Wow. Wow, wow, wow, wow, wow. Wow! Last Friday, when I wrote that the market selloff was getting overdone and that investors had whipped themselves into a frenzy that savvy investors ought to fade, in no way did I expect to see 500 points lower THAT DAY, followed by another 600 points down yesterday. NO. WAY.
I have seen a lot in my 35 years of trading, from the "pits" on four "floors" to the myriad of trading screens populated with the flashing prices of markets from every corner of the globe. Yet, I don't think I have ever seen the likes of what we have just experienced in the last three days. Three days that now hold the ignominious distinction of being the biggest three-day market decline ever in history. Okay, for sheer shock and awe maybe 1987 beats this, with a 22% decline in one day (I remember that well), but at least then there was an explanation: portfolio insurance -- but now?
For a while yesterday I watched, as others did, and saw the market rationally bounce back from the morning insanity. (1000 down???) This was how it should be, I thought. Earlier in the day I was on TV on our local NYC Fox station telling investors to buy panic.
I bought some Marvell Technologies (MRVL) at the low print of the day. We got to within 100 points of going positive and many bellwether stocks like Action Alerts PLUS portfolio holding Apple (AAPL) and Intel (INTC) were nicely in the green and things were looking up, but then it pretty much all melted away. For the life of me I still don't get the magnitude of this decline.
Over the past two months I have been on and off mentioning the slowdown in Federal government spending and alluding to that as a potential negative, although I would always balance it out by saying that the government is on track to spend nearly $4.3 trillion this year.
Four-point-three trillion is a lot of money and that's money that gets paid to someone -- firms, people, etc. Not only is it a lot, but it's a big uptick over last year, an uptick of over $100 billion. Furthermore, bank lending has been expanding, too.
All in all, money creation -- both the high-powered stuff we get when the government spends (base money) and the more ubiquitous kind we get when banks lend (bank credit) -- seemed sufficient to at least sustain economic growth where it has been, around 2.0% to 2.5% annually. You crash with this?
I get the fact that there were fears of a Fed rate hike, but the jury was still out on that. And then there's China. The whole world seems to be fixated on a belief that 7.5% annual growth is somehow a disaster over there. Furthermore, there's widespread misunderstanding about how the Chinese banking system functions and the fact that it acts as a fiscal arm of the government. Those are NOT private banks over there! There is no "credit bubble."
The bottom line is, it still doesn't add up, all the bearishness, the panic. Maybe I am missing something? Could it be the algos? Have the algos become the portfolio insurance of the 2000s? Perhaps. To tell you the truth, I don't know much about algos other than to say that they seem to "front-run" orders coming down the electronic "pipe," so to me they would be more a symptom than a cause, although I could see how they would exacerbate moves.
I'll go out on a limb here and say that despite the irrationality of the last three days, I am still bullish. However, if you ask me what scenario would make me worry, I would say that it is the current Conservative leadership and the governments we see all over the world that continue to push their neoliberal policy agenda of austerity, spending cuts, budget balance, limited fiscal, etc. Not only is this highly deflationary, but it risks total systemic default at some point.
I am reminded of something I wrote way back in November of last year right after the midterm elections, when I predicted that failure to raise the debt ceiling would send the whole entire system into default. That's because it would effectively deactivate the automatic stabilizers like Social Security, Medicare, Medicaid, Veterans Benefits, unemployment benefits, etc. Those are the safety nets that automatically kick in, in downturns. If you deactivate them, we go down and stay down.
That may still be coming if we are to believe Jack Lew, who says that by October the debt ceiling will have to be raised. We are a little shy of a month away from that. Who knows how bad things may get when we hit that? It could be the economy's Event Horizon. I just hope not.