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- China’s transition to a new currency regime was supposed to represent a move towards a greater role for the market in determining the exchange rate for the yuan. That’s not exactly what happened. As BNP’s Mole Hau hilariously described it last week, “whereas the daily fix was previously used to fix the spot rate, the PBoC now seemingly fixes the spot rate to determine the daily fix, [thus] the role of the market in determining the exchange rate has, if anything, been reduced in the short term.” Of course a reduced role for the market means a greater role for the PBoC and that, in turn, means FX reserve liquidation or, more simply, the sale of US Treasurys on a massive scale.
- The liquidation of hundreds of billions in US paper made national headlines this week, as the world suddenly became aware of what it actually means when countries begin to draw down their FX reserves. But in order to truly comprehend what’s going on here, one needs to look at China’s UST liquidation in the context of the epochal shift that began to unfold 10 months ago. When it became clear late last year that Saudi Arabia was determined to use crude prices to bankrupt US shale producers and secure other “ancillary diplomatic benefits” (think leverage over Russia), it ushered in a new era for producing nations. Suddenly, the flow of petrodollars began to dry up as prices plummeted. These were dollars that for years had been recycled into USD assets in a virtuous loop for everyone involved. The demise of that system meant that the flow of exported petrodollar capital (i.e. USD recycling) suddenly turned negative for the first time in decades, as countries like Saudi Arabia looked to their stash of FX reserves to shore up their finances in the face of plunging crude. Of course the sustained downturn in oil prices did nothing to help the commodities complex more broadly and as commodity currencies plunged, the yuan’s dollar peg meant China’s export-driven economy was becoming less and less competitive. Cue the devaluation and subsequent FX market interventions.
- In short, China’s FX management means that Beijing has joined the global USD asset liquidation party which was already gathering pace thanks to the unwind of the petrodollar system. To understand the implications, consider what BofAML said back in January:
- During the oil-boom era, oil-exporters used oil earnings to finance imports of goods and services, and channeled a portion of surplus savings into foreign assets. ‘Petrodollar’ recycling has in turn helped boost global demand, liquidity and asset prices. With the current oil price rout, external and fiscal balances of oil exporters are undermined, and the threat of lower imports and repatriation of foreign assets is cause for concern.
- Recycling of Asia-dollars might partly replace the recycling of petrodollars. Asian sovereign wealth funds ($2.8tn) account for about 39% of total sovereign wealth funds, and will likely see their size increase at a faster clip. Sovereign wealth funds of China (CIC & SAFE), Hong Kong (HKMA), Singapore (GIC & Temasek) and Korea (KIC) rank in the Top-15 globally
Yes, the “recycling of Asia-dollars might partly replace the recycling of petrodollars.” Unless of course a large Asian country is suddenly forced to become a seller of USD assets and on a massive scale. In that case, not only would the recycling of Asian-dollars not replace petrodollar recycling, but the “Eastern liquidation” (so to speak) would simply add fuel to the fire – and a lot of it. That’s precisely the dynamic that’s about to play out.
- A careful reading of the above from BofA also seems to suggest is that looking strictly at official FX reserves might underestimate the potential size of the petrodollar effect. Sure enough, a quick check across sellside desks turns up a Credit Suisse note on the “secular downtrend in EM reserves” which the bank says could easily be understated by focusing on official reserves.
- First, note the big picture trends (especially Exhibit 2):
- And further, here’s why the scope of the unwind could be materially underestimated.
- Taken into context, the year-to-date fall in EM reserves accounts for only 2% of the total stock of EM reserves. However, the change in the behavior of EM central banks from persistent buyers to now sellers of reserve assets carries important implications. Importantly, official reserves will likely underestimate the full scale of the reversal of oil exporters’ “petrodollar” accumulation.
- Crucially, for oil exporting nations, central bank official reserves likely underestimate the full scale of the reversal of oil exporters’ “petrodollar” accumulation. This is because a substantial part of their oil proceeds has previously been placed in sovereign wealth funds (SWFs), which are not reported as FX reserves (with the notable exception of Russia, where they are counted as FX reserves).
Currently, oil exporting countries hold about $1.7trn of official reserves but as much as $4.3trn in SWF assets.
In the 2009-2014 period, oil exporters accumulated about $0.5trn in official reserves but as much as $1.8trn of SWF assets.
Now that the tide has turned, it is likely that not only official reserves drop but that SWF asset accumulation slows to nil or even reverses. SWF selling may be a slower process as assets tend to be less liquid, but the opportunity might still be taken to repatriate some investments, for instance to boost domestic rather than foreign infrastructure projects.
