Baby Dotard Barks "Treason!" As Stocks Dive - What You Should Know About This Market Volatility

"WAAAAAH! Those Dems Is Treasonous For Not Clapping At My Speech!"

Even as the overgrown thug baby occupying the White House pissed his Depends at a speech at a company in Cincinnati (Sheffer Corporation)  yesterday he continued to bluster and bawl about the Democrats committing "treason". This because they refused to clap at the pathetic excuse for a State of the Union speech last Tuesday - when he barely managed to sound sane for an hour and twenty minutes.    At the Ohio company the fat con man and snake oil salesman yelped:

“Can we call that treason?  Why not? I mean, they certainly didn’t seem to love our country very much.”

Confusing love of country with ass kissing  this sleazy real estate criminal and Russian -backed stooge.. Of course, this fat turd is mad because one can't be guilty of treason for merely failing to applaud a farrago of lies.

But the interesting thing is that while this blubbering buttbrain was going on  about Dem "treason" the stock market plummeted by more than 1,000 points.  Even more interesting, as Diaper Donnie ranted, TV networks broadcast a jarring split screen. As Dotard  boasted of companies bringing billions of dollars back to America, the Dow Jones industrial average was shedding billions more. At one point, the rout became so drastic that CNN and MSNBC switched from the speech to report exclusively on the market gyrations.

Trump's delirious spiel about "treason" and inflating his effect on national economics coincided with the largest one day point drop in history.

This is where we get very serious and try to note the underlying reasons for what's going on. Higher wages threatening inflation and higher interest rates from the Fed has been one reason, and it is legit. While fatter paychecks are a welcome sight to workers (wages climbed 2.9 percent last month) they usually signal inflation for stock investors That in turn signals to them a Federal Reserve move to increase interest rates, meaning an end to the cheap money that's been fueling the stock bubble.

Right now the market is floating on trillions ($4 trillion to be exact)  of cheap money thanks to the generous Federal Reserve quantitative easing program. But the underpinning of this is really massive debt which hasn't been helped by the GOP tax cuts. These are projected to add nearly $1.5 trillion in deficits.

As yesterday's WSJ 'Business and Finance' headline blurted: Investors Fear Broader Asset Fall. Therein noting that over the past year stocks, emerging market currencies, commodities (like copper and gold) and high yield bond prices, have all risen in lock step.  However, this flashes red warning signs to global investors who (ibid.):

"had grown uneasy about various assets moving in lockstep -  especially because trading in many of these market isn't typically tied to share prices Such closely correlated movements are often associated with turning points in the markets."

Further, and most important:

"A sharp rise in asset prices can lead to an increase in leverage, or the use of borrowed money,before a turn in sentiment prompts a decline in prices that spurs forced selling as borrowers scramble to repay debt obligations..   That has some investors worried that even if some sort of market correction is inevitable, the number of markets that are moving in tandem raises the prospect of a more severe selloff than what the still positive fundamentals would warrant."

In other words, the lockstep asset prices could lead to a "mulltiplier" sell-off effect that would overshadow a normal correction, So if 10 percent is a normal correction and the DOW was initially at 25,000 or so, that would mean a loss (total) of 2500 points.  If this is a multiplier effect at work, we could instead be looking at a  20 percent correction, or a 5000 point drop  Do the math and you will infer the selloff isn't over, not by a long shot.  That doesn't mean it will dive today (though the DOW Futures indicates that) but we can expect weeks of gyration leading up to the debt ceiling increase. (Or what should be a debt ceiling increase!)

Let us note that debt:  municipal, corporate or (federal) governmental, is financed via bonds.  Investors purchase bonds at a certain rate and then see their yield increase or decrease. Generally, bond yields have now increased which explains why many foreign investors are bailing out of our stock market to buy bonds instead. They feel bonds are a safer bet and they're probably correct.

