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.
|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.
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.
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,