- In other words, looking at the total amount of official reserves for oil exporters understates the potential for petrodollar draw downs by around $2.5 trillion. Now obviously, it’s unlikely that exporters will exhaust the entirety of their SWFs. Having said that, the fact that EM FX reserve accumulation turned negative for the first time in history during Q2 underscores how quickly the tide can turn and how sharp reversals can be. If one fails to at least consider the SWF angle then the effect is to underestimate the worst case scenario by $2.5 trillion, and if 2008 taught us anything, it’s that failing to understand just how bad things can get leaves everyone unprepared for the fallout in the event the situation actually does deteriorate meaningfully.
- So that’s the big picture. In other words, the above is a discussion of the pressure on accumulated petrodollar investments and is an attempt to show that the pool of assets that could, in a pinch, be sold off to finance things like massive budget deficits (Saudi Arabia, for instance, is staring down a fiscal deficit that amounts to 20% of GDP) is likely being underestimated by those who narrowly focus on official reserves. Switching gears briefly to consider what $50 crude means for the flow of petrodollars (i.e. what’s coming in), RBS’ Alberto Gallo has the numbers:
- If petroleum prices continue in to year end at their current YtD average ($52), this would represent a 60% decline in Petrodollar generated in 2015 vs between 2011 and 2014. Assuming that 30% of gross Petrodollars generated per year are invested in financial markets, this would imply $288bn ready for investments in 2015 vs a $726bn average between 2011 and 2014. Lower purchasing power from oil-exporting countries may in turn reduce demand for $-denominated fixed income assets, including $ IG and $ HY. US IG and HY firms have issued $918bn and $220bn YtD, which in total marks a record-high vs past years.
- And while all of this may seem complex, it’s actually quite simple: less petrodollars coming in without a commensurate reduction in what’s going out means the difference has to be made up somewhere and that somewhere is in the sale of USD reserve assets which are prone to being understated if one looks only at official FX reserves. Contrast this with the status quo which for years has been more petrodollars coming in than what’s going out (in terms of expenditures) with the balance being reinvested in USD assets.
- Simplifying even further: the virtuous circle (for the dollar and for USD assets) has not only been broken, but it’s now starting to reverse itself and the potential scope of that reversal must take into account SWF assets.
- Where we go from here is an open question, but what’s clear from the above is that between China’s FX reserve drawdowns in defense of the yuan and the dramatic decrease in petrodollar flow, the self-feeding loop that’s sustained the dollar and propped up USD assets is now definitively broken and we are only beginning to understand the consequences.
- We have shown how the US economy structurally changed after Nixon took the US off gold, letting the Federal Reserve do what it does best. Obviously, with the “hard” anchor of the US dollar cut loose, the rest followed suit. It is telling that the so-called post-Bretton Wood “gold standard” of all currencies, the Deutsche mark lost 65 per cent of its purchasing power from 1971 to 1990.
- Also note that the French, with its inferior Franc lost 84 per cent of its purchasing power over the same, time hated the Germans for it. As a “victorious” nation of the Second World War, the French had a right to veto German unification, and would only agree to re-merge east and west if the Germans would give up their coveted mark and join the euro.
- But we digress, in the this episode we will focus on debt levels within the context of unrestrained central banking.
- Throughout history the US economy used to be leveraged, on average, 1.5 times GDP; total credit market debt fluctuated more or less within a tight range of maximum one standard deviation from its long term mean. Prior to 1971 the only time debt levels really got out of hand was during the Great Depression on back of a 45 per cent decline in nominal GDP. Total outstanding debt, in dollar terms actually fell by 12 per cent over the same time span.
- So, the US economy was leveraged 1.5 times its annual output from 1840 to 1971 before fundamentally changing its trajectory. Needless to say, this low debt period was also when the US economy became the world’s largest and most sophisticated (see here) and ultimately a global hegemon.
- Growth, on the other hand have moved inversely to the debt level. On a decennial CAGR basis growth in 2015 is only beaten by 1935 in terms of under-performance.
- So why did debt levels rise so dramatically after the final central bank restraint was removed? It is essentially due to the massive subsidy central bankers provided. If you tax a thing you get less of it (think all the tax on labour) but if you subsidise it you will get more of it. As time went by, debt obviously grew ever larger and eventually large enough to become an integral part of the business cycle. In other words, central banks could not stop the subsidy for fear of creating, well, a 2008 financial meltdown.
- So every time spending growth came to a halt, the central banks would step in and lower rates and consequently also debt servicing cost. With more money in consumers’ pockets spending could resume.
- As debt continued to grow, debt servicing cost obviously rose along with it, and the high in interest rates could never reach its previous peak before a new slump in spending occurred. In addition, the central banks always had to lower rates to a lower level than in the preceding cycle to reinvigorate spending.
- When debt funded spending could not be stimulated even at zero rates the necessary deleveraging started with devastating consequences for global finance, trade and output.