Just so you know, companies comprising the Standard & Poor's 500 index got 43 percent of all their sales from outside the country in 2016 - the last full year for which the S&P DOW Jones Indices has statistics. Indeed, the biggest U.S. company - Apple - got 63 percent of its investment sales from abroad in the most recent year for which stats were available.

As can be seen, our stock market stability is currently built upon the purchase power and holdings of foreign investors. If these investors bail, as in sell - then flee to bonds and sell them too - that means a "multipleir"sell off must ensue and that's what we're seeing now- as in yesterday's nearly 1200 point drop of the DOW.  The Financial Times, by the way, is already referring to what we've been in as a "bond bear market", meaning crashing prices, rising yields.

As per an article appearing in the Sunday Denver Post (p. 11A):

"The stock market finally got spooked by an ongoing sell-off in bonds.  As bond prices fall their yields go up, a sigaal of rising interest rates. Low interest rates have been an underpinning of the current bull market in stocks now for the ninth year."

Now, go to the WSJ headline on Feb. 2nd ('Deficits Shake Up Treasury Bond  Issuance'), in which article we learned the Trumptard- GOP tax cuts boosted borrowing needs at a time of shifting demand for debt. Just as regular bond yields are rising, we learn that Treasury bond yields are as well. (The yield on the 10-year Treasury climbed to 2.84 per cent Friday  from 2.79 percent Thursday.  That may not sound like much difference, but over a 1-day  interval it's colossal.

 This is not a good thing because  "investors think the supply of government bonds hitting financial markets is rising as budget deficits grow as a result of the Trump administration's recent $1.5 trillion tax cut."

As a result, the Treasury Borrowing Advisory Committee (TABC) has estimated the Treasury will need to borrow a net $955 billion for the fiscal year that ends Sept. 30th.  For reference, this is up from $519 b the previous year and discloses a radical increase in debt (and deficits) traced to the recent tax cuts. Worse, the TBAC has estimated borrowing costs will be even greater in subsequent years, e.g. $1. 083 trillion in 2019,  and $1.128 trillion in 2020.  This marks the first sustained acceleration in Treasury borrowing since the 2007-09 recession and also comes within weeks of the looming debt ceiling increase.

A warning heard from Eric Winograd, senior  U.S. economist at AllianceBernstein, ought to send chills down the spine of every equity investor, e.g.(D. Post, ibid.)

"We are rapidly approaching the point at which low rates will no longer provide support to the equity market."

What could go very wrong and send the current correction into a crash? Failure to raise the debt ceiling whereby we (as a nation) signal to creditors we don't plan to pay off what we already owe. U.S. debt is considered the safest of safe assets, which is why lots of other financial products are benchmarked to U.S. Treasury yields. If our creditors doubt they’ll receive full and timely payments, Treasury yields will rise, setting off a chain reaction of chaos and panic in markets throughout the world.

Note that technically  we  reached our borrowing limit in early December. Since then, the Treasury has been resorting to “extraordinary measures” to prevent default. This essentially means moving money around so we can meet our obligations without issuing new debt. At some point, though, those measures will get exhausted. And that some point is coming sooner than previously expected. In November, the Congressional Budget Office projected that Treasury would run through those extraordinary measures around late March or early April. But then Republicans passed their absurd tax bill.

The potentially most dire aspect is that the debt ceiling won't be increased.   If not, well ...look for lots of roiling market upheaval and volatility and a possible further correction or even crash. (Though I don't foresee the big one until October)..  Re: volatility, it should be noted that the Vix volatility index, Wall Street's  "fear gauge", shot to its highest level yesterday since the Chinese currency devaluation in 2015.

FT columnist Gillian Tett also has referenced other serious issues, including: too low interest rates have "fostered financial engineering", i.e. structuring ETNs (exchange traded notes) to make bets on volatility  - similar to how credit default swaps were used prior to the credit crisis in 2008. Also, Tett warns "regulators are finding it hard to keep track of the risks" because they are now so fragmented.

