On the interwebs, I am seeing people call the stock market drop a “crash”. It’s not. That’s the wrong term. It’s bleeding. It’s hemorrhaging. It’s falling. It’s got no buyers. It has no bid. But, it’s not a crash.
We have some really big issues in the market. Inflation is still there despite the recent drop in commodity prices. Government spending isn’t stopping and that is the source of inflation. Global energy production is a huge issue for the market and as we enter winter, bigger. Book a flight to England because last night the British pound had a moment. Suits on Saville Row just got cheaper for Americans. The Euro is cheap relative to the dollar too. China ordered its banks to “Buy Mortimer Buy” last night. Roughly 30% of household mortgages in China are considered “bad debt”. It’s not just a local malaise. It’s global gloom.
How do you know when it’s a crash?
The stock market will tank. But, that won’t be the only thing that will tank. You will see things like grains, livestock, and other asset classes tank all at the same time. Everything is a sell, not just stocks. You will see the short end of the yield curve, like Fed Funds or Eurodollars ($GE_F), get bid up as cash moves from all asset classes into short-term rates until the dust settles. They call that a flight to quality.
In this market bust out, interest rates moved higher with the market moving lower. That’s not a flight to quality.
The reason is that all these asset classes, even unrelated ones, are interrelated because the same firms all trade them. As the stock market tanks, they sell off other assets to raise cash to meet margin calls and other bank servicing needs.
For what it’s worth, I don’t think this stock market has seen a bottom yet. All the cognoscenti are talking about “June Covid lows” but Covid was a rare event. Ignore rare events. When you do some analysis on data, it is even somewhat useful to toss out all market data during Covid.
I know some folks are really scared and think we could go really low. I am not in that camp but we will go lower and we will stay in recession a lot longer than the elite pundits think we will.
This market has fundamental problems which were deliberately started at the White House. Until that changes, it’s hard to get really, really bullish.
A better signal to see where the market is going is what’s called the forward price-earnings ratio. Stock markets always trade at a multiple of earnings. I just checked Tesla stock and it’s trading at 46.95 earnings. At the end of March, it was 107.53, so you can see there has been a lot of earnings compression in the market this year. When you see forward P/E ratios expand, that shows speculative fervor is coming into the market. Lately, the market has been pegged around 16 times earnings. That’s 3200 on the S+P 500. The market is at 3690 right now.
It is worth noting markets don’t move in a straight line. We will probably get a couple of positive days in the market as bears take a breather, and bulls pick over the carcass looking for deals.
There is no fervor. There is gloom.
COVID was not a recession. COVID was a self induced economic and cultural experiment and has no relevance to where we are now. Neither does 2008/2009. That was a black swan financial recession that started in real estate and banking. What we have now is more classical inflation that will lead to a recession created by the Fed.. It is indeed the 1970's. but we will have no way out. The Reagan way out was to both solve both inflation (by raising rates) and recession (by energizing the private sector). Both efforts brought supply and demand into equilibrium. That's when things took off again. Sadly, we don't have that caliber of leadership now. We are being ruled by the HR department of a mid-sized company. The company is going bankrupt and HR thinks it's important to talk about pro-nouns while sales drop every year. Hopefully President DeSantis and a R House and Senate can get us out of this mess in 2024.
Fair play that the stock market is not yet a crash and is slowly, but decisively repricing itself. OK.
What is happening is a perfect storm at all other points of the compass. This is something that did not happen back in the Carter debacle.
1. The Gov't is pissing gasoline on the inflation fire with excess spending and withdrawing money from the market via higher taxes. This does not solve itself. This is self-inflected and stupid.
2. We have only begun to see the impact of higher interest rates and they are going way, way higher. The Volcker Rule that interest rates have to be 1.5X the inflation rate is a good frame of reference.
3. Mortgage rates have doubled for the 30-year in the last 6 months and will continue to rise thereby killing the American dream of home ownership and kneecapping the home building industry. This gets much worse.
4. Energy prices are still double what they were when Biden came into office and there is no plan -- selling off the strategic oil supply to China, et al, is not a plan -- to solve this important problem.
5. The US may have it much better than other countries as measured by an insanely strong dollar v both the pound sterling and the euro. Look at these exchange rates, the strongest USD in 40 years.
Stating the obvious -- an insanely strong dollar is death to US exports. Good time to spend time in Paris.
6. There is a war that can get a lot shittier and is headed that direction. This war is both armaments and energy particularly European energy.
7. The combination of the current POTUS and the Sec Treas is the weakest combo in recent history. Their economic intel and resourcefulness is transitory to non-existent.
8. The earnings predictions going forward are all signaling a massive contraction of economic activity, lessened profits, and hiring/employment chaos. This does not bode well for the near or mid-term future.
So, the market is not in crash mode, but the global and US economy is in free fall and nobody is minding the store or doing anything about it. This gets very ugly and begs the question - WTF do you do when nothing works?
Vote.
JLM
www.themusingsofthebigredcar.com