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Here's Why The Markets Have Suddenly Become So Turbulent
Submitted by Charles Hugh-Smith via PeakProsperity.com,
When stock markets are free-falling 10+% in a matter of days, it’s natural to seek some answers to the question “why now?”
Some are saying it was all the result of high-frequency trading (HFT), while others point to China’s modest devaluation of its currency the renminbi (a.k.a. yuan) as the trigger.
Trying to finger the proximate cause of the mini-crash is an interesting parlor game, but does it really help us identify the trends that will shape markets going forward?
We might do better to look for trends that will eventually drag markets up or down, regardless of HFT, currency revaluations, etc.
Five Interconnected Trends
At the risk of stating the obvious, let’s list the major trends that are already visible.
1. The China Story is Over
And I don’t mean the high growth forever fantasy tale, I mean the entire China narrative is over:
- That export-dependent China can seamlessly transition to a self-supporting consumer economy.
- That China can become a value story now that the growth story is done.
- That central planning will ably guide the Chinese economy through every rough patch.
- That corruption is being excised from the system.
- That the asset bubbles inflated by a quadrupling of debt from $7 trillion in 2007 to $28 trillion can all be deflated without harming the wealth effect or future debt expansion.
- That development-dependent local governments will effortlessly find new funding sources when land development slows.
- That workers displaced by declining exports and automation will quickly find high-paying employment elsewhere in the economy.
I could go on, but you get the point: the entire Story is over. (I explained why in a previous essay, Is China’s “Black Box” Economy About to Come Apart? )
This is entirely predictable. Every fast-growing economy starting with near-zero debt and huge untapped reserves of cheap labor experiences an explosive rise as the low-hanging fruit is plucked and the same abrupt stall and stagnation when the low-hanging fruit has all been harvested, leaving only the unavoidable results of debt-fueled speculation: an enormous overhang of bad debt, malinvestment (a.k.a. bridges to nowhere and ghost cities) and policies that seemed brilliant in the good old days that are now yielding negative returns.
2. The Emerging Market Story Is Also Done
Emerging currencies and markets have soared on the back of the China Story, as China’s insatiable demand for oil, iron ore, copper, soy beans, etc. drove global demand to unparalleled heights.
This demand pushed prices higher, which then pushed production (supply) higher, as the low cost of capital globally enabled marginal resources to be put into production with borrowed money.
Now that China’s demand has fallen off—by some accounts, China’s GDP is actually in negative territory, despite official claims that it’s still growing at 7% annually—commodity prices have crashed, taking the emerging markets’ stock and currency markets down. (Source)
Here is a chart of Doctor Copper, a bellwether for industrial and construction demand:
Here is Brazil’s stock market, which has declined 54% in the past 12 months:
These are catastrophic declines, and with China’s growth story over, there is absolutely nothing on the global horizon to push demand back up.
3. Diminishing Returns on Additional Debt
The simple truth is that expanding debt has fueled global growth. Though people identify China as the driver of global demand for commodities, China’s growth is debt-driven. As noted above, China quadrupled its officially tracked debt from $7 trillion in 2007 to $28 trillion as of mid-2014—an astonishing 282 percent of gross domestic product (GDP). If we add the estimated $5 trillion of shadow-banking system debt and another year’s expansion of borrowing, China’s total debt of $35+ trillion is in excess of 300% of GDP—levels associated with doomed to default states such as Greece and Spain.
While China has moved to open the debt spigot in recent days by lowering interest rates and reserve requirements, this doesn’t make over-indebted borrowers good credit risks or more empty high-rises productive investments.
Borrowed money that poured into ramping up production in emerging nations is now stranded as prices have plummeted, rendering marginal production intensely unprofitable.
In sum: greatly expanding debt boosted growth virtually everywhere after the Global Financial Meltdown of 2008-2009. That fix is a one-off: not even China can quadruple its $35+ trillion debt to $140 trillion to reignite growth.
Here is a sobering chart of global debt growth:
4. Limits on Deficit-Spending (Borrowed) Fiscal Stimulus
When the global economy rolled over into recession in 2008, governments borrowed money by selling sovereign bonds to fund increased state spending. In the U.S., federal borrowing soared to over $1 trillion per year as the government sought to replace declining private spending with public spending.