Among her other depressing observations: "the global debt to gross domestic product is now 40 percent higher than it was ten years ago."  In addition, "leverage has crept unnoticed into the corporate world".   How many corporations are now surviving on billions of borrowed money, risky loans, we have no idea. But when these debts come due the party could well end in a thudding crash.

While finance pundits - like Melanie Hobson on CBS this morning - talk soothingly of the "fundamentals" being fine and to "stay the course", they avoid mention of the enormous debt and leverage this market is based upon.   Also unmentioned amidst all the tax cut cheerleading is how previous cuts have spawned stock market crashes. See e.g.

http://brane-space.blogspot.com/2017/11/has-stock-market-dodged-bullet-in.html

 All this is unfolding as Americans, flush with their  growing 401(k) balances,  are increasingly tapping them - whether for dream vacations or home remodeling projects. (Denver Post,  Business, p. 1K, Feb. 4th).   This is despite the money being taxed or even being hit with a 50 percent early withdrawal penalty. Quoting one of these irrationally exuberant folks in the piece:

"It is a hard decision but I think I will make more money in the stock market."

Of course, that is assuming no crash, which event  - if she's near retirement - would ensure her having to work 10 or 15 more years to make up the losses. No stock market rise goes on forever, all end in crashes and that's when the hoi polloi who can least afford it are parted with their cash  - with the richest investors (or those using flash trading) picking up the pieces.

The best advice one can offer in a volatile market environment is to not even think of withdrawing any 401(k) money no matter how "rich" you might feel. Remember it's only phantom money - on paper - until shares actually are redeemed.

Investors Hope For 'Correction' Cure - But It Won't Prevent the Ultimate Debt Crash

The Wall Street Journal yesterday featured a front page article, 'Stock Retreat Has Its Fans', which piqued the interest of many.  Quoting from the first two paragraphs:

"Many investors and analysts fear a postelection rally that has driven the S&P 500 up roughly 10 percent has cleaved share prices from the underlying fundamentals that tend to drive gains over time, such as interest rates and corporate earnings.

What's due now, some investors say, is a correction: a 10 % pullback from the indexes' March 1 high. They contend such a retreat would tamp down speculation, defray pockets of froth in popular investments and provide buying opportunities for those still on the sidelines."

The article goes on to state that such declines serve an important function in a market economy basically letting some of the excess 'gas' out of the balloon - which might otherwise blow up, i.e. resulting in a major crash. In this regard, the stock market is already well into bubble territory. Thus, long periods without the healthy corrections lead to market pathology and "unruly trading" - inflating the bubble further until it bursts.

Some may console themselves that a 10 percent correction or maybe even 12 percent, will ease their insecurities but alas, the crash is still on its way. What I would call a "sovereign debt crash" because it will ultimately be the recognition that most national debts can't be repaid that will be the tipping point to one of the largest crashes on record.

First, let's understand the nature of a sovereign debt crisis.,  Sovereign debt is not the same as the mortgage crisis which nearly brought down the global finance system in 2008. The latter was predicated upon the unwise purchase (mainly by banks but also by some insurers like AIG) of esoteric derivatives called “credit default swaps”. These basically represented bets on packaged mortgage securities called collateralized debt obligations.

In the case of the sovereign debt crisis, nations – not banks- are on the verge of default and are seeing their national bond ratings plummet because their debts are too high in relation to their gross domestic product (GDP).  In my March 22 post, I already noted Barbados as being deep in the maw of a sovereign debt crisis.  This followed yet another Moody's bond downgrade, down to Caaa3+, and Barbados now being on the verge of currency devaluation.

The Moody's report on the reasons for the downgrade included:

The government debt burden reached 111% of GDP at end-2016, and the authorities have accumulated a large stock of arrears to the private sector and the National Insurance Scheme,, estimated at a further 11% of GDP at end-FY2015/16. 

The National Insurance scheme is similar to Social Security in the U.S. and what the Moody's report indicates is that this program is over extended with the gov't already in arrears in what it owes (fro borrowing from the NIS) by 11 percent of GDP. In other words, the Barbados government is printing millions of dollars a month to try to keep seniors receiving their pensions.

