that spans all three of Europe’s end-to-end recessions.

Greek equities experienced their worst plunge since 1987 this week, helping push the Stoxx Europe 600 Index into its worst hole in three years.

I think the Eurocrisis is not only not over; I think it has never found its bottom.


Other commodities down because of economic slowing


“Copper prices are now below $3 a pound and there’s an expression that ‘the economy is topped with a copper roof.’ More simply put, copper tends to top out in price before it becomes obvious that … the global economy is about to weaken.” (CNBC)


While a decrease in the price of resources is good for producers and consumers, that may be looking at the wrong end of the picture. Commodity prices are driven by speculation and, so, the fall in prices means buyers are thinking the economy is going to slow and are holding back on orders. Price is down because demand for products looks likely to drop. The speculators are telegraphing what they think demand will do.


Safe-haven investments on the rise


The rise in demand for bonds is often considered a clear sign that market investors are sensing trouble. A clearer sign appears when demand for bonds goes up even though interest rates are abysmally low. But the clearest sign of all can be found when demand for long-term bonds goes up even as many people are predicting the Fed will soon be raising interest rates. People are expecting a rise in interest, yet piling into long-term bonds before the rise happens. That starts to look like a desperate move to save oneself from a collapsing stock market.


“The Treasury’s auction of $21 billion in 10-year notes received the highest demand since March 2013 even with the yield on the notes the lowest in more than a year.” (“Investors Snap Up Treasurys on Oil Plunge, Greece Turmoil“)


Another safe-haven investment we all know about is gold. It didn’t rise much with the October surprise, but it is rising now. (See “Gold Rallies to 6-Week High on Global Stock Losses“) The fact that it didn’t rise much in October but is rising now (likewise with treasuries) indicates that, regardless of what actually happens in the stock market in the next few days, people are more scared now than they were in October. Realization that recovery is not recovery may be beginning to dawn. Global economic headwinds are continuing to build, so the subconscious level of fear is building.

All of this appears to me like people are starting to prepare for the possibility of total economic collapse.


Even the good job news is not as good as proclaimed


Everyone cheered but few scratched for the facts. The government boasted that there 322,000 new jobs. Ahh, but one third of that was nothing more than the seasonal increase from stores putting on holiday help. ) See the New York Post)

Adjusting for normal season gains, which disappear as soon as the holidays are over, the job market actually posted fewer than 200,000 new jobs. That’s lousy. What’s even lousier is the fact that the government didn’t even make the seasonal adjustment before posting the data. If the government is posting figures that don’t include the usual seasonal adjustment, it must be desperate to create good news.


But does all of this add up to a stock market collapse?


With certainty, I cans say this is exactly the kind of economic turmoil I predicted you could expect this fall and that I bet my blog on. Only I said it last spring while everyone else was blowing smoke about recovery.

I think one lesson that could be learned from the recovery that never was is that a recovery that happens only to the top one percent is not a recovery that will hold. A solid recovery has to have a foundation, and this touted recovery has no foundation.


Billionaire investor Paul Singer thinks the economic recovery is “unfair” and the Federal Reserve is to blame for growing income inequality. Singer blamed the Fed for artificially boosting market prices, which disproportionately benefits those who have the means to invest in stocks and other types of assets. (CNBC)


All of the Fed’s stimulus went directly to the big banks at the top of the economic pyramid. Very little of it benefited the masses at the bottom of the pyramid, other than in their retirement funds. We call this “trickle-down economics,” but the masses have been painfully slow to realize how significant the word “trickle” was in that terminology.

Wealth created out of rarified atmosphere at the top (money printed out of thin air) barely dripped its way to the bottom. The downward flow of new wealth is, indeed, a mere trickle. If you’re happy with that kind of economic growth through tax changes that benefited the wealthy (a lower rate in capital gains which is where the wealthy make all their money), then you received all that you asked for … a trickle.

Creating all the new money at the top of the food chain has exacerbated the flaws of trickle-down economics. Not only did the wealthy get the benefit of paying lower taxes on capital gains than middle-class people pay on their income, but all the bailout money was put into the coffers of the most wealthy at the top. That, in turn, was all invested in one area of the economy that benefits from low capital gains taxes the most — the stock market. That leaves no foundation to support the wealth at the top. The people at the bottom don’t have the income gains they need in order to buy the goods the wealthy produce. So, it is a system that must ultimately collapse of its own top-heavy weight due to the lack of a solid foundation. Anyone should be able to see that, but apparently no one can.


A better plan to avoid economic collapse


Since the government was going to create money out of thin air by the trillions, a sustainable plan would have been to let all the bad banks fail and recreate the deposits out of thin air in good and smaller banks under the names of those who lost their money in the big banks. That would have created no moral hazard as happens when you bail out the rich for their greedy mistakes; it would have put the restored money back in at the bottom of the economic structure where it will certainly bubble up to the rich anyway, and so it would have created liquidity throughout the economy, rather than the stagnant pool of wealth that now sits at the top.

But that’s not how government works. Government was incapable of even seeing a way to work that out because they start from a premise that one must help the rich and trust that help to trickle down to the middle class out of the overflow of abundance to the rich.

If this were a real recovery from a collapse of banks that were too big to fail, you’d now see an expansion of smaller banks and no more banks that are too big to fail. Instead, the government deliberately made the big banks even more bloated than they were before by giving them ALL of the new money and even encouraging them to merge and, thus, double in size in order to save each other. How ridiculous!

The government has done exactly the opposite of everything that needed to happen. In doing so, it has also used up all of its reserve capacity to be a safety net. That is why there is no recovery in our recovery and why this economy will collapse and why the next economic collapse will be even worse than the last.

I’m sad to say.

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