Governments around the world have continued to run large deficits, piling up immense debts since 2008. The global move to near-zero yields has enabled governments to support these monumental debt loads, but even at near-zero yields, the interest payments are non-trivial. These enormous sovereign debts place some limits on how much governments can borrow in the next global recession—a slowdown many think has already started.
Here is a chart of U.S. sovereign debt, which has almost doubled since 2008:
As noted on the chart: what structural inadequacies or problems did governments fix by borrowing gargantuan sums to fund state spending? The basic answer is: none. All the same structural problems facing governments in 2008 remain untouched in 2015. These include: over-indebtedness, bad debts that haven’t been written down, insolvent banks, soaring social spending as the worker-retiree ratio slips below 2-to-1, externalized environmental damage that has yet to be remediated, and so on.
5. Central Bank Stimulus (Quantitative Easing) as Social Policy Has Been Discredited
In the wake of the Global Financial Meltdown of 2008-2009, central banks launched monetary stimulus programs aimed at pumping money into the economy via bank lending. The stated goals of these stimulus programs were 1) boost employment (i.e. lower unemployment) and 2) generate enough inflation to stave off deflation, which is generally viewed as the cause of financial depressions.
While it can be argued that these unprecedented monetary stimulus programs achieved modest successes in terms of lowering unemployment and pushing inflation above the zero line, they also widened wealth and income inequality.
Even as these programs made modest dents in unemployment and deflation, they pushed asset valuations to the moon—assets largely owned by the few at the top of the wealth pyramid.
Here is a chart of selected developed economies’ income/wealth skew:
The widespread recognition that the benefits of central bank stimulus mostly flowed to the top of the pyramid places political limits on future central bank stimulus programs.
The 2008-09 Fixes Are No Longer Available
In summary, the fixes for the 2008-09 recession are no longer available in the same scale or effectiveness. Expanding debt to push up demand and investment, rising state deficit spending, massive monetary stimulus programs—all of these now face limitations. This means the central banks and states have very limited tools to reignite growth as global recession trims borrowing, investment, hiring, sales and profits.
What Ultimately Matters: Capital Flows
In Part 2: What Happens Next Will Be Determined By One Thing: Capital Flows, we’ll look at the one dynamic that ultimately establishes assets prices: capital flows.
I personally don’t think the world has experienced a period in which capital preservation has become more important than capital appreciation since the last few months of 2008 and the first few months of 2009. Other than these five months, the focus has been on speculating to obtain the highest possible yield/appreciation.
This suggests to me that the next period of risk-off capital preservation will last a lot longer than five months, and perhaps deepen as time rewards those who adopted risk-off strategies early on.
Click here to read Part 2 of this report (free executive summary, enrollment required for full access)
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Maybe it is because the Banksters are losing control?
Nope. No one controls the Blob once unleashed. Fiat currency goes only one way, and that's outward, first slow, then fast.
I'd like to answer that question: "Precisely which structural problems in the U.S. economy did borrowing and blowing $9.4 trillion solve?"
The structural problem was that the illuminati weren't rich and powerful enough.
Productive farm land. The future awaits...
Sure would be nice if the the Tylers would post up a real discussion about the Markets vs the Real Economy, policy failures and problems aren't resolved with the same thinking that created them.
Except the Central Wankers aren't really interested in the real economy, only the fictious one that wears the mask of financial markets.
https://www.youtube.com/watch?v=lA0BbDe2RL4
Are we experiencing the Great Recession of 2015 or merely a painful paradigm shift in how the global economy is run? Many in the West quickly blame China for mismanagement of its economy and currency. This may or may not be true, but this is only a small fraction of a much bigger story. Has anything been learned since the financial crisis of 2008?
CrossTalking with Mitch Feierstein, Stephen Keen, and Mark Weisbrot.
Last week, 28 billion pulled out of the Market.
28 billion pumped in by the PPT, to keep the market from accelerating into margin calls and panic.
Ready, set, go on Monday. .Anyone else want out while the fed props this crap up a little longer?