Some may believe Barbados is an exception, but it isn't. Around the world governments are buried in debt - sovereign debt. It is this debt bomb - building up - that will ultimately roil the markets, along with serious missteps by the Trumpites in handling any future financial crises.  

But back to the sovereign debt crisis, not only is the U.S. in up to its eyeballs, with the Trumpites set to blow the debt wide open, i.e.


That is, the federal debt as a percentage of GDP would explode through the roof - exceeding the size of the entire U.S. economy within ten years. of Trump and the GOP get their tax policy plans rammed through.

Meanwhile, Europe is printing euros like there's no tomorrow, and debt - especially in nations like Spain, Portugal and Greece, piling up to unprecedented levels.  Then there is the Bank of Japan which has printed over 13.3  trillion yen   The Fed in the U.S. has done its own form of printing money by way of "quantitative easing", purchasing over $4 trillion in the bond market.

All of these signals in tandem show the instability of the global debt crisis and no one who looks into these can remain complacent. Barbados, of course, is near and dear to my heart  - so I pay special attention to what goes on there, like I do here in the U.S. But other nations' debt issues can't be overlooked because they also impact our own financial-economic conditions. As their own sovereign debt crises have manifested the oncoming 'train wreck'  is difficult to avoid. Expect to see default after default.

What's my main worry looking at Barbados and other nations? Well, that none of their debts will ever be repaid. Those debts, including unfunded liabilities into the future (e.g. pensions to be paid) are simply too huge for repayment even in instalment. The credit agencies Standard and Poor's and Moody''s already seem to recognize the writing is on the wall in the case of Barbados, which is why the loan conditions now are so draconian there's no way the debt will be covered.

It is no 'biggie' then to foresee that the debt collapse now drowning Barbados will very soon hit Europe, then spread to Japan - and the U.S. by the end of the year.   That end point will be accompanied by falling oil prices, failure to raise the debt ceiling after a brutal partisan showdown (and Trump -GOP bravado), and then cratering bond prices.

Obviously, borrowing more money for any sovereign debt nation isn't the answer. It hasn't been for Barbados, and has only pushed it into a debt hole. The same is true for Greece, Spain, Portugal, Japan and others.  Borrowing is especially useless as the loan terms are degraded - less money on offer, accompanied by more demanding loan condition. Ask Barbados' Central Bank.

Yes, a correction will likely help in the immediate future to stabilize stocks, but not in the longer term, and Trump's own actions may precipitate whatever crash is in the works to happen much sooner.

Attending to the Warning Signs of a Major Stock Market Correction

Many in the stock market are fairly ebullient - when the market soars - which is when it's not taking a dump on certain days or in response to specific events (e.g. Ebola infections, ISIS gains in Iraq etc).. Most have been beneficiaries of the Fed's infusion of "crack" in the form of "quantitative easing" and cheap money. (With another round on the horizon. Notice how the DOW stopped dropping once the buzz began about QE3, following QE1 and QE2 - which have together infused $4.3 TRILLION in bond purchases so far).

But at some point, the cheap money flow has to stop and even if it's done slowly Maul Street will respond hysterically, which is what has prompted discussion of how large a future correction will be ('How Bad Can It Get?', WSJ Sunday in Denver Post, Oct. 19). As the article observes, "corrections of 5% to 20% are a normal part of the stock market" and pointed out that even J.P. Morgan built corrections into his forecasts (often taking advantage of inside info while the little guys got toasted.)

Thus, those in the market now, whether in 401ks, IRAs or doing their own thing in day trades, need to be aware of the potential for loss, and large loss. In line with this, the article points out the "gloomiest" prognostication for a drop so far has been Scottish stock market historian and analyst Russel Napier. He suggests that Wall Street "might fall by 75 percent or more before the carnage is over."  This would put the DOW at about 4300 or where it was in 1980.

