“It’s going to be pretty deep. We’re in the camp that this is not yet a big move. It’s scary, and those last two-day trends look ugly… The Fed didn’t put any bullets back in the revolver when they had the chance… I have to believe that if the correction exceeds 10%, we’ll start to hear talk of QE4, and any discussion of the first fed funds rate hike would be tabled.” – Doug Ramsey, Leuthold Weeden Capital Management
Finally! Some vigilante shareholder justice. I’m talking about investors in China taking the law into their own hands and arresting the chairman of a metals exchange which has frozen investors accounts. This is the kind of spectacle only a massive global credit bubble can deliver. Details below.
First, though, how bad will this week get for investors? And how long will it be before some diphead starts telling you to buy on the dips? And is there anything to be gained by timing the bottom?
As to how bad it can get, let’s acknowledge that it’s not that bad. At least not yet. The Shanghai Composite may have fallen by 8% on Monday. And it may be down 37%, peak to trough. But last week’s 5.77% decline on the S&P 500 hardly rates, historically speaking.
The largest one-week decline on the S&P 500 was 18.47% in July of 1933. The second-largest was 18.20% in October of 2008. Five of the other top-ten one-week moves took place in the early 1930s. One took place in 1940. One took place in 1987 (-12.20%). And one took place in 1929 (-12.30%).
That brings up an obvious question: is this the beginning of a depression or the middle of one? Dow and S&P stocks didn’t make a final low until 1941. There were lots of tradeable ups and downs between 1932 and 1941. But it wasn’t a secular bull market. It was a depression.
Paul Krugman thinks he knows how to beat this, by the way. Add more government debt. Seriously. I’m not kidding. In Friday’s New York Times, Krugman wrote:
“Believe it or not, many economists argue that the economy needs a sufficient amount of public debt out there to function well. And how much is sufficient? Maybe more than we currently have. That is, there’s a reasonable argument to be made that part of what ails the world economy right now is that governments aren’t deep enough in debt.
“I know that may sound crazy. After all, we’ve spent much of the past five or six years in a state of fiscal panic, with all the Very Serious People declaring that we must slash deficits and reduce debt now now now or we’ll turn into Greece, Greece I tell you.
“But the power of the deficit scolds was always a triumph of ideology over evidence, and a growing number of genuinely serious people — most recently Narayana Kocherlakota, the departing president of the Minneapolis Fed — are making the case that we need more, not less, government debt.”
And blah blah blah. The rest might as well come out of the mouth of Jeremy Corbyn. But Krugman made one good point. Unlike 2008, there is no monetary policy flexibility. That is, interest rates are already as low as they can go. If you can’t make money any cheaper, and you can’t make people borrow or spend, there’s only one thing left to do: spend money you don’t have.
This is what Doug Ramsey refers to in the quotation at the beginning of this article. Quantitative easing has become a de-facto kind of fiscal policy. If governments themselves can’t borrow and spend more money (for political reasons), then their agents at central banks can do the job for them.
Here’s a prediction: the next round of QE won’t work anything like previous three. The mugs are on to the game now. Instead of getting in the slipstream of the central bank to ride asset prices higher (and bond yields lower), the public and anyone with a brain will take advantage of the added liquidity to sell. Write it down.
By the way, remember last week when I wrote about the market’s bad breadth? Turns out Ramsey was on the case in early August, just as I was getting settled into my new apartment in Shad Thames. Specifically, Ramsey said S&Ps high in May had failed to trigger similar moves in transportation stocks, utilities, and corporate bonds.
The failure to ‘confirm’ the high in stocks was what Ramsey called an ‘internal market signal’. It’s not the sort of thing you’d notice unless you were looking for it. And you’d only be looking for it if you were experienced enough to know that when four different indicators are in 40-week downtrends, the market signals are telling you something the headlines aren’t.
By the way, Tim Price and I spoke about this at lunch last week in Soho over hot Chinese food. What signals should investors in the UK market be alert to? You’d expect the stockmarket to be under pressure here, too. But are there signals pointing to other trouble in other markets like gilts, the pound, or the property market?
On the other hand, what about contrarian signals that you should buy? Check out the chart below. On 11 August, I noted that Peabody Energy Corp (NYSE: BTU) had made a five-year low and had an RSI hovering at 30. The stock was up a whopping 57% last week. Howzat?
(Source: www.stockcharts.com)
Granted, Peabody isn’t in the S&P 500 any longer. But when a company advances that much in the face of a market, you’d be wise to take note. Only 15 companies in the S&P 500 actually advanced last week, according to Bloomberg data. And the biggest advance?
Newmont Mining (NYSE: NEM)! The big-cap gold miner was up a modest 4.55%. Now I’ll have something specific to ask MoneyWeek’s commodity stock expert, Alex Williams, when I have coffee with him later this week. Is it time to buy resource stocks again?
Hold that thought. The larger question is whether it pays to speculate on market bottoms when the market is falling like a stone. A very sharp stone. Yes, you know the old adage that you’re not supposed to try and catch a falling knife. Let the market tell you when to buy and don’t try to guess.
That’s the question, isn’t it? Is there anything to be gained by trying to time the bottom? Well, if you’re a speculator, yes. There’s plenty to be gained. But if you’re an investor, there’s plenty to be lost.
And for long-term investors, that’s the real question. It’s not whether you should buy. It’s whether you should sell. If it’s just a hiccup – albeit a painful and loud one like the 1987 crash – you’re better off closing your browser, shutting your computer down and going for a long walk in the relaxing rain.
But the question you have to ask yourself is whether now is like 2008 again, but with less flexibility from the authorities, and less confidence in authority itself. Not many investors approaching retirement age could afford a repeat of 2008.
For Chinese investors, it’s not so much a question of repeating a bad experience as it is learning from a new one. A new bad experience. The bad experience of trusting the authorities when they tell you it’s safe to buy stocks. A whole generation of new Chinese stockmarket investors are about to learn that governments can’t really control markets. That stocks go down as well as up.
That brings me back to the vigilante justice story I mentioned at the beginning. Our story takes us to the southwest Chinese city of Kunming. There, at the Fanya Metals Exchange, you’ll find investors with frozen accounts and no recourse to getting their money back.
The exchange president, Shan Jiuliang, was accosted outside a Shanghai hotel by investors who delivered him to the cops. The cops let him go. But it’s an interesting precedent.
What’s their grievance? The exchange buys and stockpiles minor metals like indium and bismuth, according to The Financial Times. It promises high-yield returns from highly liquid investments. The trouble is that the investments stopped paying off in July. Investor funds have been frozen since.
That’s the bigger trouble in a financial system with no ‘policy flexibility’. When the next crisis comes along, and confidence is lost, the only way to keep people ‘invested’ in the system is to prevent them leaving. A capital control/quarantine/jail.
Category: Market updates