The markets are turbulent because people with insight are pulling their money out of the market, flight capital in the face of a fast spreading global war. Obama's ISIS is now out of control, there is a mass migration from war zones in the Middle East and North Africa and, worse of all, jihadists are pouring into Western Europe and America. Smiling, friendly jihadists like the guy who wanted to kill everyone on that French train. I wonder if, behind that smile, Obama also is a jihadist? Nah, he is a NWO follower through and through.
When you can create money from the stroke of a pen or keyboard, this is expected.
This is like watching something akin to the Great Extinction when all the large dinosaurs died off. They consume to much to survive.
Here's why dinosaurs died off...
https://humormedication.wordpress.com/2010/02/24/gary-larson-dinosaurs/
Sounds like somebody's been reading Martin Armstron's blog
"We will not have any more crashes in our time."
- John Maynard Keynes in 1927
...he said, assuming that his sound policies would be followed to the letter.
That the fiscal policies of Keyenes have been ingored in favor of monetary policy that just feeds asset bubbles lets Keynes off the hook.
I might add that Keynes believed in cutting deficits and increasing taxes in prosperious years and the opposite in down years. No one can say that his policies have been followed in the least.
http://www.barrons.com/articles/quantitative-easing-redux-1440826605
Quantitative Easing Redux?
Fed officials always try to disconnect the bank’s actions from stock-market gyrations, but history doesn’t support that indifference.
By Vito J. Racanelli
August 29, 2015
If a “rate hike” is Wall Street’s obsession this year, the effective opposite, “quantitative easing,” gets much less mention after three mammoth rounds of central-bank asset buying, or quantitative easing, in the past few years. But what’s that we hear? Another thing the Fed’s Dudley said last Wednesday was, “I’m a long way from quantitative easing. The U.S. economy is performing quite well.”
Fed officials always try to disconnect the bank’s actions from stock-market gyrations, but history doesn’t support that indifference. “It will take less than a 20% decline in U.S. stock prices for the Fed to begin discussing a new round of quantitative easing,” says Darren Pollock, a portfolio manager with Cheviot Value Management.
On several occasions in recent years, a Fed official has stepped in with easing statements following market routs. The Fed knows it can’t let the stock market fall without backpedaling on its tough monetary talk, Pollock says. It must try to keep stock prices from plummeting and pulling down consumer confidence, which could affect the economy.
Stocks recovered big-time last week, but remain vulnerable. Should the market fall some more, Pollock says, “It may force the Fed to do a U-turn and speak of a willingness to provide more stimulus—like QE.”
The Fed won’t let all the effort and money invested in propping up the economy since 2008 go to waste. It won’t stand at the plate and strike out looking. The Yellen put lives.
If the Fed bankers are so f***ing omnipotent, then they would NEVER let the markets drop at all. Why should they? It just makes the highly trained and obedient lemmings, get fearful and panic. The Dow tumbled almost 3,000 points from its recent Fed-enabled all time-high. Why did they not stop it, and stop EVERY fall, at -250 or so? Why did they not stop the last big decline to below 7K? Everyone would remain blissfully ignorant and living happily ever after in their personal ‘Matrix’. If the Fed wound up owning 50% of the entire market float, who cares so long as millions of 401K’s go up?
Or, are these falls engineered conspiracies only designed to allow the wealthy to put billions in cash to work, before the next Fed pump begins? Maybe. At any rate, if the “growth” story is really dead and millions more immigrants just accelerate the decline of America, than more debt to hide the mess will fail. Entitlements will have to be cut, sowing the seeds of more anger in the entitled masses.
In the end, Mr. Market will tame and humble even the arrogant Fed bankers and the multitudes who worship them.
Are the 'multitudes that worship them' not also members of this so named 'Mr. Market' that you speak of...?
CHS swings, and misses.
QE as social policy was never more than an academic's vaporous apparition, like the succubus scene in Ghostbusters.
Here's my take on the "China Story", which is they've now stolen all the manufacturing they can and now, for the first time in twenty years, can no longer grow by mere theft (of course I mean "theft" in a good way, they work smart and hard to "steal" manufacturing from the US and Europe, it's the vulture capitalists at *our* end who are the criminals).
And, maybe their vaunted central planners didn't see this coming and they smashed through the wall and over the cliff. Oops.