- This process, which Stockman refers to as dishonest market pricing, had even more perverted effects than just rising the overall debt level. It allowed the emergence of debt that consumed current resources without adding to future production. The massive increase in mortgage loans (which per definition must be repaid out the production of the mortgage holder) and financial sector debt helped increase what we call counterproductive debt.
- While we get much pushback on this concept – a house is claimed to be productive as it provides housing services – the point is simply that the future productive stream of goods and services needed to repay the resources used in the process to build the house cannot come from the house itself. Taken to its logical extreme, a two week vacation in Spain to recuperate, paid for by consumer debt is also productive in the sense that its can help bring forth a more motivated worker upon return.
- The jet fuel, food and services consumed during the two week vacation on the other hand is consumed and can only be repaid by future production; but it did nothing to actually provide the means for which future production can emerge. Unless paid for by prior production, through honest savings, debt funded consumption make society poorer and less capable of meeting its future liabilities. That this is lost on the Keynesians in charge has led to more destruction than any war have ever done.
- It is the same with a mortgage. Allocate too much resources to the building of houses paid for by promises to repay from future production and the promised income stream will never materialise, because the means it was predicated upon are no longer available to make the investments necessary. They were consumed in the process of building the houses.
- Whilst counterproductive debt rose exponentially from the 1970s, debt taken on with the intent of making a subsequent sale on the other hand remained relatively constant. Productive debt, presumably the kind that is self-liquidating, did not take the central bank subsidy bait to the same extent.
- Combining zero interest rates and a massive pile of counterproductive debt leads to a very toxic mix for sound and sustainable growth. Central banks, shell-shocked by the fact that they cannot goose spending at zero interest rates fear peak debt will lead to a massive deflation, starts programs to fund their governments, which can spend.
- And spend they do. Government debt is under the category we call destructive debt, pure consumptive in nature without even leaving traces of wealth behind. Mortgage debt, while counter-productive, at the very least leave behind a house.
- As the counter-productive part of the outstanding debt went into free-fall, the government, funded by its central bank, started spending and bailing out the very same counter-productive debt. In this phase of the global debt debacle, destructive debt rises to maintain the status quo. This is obviously also the very last stage as there will be no one to bail out the governments of the world when the next deflationary down-leg starts.
- It is also worth noting that velocity of money falls when counter-productive debt rises too high in proportion to society’s productive capacity. By this logic, peak debt was actually reached as early as in the mid-1990s, but ever lower central bank rates, the emergence of China with its massive recycling of dollar inflation (more on this later) helped postpone the day of reckoning.
- The United States lags far behind other developed countries in terms of personal, civil and economic freedoms, according to a study released this month. Its neighbor to the north, for example, ranked 14 spots ahead of the so-called “Land of the Free.”
- Three international think tanks — the U.S.-based Cato Institute, Canada’s Fraser Institute, and Germany’s Liberales Institut at the Friedrich Naumann Foundation for Freedom — released the Human Freedom Index earlier this month. In addition to major civil liberties, the study considers safety and rule of law, relative size of government and capitalist values like the soundness of money, property rights, and access to international trade. The authors used a total of 70 data sources ranging from 2008 to 2012, the most recent year for which all necessary data is currently available.
- According to the report,
“The top 10 jurisdictions in order were Hong Kong, Switzerland, Finland, Denmark, New Zealand, Canada, Australia, Ireland, the United Kingdom, and Sweden.”
- The U.S. ranks 20th, while Myanmar, Congo and Iran round out the bottom of the list of 152 countries.
- Commenting on Canada’s high ranking compared to the U.S., Fred McMahon, the editor of the study, told the Toronto Sun:
“Canada doesn’t lead in a single area, but it’s high on all areas, like economic freedom … We have a very strong rule of law, good on safety and security. You can’t really have freedom without safety and security. And of course, in what you might call political freedoms and associations, speech and so on, we’re also top of the class.”
- McMahon cited the U.S. war on terror, recent changes to property rights, and the ongoing effects of the 2008 financial crisis for the country’s poor ranking. “The U.S. has declined incredibly over the past decade- and-a-half,” he told the Sun last week, adding:
“The U.S. is known as the ‘Land of liberty’ and Canada is known as ‘The land of good governance,’ so it’s a little surprising that a country whose motto hinges on good government as a motto is well-ahead of a country whse motto hinges on liberty.”
- Hong Kong’s high ranking may seem surprising, but the index does not attempt to measure democracy, and this year’s report doesn’t take into account recent pro-democracy protests in the country and the subsequent government crackdown.
