|Dow||-99.99 to 17,180.84|
|S&P 500||-12.70 to 1,989.63|
|Nasdaq||-48.44 to 4,605.16|
|10-YR Yield||+.013 to 2.116%|
|Gold||-$29 to $1,193.50|
|Crude Oil||-$2.61 to $55.20|
The year was 1998.
The locus of the crisis was Russia.
The cause was a debt crisis.
The result was a collapse in emerging markets stocks, EM currencies like the Russian ruble, and EM bonds.
I’m talking about the Long-Term Capital Management (LTCM) debacle. And I remember it well because it was one of the worst financial crises in the 1990s.
In a nutshell, the LTCM hedge fund had placed mammoth bets with borrowed money in the global bond market. It was expecting several relative moves in interest rates to play out. But those bets began to sour as fears of a Russian debt default soared.
|Russian international reserves assets decreased from $420.5 billion to $416.2 billion, according to the central bank.|
Losses quickly mounted, with EM investments and anything even remotely linked to them getting crushed. Some markets plunged by more than 50 percent in the span of a few months. Then the U.S. markets got infected, with the Dow Industrials tanking more than 500 points one day, and several hundred points a few weeks later.
The Federal Reserve was ultimately forced to call in heavy hitters from financial firms up and down Wall Street. It organized a back-room, $3.6 billion bailout of the floundering fund, and cut interest rates three separate times to stabilize the financial system.
What’s worth noting is that the underlying U.S. economy sailed through the crisis relatively unscathed, even as some foreign economies tumbled into recession. And as bad as the short-term damage was for U.S. stocks, they quickly righted themselves and took off to the upside later in 1998 and throughout 1999.
Now do you see why I say the action today is eerily familiar to what we saw 16 years earlier? As a matter of fact, the Russian ruble collapsed by more than 12 percent today alone — the single-biggest one-day plunge since the LTCM crisis.
The proximate cause this time is falling energy prices — and debt linked to energy producers. There’s absolute carnage in many foreign-linked ETFs, stocks, bonds, and currencies. And just like last time, our markets are getting hit — but nowhere near as much as those overseas.
|“Could it be the Fed yet again that steps into the breach?”|
Last time it took a Fed bailout to save the day. With energy prices in freefall and contagion selling ripping through foreign markets, could it be the Fed yet again that steps into the breach? A foreign central bank or group of banks? An emergency OPEC output cut, which would lead to a furious countertrend rally in energy prices?
I don’t know. But I’m watching very closely because we may be reaching the tipping point for a policy response.
So what are your thoughts here? Is the selling in foreign markets getting out of control, and if so, how do you think policymakers should or will respond? Are you looking to take advantage of some of the bargains being created? Or are you staying the heck away from free-falling Mexican, Malaysian, Brazilian, Russian, etc. investments — including stocks, bonds, and currencies?
The Money and Markets website is a great tool for you. Hit it up and weigh in on these questions when you have a minute!
|Our Readers Speak|
The discussion is still raging on falling energy prices, and the positive and negative effects they have.
Reader Allen said: “A lot of people are saying that sustained low oil prices will put companies out of business and their employees out of work. Maybe so. But it seems like it will also have the effect of allowing businesses that benefit from low gas prices to expand and hire more people as well.”
In response, Reader John said: “You are right (on the second part). Lower-priced oil will stimulate business in every sector (other than oil) in the entire economy — increasing profits, resulting in lower prices and greater sales, and creating jobs at the same time.
“All businesses benefit from lower cost energy, and I’m not just talking about products that use petroleum based materials. About half of the energy used in the U.S. is used for transportation. So the cost of energy works its way into everything we buy — almost all of which has to be moved around.”
Reader Taipan agreed with both of those commentators, adding that we shouldn’t cry any tears for those on the losing side of the trend. The comments: “Government should not and must not interfere in stabilizing the price of oil. For too long oil has been grossly over-priced. Prices are now beginning to reflect the true value and cost of oil.
If banks big and small, along with bond holders, are feeling the pinch, and losing their shirts, then that is the risk they took. When I invest and lose, I get no bail-out and when I win, the IRS is there for their share. Let a ‘so-called free economy’ be free to flow with the market place.”
But the process is far from painless, especially for economies and markets linked to energy prices (and commodity prices in general). Indeed, Reader Michael5152 said:
“As a South African, I have to agree with you. There will be very few who will escape the coming devastation. Our rand has lost (8 percent) of its value against the US$. South Africa is a commodity exporting country, and we are being hammered because of the crisis.”
What would you add to the discussion? What does the ongoing energy market meltdown mean to you and your investing strategy? Here’s the website link to add your thoughts.
|Other Developments of the Day|
On the economic front, industrial production jumped 1.3 percent in November. That was the biggest gain since May 2010, though a separate report for December showed a bit of weakness in the New York City region.
A gunman identified as an Iranian refugee walked into a downtown Sydney café and took several hostages, hoisting an ISIS-style flag in the window. Negotiators spent several hours trying to resolve the situation, while at least five hostages managed to escape.
Sony (SNE, Weiss Ratings: C-) attempted to push back against the press in the wake of a massive hacking scandal. It threatened legal action against multiple media outlets if they published more internal emails and other communications.
Those communications were grabbed electronically by a hacker group identifying itself as the “Guardians of Peace.” They’re reportedly chock full of embarrassing comments, details on employee salaries, health records, and other sensitive material.
Looking to fill up your tank with cheap gas? Well, you’re in luck! The price of a gallon of gas starts with a “$1” now in 13 states, according to GasBuddy.com.
Do you have any thoughts on these or other headlines out there? Then be sure to swing by the website and share them with your fellow investors.
Until next time,