But y'know, it's not a disaster for all that, just an overshoot that requires a correction. It's not like China is about to dry up and blow away.
Chicken & egg story comes to mind...
Which came first in this ~30 year dynamic of 'offshoring' - Chinese mercantilism, or American greed?
As A business owner, my observation is the offshoring occured for one main reason: the American consumer going straight for the cheapest prices over anything made in America or made by non-slave labor.
They voted with their dollars and still do.
Put another way, consumer choice forced American companies to move oversees or else go out of business.
One example: In my neck of the woods, Vermont Tubbs snowshoes, once an icon of the North Country, eventually gave up and moved the factory to Asia. It was either that or go out of business because most Americans won't pay a couple bucks extra for something made in America.
The American Greed is actually the greed of the American Consumer more than anything else.
As a former owner of 3 businesses who went John Galt 2 years ago due to cost and intrusion of government, I have to say that CONSUMER choice had nothing to do with it. GOVERNMENT had EVERYTHING to do with it. Government can kiss my arse. I refuse to waste the limited time I have on this planet working long hours and taking more risk for being responsible for other people making a living while at the same time having to fork over a good chunk of my time to jump through government hoops and then give them a chunk of the profits while I eat the entire loss if I happen to lose money in this fake economy. They can all go F#$% OFF. I'm done running like a hamster on a wheel and getting nowhere. Best decision I've ever made! Life is good!
3 years in, I absolutely agree. The running joke in my company is that my colleagues have to decide whether they work for the city, the county, the state or the federal government. Most choose the city.
When I started my conxulting business, I needed someone to answer the phone when I went home for a holiday.
There was a very young VietNamese refugee working in the copy shop evenings.
I hired her for for the week.
When I got back, I discovered that she had organized everything that could be without a computer.
She asked me, Can I have disk to learn Macintosh.
She came back a few hours later and asked for the disk for Excel.
She ran my office for ten years as it grew from just me to fifteen employees.
I sold the business after I was sued for conspiring to conceal cancer and reproductive hazards , and firing the plaintiff in furtherance of that conspiracy, But I digress.
Years later I met her in the subway.
I asked her what she was doing now. She showed me her workplace as a security guard in a section 8 tower .
I asked her why she was doing such a low level job, considering her intelligence and energy.
She said.
Poor is good.
Rich is good
Middle is bad.
I make more, then no scholarship for son, free medical care, etc.
she did the math.
We all lose
+100
Love your post! Congrats, you did it!
Anybody who has the possibility and the means should consider a lifestyle with the least possible gov. intrusion, being it in another country or otherwise far removed from gov. supervision. There are many possibilities, do some research and choose what works best for you.
Just in case you missed this excellent example:
http://www.oftwominds.com/blogaug15/destroy-jobs8-15.html
I'm guessing that in Asia there are many countries that copy cat American Stuff or other European Brands.
Philippines, Japan, Thailand, South Korea, Vietnam, Taiwan, Singapore.
I'm not sure about Lain America or Africa or India except India has Tech People, IT People, and Pharmacy Manufacturing.
China has much more people and city sized places with whole industries built in one place as if a national effort.
I don't know enough about it.
Trading Houses in the USA have sprung up since 1980. The call themselves this or that, but they are no more than Wealthy Nabobs that do little out of patriotism... along with their Banking Brothers or private funders.
You mean Karl Icahn made a mistake in taking an 8% stake in Freeport Mc Moran Copper and Gold ?
Don't tell me what to buy, tell me when to buy
The markets are bigger than any bank or government.
When shit gets real, nothing is going to stop it.
That is until the middle class becomes extinct through mass bankruptcy and the elite finally consolidate all power.
Viva la Koch.
Why Koch? Liberal Progressives are the richest in this country. They are closest and believe the most fervently about government, and goverrnment control. They are the insiders.
Koch owns a commodity that is deflating.
remember?
In our story today it's not a lady or a tiger, we have to choose. It's a 'rate hike' or 'QE4'.
So we have to decide whether to be eaten alive by the voluptuous lady or a vicious tiger. (There's an even more frightening version called "The Lady or Caitlyn Jenner. I don't have to tell you how that ends up.)
And which is the lady: the rate hike or QE4?
And which is the tiger: QE4 or the rate hike?