- This wasn’t the only recent study to take issue with civil liberties in America. In February, Reporters Without Borders announced that the U.S. had dropped three places in its “World Press Freedom Index” as a result of a “‘war on information’ by the Obama administration” and a crackdown on reporters’ abilities to freely report on events like the Ferguson protests, where trespassing charges were recently leveled against two journalists for their work documenting last year’s uprising following the death of Michael Brown
08.28.15 – Why QE4 Is Inevitable
- One narrative we’ve pushed quite hard this week is the idea that China’s persistent FX interventions in support of the yuan are costing the PBoC dearly in terms of reserves. Of course this week’s posts hardly represent the first time we’ve touched on the issue of FX reserve liquidation and its implications for global finance. Here, for those curious, are links to previous discussions:
- China Dumps Record $143 Billion In US Treasurys In Three Months Via Belgium
- China’s Record Dumping Of US Treasuries Leaves Goldman Speechless
- How The Petrodollar Quietly Died And Nobody Noticed
- Why It Really All Comes Down To The Death Of The Petrodollar
- Devaluation Stunner: China Has Dumped $100 Billion In Treasurys In The Past Two Weeks
- What China’s Treasury Liquidation Means: $1 Trillion QE In Reverse
It’s Official: China Confirms It Has Begun Liquidating Treasuries, Warns Washington
- And so on and so forth.
- In short, stabilizing the currency in the wake of the August 11 devaluation has precipitated the liquidation of more than $100 billion in USTs in the space of just two weeks, doubling the total sold during the first half of the year.
- In the end, the estimated size of the RMB carry trade could mean that before it’s all over, China will liquidate as much as $1 trillion in US paper, which, as we noted on Thursday evening, would effectively negate 60% of QE3 and put somewhere in the neighborhood of 200bps worth of upward pressure on 10Y yields.
- And don’t forget, this is just China. Should EMs continue to face pressure on their currencies (and there’s every reason to believe that they will), you could see substantial drawdowns there too. Meanwhile, all of this mirrors the petrodollar unwind. That is, it all comes back to the notion of recycling USDs into USD assets by the trillions and for decades. Now, between crude’s slump, the commodities bust, and China’s deval, it’s all coming apart at the seams.
- Needless to say, this “reverse QE” as we call it (or “quantitative tightening” as Deutsche Bank calls it) has serious implications for Fed policy, for the timing of the elusive “liftoff”, and for the US economy more generally. Of course we began detailing the implications of China’s Treasury liquidation months ago and now, it’s become quite apparent that analyzing the consequences of China’s massive FX interventions is perhaps the most important consideration when attempting to determine the future course of global monetary policy.
- On that note, we present the following from Deutsche Bank’s George Saravelos, which can be summarized with the following snippet:
- The potential for more China outflows is huge: set against 3.6 trio of reserves, China has around 2 trillion of “non-sticky” liabilities including speculative carry trades, debt and equity inflows, deposits by and loans from foreigners that could be a source of outflows (chart 2). The bottom line is that markets may fear that QT has much more to go.
- What could turn sentiment more positive? The first is other central banks coming in to fill the gap that the PBoC is leaving. China’s QT would need to be replaced by higher QE elsewhere, with the ECB and BoJ being the most notable candidates… Either way, it is hard to become very optimistic on global risk appetite until a solution is found to China’s evolving QT
In other words, first according to Deutsche, and soon according to virtually all sellside strategists who are slowly but surely grasping the significance of what we have been warning for month on end, QE4 is inevitable. The only problem is that when the Fed pivots from “imminent rate hike” to QE4, it will loose the last shred of credibility it had left. The Fed is now completely trapped.
- * * *
- Beware China’s Quantitative Tightening
- Why have global markets reacted so violently to Chinese developments over the last two weeks? There is a strong case to be made that it is neither the sell-off in Chinese stocks nor weakness in the currency that matters the most. Instead, it is what is happening to China’s FX reserves and what this means for global liquidity. Starting in 2003, China engaged in an unprecedented reserve-accumulation exercise buying almost 4trio of foreign assets, or more than all of the Fed’s QE program’s combined (chart 1). The global impact was indeed equivalent to QE: the PBoC printed domestic money and used the liquidity to buy foreign bonds. Treasury yields stayed low, curves were flat, and people called it the “bond conundrum”.
- Fast forward to today and the market is re-assessing the outlook for China’s “QE”. The sudden shift in currency policy has prompted a big shift in RMB expectations towards further weakness and correspondingly a huge rise in China capital outflows, estimated by some to be as much as 200bn USD this month alone. In response, the PBoC has been defending the renminbi, selling FX reserves and reducing its ownership of global fixed income assets. The PBoC’s actions are equivalent to an unwind of QE, or in other words Quantitative Tightening (QT).