And it's not just a remote possibility. Arch-forecaster Nate Silver, in his book, The Signal and the Noise- Why So Many Predictions Fail But Some Don’t  warns (p. 347):

"Of the eight times in which the S&P 500 has increased at a rate much faster than its historical average over a 5-year period , five cases were followed by a severe and notorious crash, such as the Great Depression and the Black Monday crash of 1987”.


Interestingly, two of the largest stock market dives have followed two of the biggest bubbles: the first of 37.85 percent and on the heels of the bubble that formed from Jan. 14, 2000 to Oct. 9, 2002, and the second of 58.78 percent that formed (mainly due to the housing bubble) from Oct. 9, 2007 to March 9, 2009.

Are there warning signs to attend to? Of course! First among them is that IF  the economic future was truly rosy long term interests rates (a barometer of economic growth, i.e. since it indicates wages going up) would have been going up. But instead we observe them tumbling with the benchmark yield on 30-year Treasury bonds having now dipped below 3% and yields on the 10-year note at mid 2013 levels.

People should also be leery of the S&P increasing beyond the range Silver notes over a 5-year period, and the DOW is also a proxy of that - and red alarms ought to sound if it hits 17,000 and stays there any length of time.

A final warning sign which too few attend to is stock buybacks by the companies themselves. I mean, WHY should you have to buy back your own stock to create an artificial rise in share price if your company is genuinely doing well? It makes no sense. If you're going to use any extra money for anything it ought to be for paying dividends, not stock buybacks!

Columnist Jonathan Clements in his piece in the WSJ Section of the Post this past Sunday, observes:

"Many companies were big buyers of their own stock before the 2007-09 market decline, only to scuttle their buyback programs during the market crash. In recent years with share prices up sharply they have begun to voraciously buy back."

And why not, because they are then reaping the bounty of their own high share prices? Buy backs also make management's stock options more valuable - so what better way to compensate the Street's honchos?  Strangely, all this has selectively blinded investors to the lack of dividends. As Robert Arnott, quoted by Clements, stated:

"Dividends are reliable, You cut them at your own peril - but you can cut a buyback and hardly anyone notices."

Why? Why aren't the little guys more aware of how they're being shafted? Maybe for the same reason, as former trader Michael Lewis observed this morning on CBS' Early Show, they're not paying attention to how flash trading is ripping them off via "millisecond" advantage and thereby gaining pennies on the dollar with each trade made. They essentially gain those pennies (which add up to billions over time) by getting shares redeemed before you can via that slight micro-time advantage.

Why doesn't the SEC do anything to stop this baloney? According to Lewis, because once they leave the SEC they will be looking for jobs on the Street so don't want to alienate it with antagonistic regulations or judgments.  So don't look for the SEC honchos for any guidance or alerts to help you with navigating the swamps of Maul Street. You are literally on your own - with maybe this blog and a few others to try to provide some heads ups.

What you can do is what every sane investor ought to be doing: leaving any stock now that doesn't deliver dividends and is only doing buy backs. (With a little research you can find this out.)

You can also re-assess your risk tolerance. Can you really afford to lose 75 percent of your 401k  if the market came a crapper again? And don't take any online quizzes to asses your current risk tolerance! Psychologists will tell you when the market's going up, DOW headed toward 17,000 as it is now, people tend to over answer on the positive side.

What you really need to do is doff the rose-tinted glasses and pink Pollyanna hat and put on your black, negative thinking cap. Ask yourself how you would feel if you had $300,000 salted away  in 401ks and IRAs and after a major crash or "correction" had $75,000 left.  Would you be able to suck it up and move on? Would you be able to stick to the Street mantra of "Buy and hold!"  If not, you had better rethink your positions and portfolio.

Of Retirement Nest Eggs - And The Inadequacy Of Americans' Savings

Columnist Jonathan Clements in Sunday's Denver Post WSJ Section put forth a blunt question:

"If you lost 25% of your money invested in a stock market correction, would you be ok with it?"