- What are the implications? For global risk assets, they are clearly negative –global liquidity is falling. For fixed income, the impact on nominal yields is ambivalent because private safe-haven demand for bonds may offset central bank selling. But real yields should move higher, inflation expectations lower, and there should be steepening pressure on curves. This is indeed how markets have responded over the last two weeks: as if the Fed has announced it is unwinding its balance sheet!
- The potential for more China outflows is huge: set against 3.6trio of reserves (recorded as an “asset” in the international investment position data), China has around 2trillion of “non-sticky” liabilities including speculative carry trades, debt and equity inflows, deposits by and loans from foreigners that could be a source of outflows (chart 2). The bottom line is that markets may fear that QT has much more to go.
- What could turn sentiment more positive? The first is other central banks coming in to fill the gap that the PBoC is leaving. China’s QT would need to be replaced by higher QE elsewhere, with the ECB and BoJ being the most notable candidates. The alternative would be for China’s capital outflows to stop or at least slow down. Perhaps a combination of aggressive PBoC easing and more confidence in the domestic economy would be sufficient, absent a sharp devaluation of the currency to a new stable. Either way, it is hard to become very optimistic on global risk appetite until a solution is found to China’s evolving QT.
- On Thursday, Ukraine struck a restructuring agreement on some $18 billion in Eurobonds with a group of creditors headed by Franklin Templeton. The deal calls for a 20% writedown and a reprofiling that includes a maturity extension of four years and an across-the-board 7.75% coupon. All told, Kiev should save around, let’s just call it $4 billion once everything is said and done (there are some miscellaneous loans and bonds that still have to be worked out).
- That’s the good news.
- The bad news is that Ukraine also owes $3 billion to Vladimir Putin.
- Now obviously, owing Vladimir Putin $3 billion is not a situation one ever wants to find themselves in, but this particular case is exacerbated by the fact that Putin did not loan the money to Ukraine as we know it now, he loaned the money to a Ukraine that was governed by Russian-backed Viktor Yanukovych. Of course Yanukovych was run out of the country last year following a wave of John McCain-attended protests.
- Well, one thing led to another and here we are 18 months later with a festering civil war and a sovereign default and on Thursday, Ukrainian finance minister Natalie Jaresko offered the same restructuring terms to Russia that it offered to Franklin Templeton and T. Rowe. In effect, Jaresko was attempting to tell Vladimir Putin that Ukraine would allow him to take a 20% upfront loss on the $3 billion he loaned to Yanukovych who was overthrown by the current Ukrainian government with whom Moscow is effectively at war. As you might imagine, Putin was not at all interested.
- So what happens now?
- Well, it’s very simple actually. Someone owes Vladimir Putin $3 billion which he intends to collect in full and he could care less if Franklin Templeton and T. Rowe Price are willing to take a 20% hit.
- Who’s going to pay him, you ask? Probably the US taxpayer. Here’s BofAML:
- The $3bn Russian bond is included in debt restructuring, but Russia will not participate in debt restructuring and will either be paid $3bn from reserves in December or there will be a political decision to agree on an extension, likely without haircuts. We believe the $3bn bond is likely to be classified as sovereign debt and the IMF would likely be forced to pay it (as a holdout) in order to continue the program in December.
Got that? The IMF (so, the US with the tacit support of the taxpayer) is going to pay Vladimir Putin his $3 billion which he loaned to Viktor Yanukovych who the US effectively helped to overthrow.
- And if that isn’t hilarious enough for you, consider that the rationale behind paying Putin 100 cents on the dollar is that the IMF needs to be able to justify the continual flow of IMF bailout funds to Kiev, some of which must be used to pay Gazprom which immediately remits the funds to Putin’s personal money vault.
- So in a nutshell, the US is going to pay Putin in order to ensure that it can continue to pay Putin.
Charles Schwab Breaks: “System Is Temporarily Unavailable”: It has not been a good week for the retail brokers: on Monday, TD Ameritrade infuriated thousands, when the system broke just as the market crashed, preventing countless retail traders from buying (or selling). Is this a signal that the market is going to be down and the Plunge Protection Team will try to pump it up. Europe is down, futures are down. JPM quant said the market will plunge again.
- There’s little question that the collapse of the financial universe in 2008 dealt a dramatic blow to retail’s confidence in US capital markets. Taxpayers were forced to foot the bill for a Wall Street bailout just as 45% of their 401ks was being vaporized and to make matters immeasurably worse, CNBC ensured that mom and pop could watch their retirements disappear in real time on the same channel that had, for the better part of a year, been telling them that everything was fine.
- To the extent that the Fed-driven, six-year rally restored some semblance of trust between retail investors and Wall Street, it was wiped away for good on Monday when, in a harrowing day of flash-crashing mayhem, the perils of broken, manipulated markets were laid bare for all to see and to add insult to injury, the ETF pricing model blew up causing some funds to trade far below NAV.
- Given that, and given how predisposed household investors are to mistrust Wall Street in the post-crisis, post-Flash Boys world, retail outflows during uncertain times (like those that began last month when China’s stock market collapse began to make national news) shouldn’t come as a surprise, but as Credit Suisse notes, something happened in July and August that hasn’t happened since Q4 of 2008: retail investors pulled money from both stocks and bond funds.
- In other words, mom and pop were selling everything.
- From Credit Suisse:
We observe that the latest weekly estimates from the ICI indicate these retail investment outflows began gaining strength in Q3 2015.Data to date suggest that we will see the first example of back-to-back monthly outflows from both equity and bond mutual funds (in July and August 2015) since Q4 2008.
- More from Bloomberg:
Credit Suisse estimates $6.5 billion left equity funds in July as $8.4 billion was pulled from bond funds, citing weekly data from the Investment Company Institute as of Aug. 19. Those outflows were followed up in the first three weeks of August, when investors withdrew $1.6 billion from stocks and $8.1 billion from bonds, said economist Dana Saporta.
“Anytime you see something that hasn’t happened since the last quarter of 2008, it’s worth noting,” Saporta said in a phone interview. “It may be that this is an interesting oddity but if we continue to see this it could reflect a more broad-based nervousness on the part of household investors.”
Withdrawals from equity funds are usually accompanied by an influx of money to bonds, and an exit from both at the same time suggests investors aren’t willing to take on risk in any form. While retail investor sentiment isn’t the best predictor of market moves, their reluctance could have significance, Saporta said.
“It might suggest households are getting nervous about holding investments, and that could lead to some real economic implications including cutting back on spending,” she said. “Should the market turn lower again, it will be interesting to see if we have the traditional move back into bonds or if households move to cash.”
- On Wednesday we witnessed the third largest single day point gain for the Dow Jones Industrial Average ever. That sounds like great news until you realize that the two largest were in October 2008 – right in the middle of the last financial crisis. This is a perfect example of what I wrote about yesterday. Every time the market crashes, there are huge up days, huge down days and giant waves of market momentum. Even though the Dow was up 619 points on Wednesday, overall we are still down more than 2,000 points from the peak of the market. During the weeks and months to come, we are going to see many more wild market swings, but the overall direction of the market will be down.
- Sadly, the mainstream media is still peddling the lie that everything is going to be just fine. So millions upon and millions of Americans are just going to sit there while their investments get wiped out. In the six trading days leading up to Wednesday, Americans lost a staggering 2.1 trillion dollars as stocks plunged, and the truth is that this nightmare is only just beginning.
- Early on Wednesday morning, CNN published an article entitled “Why U.S. stocks aren’t headed for a crash“. I had to laugh when I saw that headline. If CNN is going to make this kind of a claim, they better have something very solid to base it on. But instead, these are the five reasons we were given for why the stock market is not going to collapse…
- 1. “The U.S. economy isn’t on the verge of a recession.”
- This is exactly what all of the “experts” told us back in 2007 and 2008 too. In America today, the homeownership rate is at a 48 year low, 46 million Americans go to food banks, and economic growth has slowed to a standstill (and that is if you actually buy the highly manipulated official numbers). The truth, of course, is that things continue to progressively get worse as our long-term economic decline continues to unfold. For much more on this, please see my previous article entitled “12 Ways The Economy Is Already In Worse Shape Than It Was During The Depths Of The Last Recession“.
- 2. “China’s effect on U.S. is limited.”
- Really? Go to just about any major retail store and start reading labels. You will likely find far more things that were “made in China” than you will American-made products. The global economy is more interconnected than ever before, and the Chinese stock market is the second largest on the entire planet. Of course what is happening in China is going to affect us.
- 3. “American businesses are doing pretty well (outside of energy).”
- Actually, they were doing pretty well for a while, but now things are turning. Many large corporations are reporting declining orders, declining revenues and declining profits. Unsold inventories are beginning to pile up and the pace of layoffs is starting to increase. All of the things that we would expect to see just prior to another recession are happening.
- 4. “The Federal Reserve sounds cautious.”
- This is laughable. Ultimately, it isn’t going to matter much at all whether the Federal Reserve barely raises rates or not. The era of “central bank omnipotence” is at an end. Just look at what is happening over in Europe. All of the quantitative easing that the ECB has been doing has not kept their markets from crashing in recent days. Those that believe that the Federal Reserve can somehow miraculously keep the stock market from crashing this time around are going to end up deeply, deeply disappointed.
- 5. “Stock prices aren’t crazy high anymore.”