He then put it another way: "If you had $200,000 in stock investments and lost $50,000 of it, would you be able to handle it?"

The questions are spot-on given many money and finance gurus expect a correction soon, maybe as early as January or February next year when the Fed will likely start raising interest rates - signaling the end of the cheap money era. Clements suggests many could survive the loss using the buy and hold strategy, but many ordinary workers who had piled it up in their 401ks might have to work ten more years.

But this is the problem with investing in the stock market. It is laden with volatility and your money rises and falls almost daily with the share value. Another reason many of us call it 'phantom money' because it isn't real until you actually cash out, redeem the shares. Another problem, of course, is that many clients get burned by investment advisers and even pension funds when these assume too high a return, often 8 percent or more per annum, when that simply isn't realistic on examining the global situation. The shareholder then has been led into the proverbial fool's paradise.

According to an article in MONEY magazine ('You Call This Retirement?', Feb-March, p. 49), citing stats from the Investment Income Institute,  there is a total savings accumulated for all Americans of $21.7 TRILLION. This sounds like a staggering amount of savings until one realizes that perhaps half of it is for those in the upper ten percent of earners and the rest for 90 percent.

And while 1 in 5 Boomers is already out of the work force, many who've been forced to retire because no one will hire them, the rest scramble to save enough to live off of for 25 or 30 more years.  As MONEY notes: "It's the best and worst of times for Boomers at retirement" - meaning the potential for up to 20 or more years of living (once one hits 65) and doing the things you never could before as well as "fulfilling your bliss" (Joseph Campbell's term)  in whatever ways suit your fancy.

The problem is that without sufficient money to live off,  it portends a time of genuine misery. It is true that for a tiny elite group of lucky Boomers who have a million or more stashed away the warning could be more like: "Don't be the richest corpse in the cemetery" - the warning for too many is "Don't end up a corpse too soon from eating cat food and fried kibbles".

Based on the earlier stats, Fidelity Investments claims that a person 55 or older who has been active in his or her 401k for the past 10 years, is likely to have only about $269,000. This sounds like a grand sum until you realize that a typical couple will need at least $220,000 to cover medical expenses that Medicare doesn't pay for. Most Americans don't have anywhere near that much saved anyway, and a recent WSJ article (Sept. 12) put the median savings at just over $50,000 for the worker aged 60 -64. This is pathetic and portends a life of "cat food" and poverty unless some other means of income is supplied. (Or, one has the advantage of a VA medical benefit which pays for all the things, e.g. dental, glasses etc., that Medicare doesn't)

Oh, and don't look for lotto winnings, the chance of winning even one ordinary lotto (not the Powerball)  is less than two asteroids striking Earth at the same time.

But MONEY has some encouraging words for those who won't be able - for whatever reason - to hit the magic number for retirement nest egg savings (generally computed as at least 80% of your mean salary for the last twenty years,  so if your salary was averaging $50k/ yr. you'd need to have $800,000 saved.):

"Retirement itself is a very modern concept, an artifact of postwar prosperity and longer life spans. For most of history, those lucky enough to reach an advanced age kept working until they were physically unable - so rural life and extended families provided the safety net."

Then the piece puts a downer meme into the mix, noting that the longevity revolution and industrial revolution put an end to that.

But left unsaid is the real problem or issue, which no finance column or magazine has ever had the balls to mention, at least those that I've read: That is,  the genuine problem is we have a population surplus, too many babies being produced, which is creating too many workers chasing too few jobs.  Just tally up the "population replacement" numbers by month since 2000  (avg. about 150,000) and look at the numbers of current unemployed and under-employed. A coincidence they're nearly the same? Hell no! But again, the Neoliberal media doesn't want people to see that, only to blame THEM if they can't secure a decent job to keep them off "entitlements" until they are 70 or so.

Stop the population surplus and you solve the problem Marc Freedman complained about at the end of the article, "too many people being warehoused who no longer have an economic role".

Something to think about!