- There is some truth to this last point. Instead of stock prices being really, really, really crazy now they are just really, really crazy. But as I have pointed out inmany previous articles, the technical indicators are very clearly telling us that U.S. stocks still have a long, long way to go down.
- But let’s hope that CNN is actually right – at least in the short-term.
- Let’s hope that markets settle down and that things stabilize for at least a few weeks.
- In order for that to happen, markets need to become a lot less volatile than they are right now. The rollercoaster ride that we have been on in recent days has been extraordinary…
The Dow traveled another 1,600 points during Tuesday’s trading session, adding to the 4,900 points the index traveled in down and up moves on Monday.
- Markets tend to go up slowly and steadily when things are calm, and they tend to go down rapidly when things are volatile.
- If you are rooting for a return of the bull market, you should be hoping for nice, boring trading days where the Dow goes up by about 100 points or so. Wild swings like we have seen on Friday, Monday, Tuesday and Wednesday are very strong indicators that we have entered a bear market.
- What we have been witnessing over the past week is almost unprecedented. Just check out this piece of analysis from Bloomberg…
By one metric, investors would have to go back 75 years to find the last time the S&P 500’s losses were this abrupt.
Bespoke Investment Group observed that the S&P 500 has closed more than four standard deviations below its 50-day moving average for the third consecutive session. That’s only the second time this has happened in the history of the index.
- Of course after such a dramatic plunge it was inevitable that we were going to have a “bounce back day” where there was lots of panic buying. Initially it looked like it would be Tuesday, but it turned out to be Wednesday instead.
- But if you think that the big gain on Wednesday somehow means that the crisis is “over”, you are going to be sorely mistaken.
- Personally, I am hoping that we at least see a bit of a pause in the action, but there is absolutely no guarantee that we will even get that.
- As the markets have been flying around, more and more Americans are becoming curious about the potential for a full-blown stock market crash. The following comes from Business Insider…
This one’s pretty easy: according to Google search trends, more Americans are searching for “stock market crash” now that at any point since the last crash.
Right now, search traffic for the term “stock market crash” is hitting about 70% of the most volume this term has ever gotten through Google search.
And so while this data doesn’t convey absolute search volume for the term, we do know that Americans appear to be looking for information about a stock market crash at the highest level in about 7 years.
- Very interesting.
- In addition, Americans are also becoming more pessimistic about the overall economy. According to Gallup, the level of confidence that Americans have about the future performance of the U.S. economy is the lowest that it has been in about a year.
- And remember – it isn’t just U.S. markets that are starting to go crazy. All over the planet stocks are crashing and recessions are starting. In fact, I can’t remember a time when there has been this much economic chaos erupting all over the world all at once.
- So can the U.S. resist the overall trend and pull out of this market crash?
- Ironically, U.S. college campuses are rapidly becoming the least free, most censored places in the country. Many people have commented on this, including high profile, enormously talented comedians such as Chris Rock and Jerry Seinfeld. In fact, Chris Rock was so appalled that he stopped playing colleges because audiences had become “too conservative” Before getting all bent out of shape, this is what he meant:
- Not in their political views — not like they’re voting Republican — but in their social views and their willingness not to offend anybody. Kids raised on a culture of “We’re not going to keep score in the game because we don’t want anybody to lose.” Or just ignoring race to a fault. You can’t say “the black kid over there.” No, it’s “the guy with the red shoes.” You can’t even be offensive on your way to being inoffensive.
Although I’ve touched upon this subject before, I haven’t given it nearly the amount of attention it deserves. That said, I would suggest rereading a powerful post published earlier this summer, A Professor Speaks Out – How Coddled, Hyper Sensitive Undergrads are Ruining College Learning. Here’s an excerpt:
- Things have changed since I started teaching. The vibe is different. I wish there were a less blunt way to put this, but my students sometimes scare me — particularly the liberal ones.
- I once saw an adjunct not get his contract renewed after students complained that he exposed them to “offensive” texts written by Edward Said and Mark Twain. His response, that the texts were meant to be a little upsetting, only fueled the students’ ire and sealed his fate. That was enough to get me to comb through my syllabi and cut out anything I could see upsetting a coddled undergrad, texts ranging from Upton Sinclair to Maureen Tkacik — and I wasn’t the only one who made adjustments, either.
- The current student-teacher dynamic has been shaped by a large confluence of factors, and perhaps the most important of these is the manner in which cultural studies and social justice writers have comported themselves in popular media. I have a great deal of respect for both of these fields, but their manifestations online, their desire to democratize complex fields of study by making them as digestible as a TGIF sitcom, has led to adoption of a totalizing, simplistic, unworkable, and ultimately stifling conception of social justice. The simplicity and absolutism of this conception has combined with the precarity of academic jobs to create higher ed’s current climate of fear, a heavily policed discourse of semantic sensitivity in which safety and comfort have become the ends and the means of the college experience.
Moving along to today’s post, I want to highlight two different stories that I came across today demonstrating just how far “higher education” has cratered in recent years. First, let’s turn to Rutgers University, whose “Bias Prevention & Education Committee (BPEC)” recently put out an alert that began with the following statement:
- Screen Shot 2015-08-26 at 11.02.24 AM
- Really, since when? I think a little document called the Constitution of the United States of America might have a different opinion.
- Of course, as soon as this became publicized, the school removed that language. Reason reports that:
- Rutgers University students, you are being watched.
That appears to be the message a Rutgers.edu web page would like the campus community to absorb. The web page is maintained by the Bias Prevention & Education Committee, which chillingly warns students that there is “no such thing as ‘free’ speech,” and to “think before you speak.” From the web page:
- Since 1992, the Bias Prevention Committee has monitored the New Brunswick/Piscataway campus for bias incidents and has provided bias prevention education to staff, students, and faculty. …
Bias Acts Are:
- Verbal, written, physical, psychological acts that threaten or harm a person or group on the basis of race, religion, color, sex, age, sexual orientation, gender identity or expression, national origin, ancestry, disability, marital status, civil union status, domestic partnership status, atypical heredity or cellular blood trait, military service or veteran status.
If you experience or witness an act of bias or hate, report it to someone in authority. You may file a report on line at www.bias.rutgers.edu and you will be contacted within 24 hours.
- Rutgers defines bias so broadly that all kinds of clearly protected speech would likely trigger an incident report and subsequent investigation by this Orwellian committee.
- However, the university administration seems to be backing off some of the committee’s claims. When Campus Reform first reported the existence of the web page last week, it looked like this (Edit: Link fixed). By Monday, it looked like this. The difference? The university removed the assertion that there is no such thing as ‘free’ speech.
- I suppose this means that administrators recently reviewed the page, and stand by the rest of its claims.
Of course, this is far from a one-off incident. This is becoming systemic at universities from sea to shining sea. The good news is that some people have had enough and are speaking out. One brave example is Alice Dreger, who just very publicly resigned from Northwestern University protesting the schools’ censorship. We learn from the Chronicle of Higher Education that:
- Alice Dreger doesn’t usually pull punches. So it’s no surprise that her resignation letter is more, shall we say, direct than the average two weeks’ notice.
- Ms. Dreger resigned this week from Northwestern University, where she was a clinical professor of medical humanities and bioethics, a nontenured gig she’d had for the past decade. In her letter, she writes that when she started at Northwestern, the university vigorously defended her academic freedom. Now, she contends, that’s no longer the case.
- What prompted her departure was the fallout over an article by William Peace, who at the time was a visiting professor in the humanities at Syracuse University. Mr. Peace wrote an essay for an issue of the journal, Atrium, that Ms. Dreger guest-edited. The essay is a frank account of a nurse who helped Mr. Peace regain his sexual function after he was paralyzed.
- According to Ms. Dreger, Eric G. Neilson, vice president for medical affairs and dean of the university’s school of medicine, tried to censor portions of the essay deemed too explicit. The essay is straightforward in its description of sex, and includes multiple mentions of “the dick police,” but the purpose is to illuminate what went on in the era prior to disability rights and studies.
- In her letter, Ms. Dreger writes that the university allowed the essay to be published online only after she and Mr. Peace threatened to talk publicly about what they saw as censorship. She writes that she was “disgusted that the fear of bad publicity was apparently the only thing that could move this institution to stop censorship.”
- She asked the university to acknowledge that attempting to remove portions of the essay was a mistake and to promise not to do so in the future. “They never acknowledged that the censorship was real,” Ms. Dreger said in an interview. “I wanted a concrete acknowledgment and assurance that my work would not be subject to monitoring.” That, she said, would have been enough for her to remain.
- The idea that institutions must acknowledge wrongdoing is central to Ms. Dreger’s academic work. It’s a theme of her recent book Galileo’s Middle Finger: Heretics, Activists, and the Search for Justice in Science, which takes to task organizations that try to stifle academic freedom or single out scholars for their provocative views.
“The idea that institutions must acknowledge wrongdoing is central to Ms. Dreger’s academic work.”
- BINGO. This is so essential to a functioning, ethical society, and is something that never happens in modern America. Ever.
- In case you doubt the firebrand that is Ms. Dreger, here’s an sample of one of her tweets from earlier today:
Could everybody stop calling me a bioethicist? If I were one I’d be whoring for the medical industrial complex. I’m a historian. And moral.
— Alice Dreger (@AliceDreger) August 26, 2015
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