Lady or tiger? Rate hike or QE4?
You decide
Volatility and turbulence is set to remain high for the rest of the year. The issues from point #2, EM, aren't going away. Write about this in my last post on:
http://crackerjackfinance.com/
Charles Hugh Smith has done twice as well as I could have done here.
I like what he explained about China for instance. I'm still reading through it, think this would be great to forward to the DNC, RNC, and Congressmen.
The Federal Reserve Created our Banking System.
I think it is fair to place the blame on the FED and to end the FED on this basis... while stressing the S&L Crisis, the Deregulation, and the 2008 Global Financial Collapse which surely might have triggered a war with Europe. And the fact that the US TBTF Banks are much bigger than European Banks since the crisis even though the are responsible for poor stewardship of the World Reserve Currency and for Toxic Paper spread to pension funds world wide.
Of course the solutions will be more controversial than this article that lays out part of the problem or symptoms.
Solutions are like the Third Rail.
The multiple rounds of QE and ZIRP put the markets and the economy on a course for failure. There were four trends in place before the Great Depresion and FED POLICIES cemented those trends in place for this time period.
1. the rich got richer- thanks to QE/ZIRP
2. investing turned to speculation- on steroids thanks to QE/ZIRP
3. soaring market credit- thanks to QE and ZIRP
4. lagging business investment- stock buybacks are at all time highs since tracking began in 1990. Stock buy backs are not a business investmet. They are a disinvestment. A stock buy back is a loud and clear signal that there is no reason to invest in the business because economic conditions are not present that would allow the business to recoup those monies.
The FED is the ultimate cause of all our woes as everyone at this site knows. Spread the word to those who do not. Preaching to the choir will not bring the end to the FED.
Lets take a rain check on what Reaganomics has achieved in America's blast off to another world :
1° Soviet Empire destroyed ? ...Nope Putin is back with a vengeance, pretending the Evil Empire is the spawn of Reagan! Jumping holy Josephat! How can he even DARE pretend such a mystification? !!!
2° The US towering like a colossus... Really ? With the petrodollar hegemony now being attacked to its shorts hairs by Saud, the renegade?
3° "Our money your problem" and FIRE economy ramp will make US impregnable. Everybody will want the Greenback and Gorby is now a russian cabbage, a sour one, a "sauerkraut"...hahaha! who is as pestilential as french garlic! We have destroyed Soviet and French hubris all at once!!!
Hahaha! USA, USA reigns supreme.
And, we buried Che with his commie ideology in the jungles of AMazon. Hey! We NEVER miss our Man!
4° Houston we have a problem. Irrational exuberance now enhances exorbitant privilege ! Are you guys SURE that BW revoke and NAM poke were in our long term interests?
Is Kissinger really a TRUE AMERICAN ? Like Haldeman and Ehrlichman ? With names like that, they have debased James Dean; I mean John Dean ! Ya know the WASP tradition...Why o why did Nixon not limit his advisors to GOY and forget the Kiss, the Hald and the Ehrrrr... It would have saved the USA so much Zionnnnn!
Well now we have a Potus who is black as hell! Hells Bells! To think that traitor to the true tradition of USA, the pure, that of Jefferson Davis, betrayed by that other traitor Abraham Lincoln---I can't understand how that Nigga lover could have a first name like Abe...but then he got his comeuppence like those other liberal traitors JFK and RFK... so that the US of A can become what it was supposed to be by <<god of the Universe : the true saviour of Hitler's Aryan agenda; as postulated by Mien Kampf! (FDR was another commie diversion that we have overcome thanks to patriot Sen McCarthy)
My fellow countrymen: we have benefitted from French envy of Brit imperialism thanks to Lafayette, then Napoleon's abandonment of Louisiana purchase for a song from the same gut wrench, then Spain's decadence in handing us Florida, Texas and Californian fornication in gold rush!
We are blessed by the decadence of others; notably of the Amerindian. Manifest destiny!
So...those who pretend the wheel comes a whole circle and we are next to be "ausweissed"... have another thing coming!
Armageddon! We never give up! We are now on the trail of ET!
We've given up on the humans, we are now morphing into another species...
Honest Ann has THAT agenda in her honest nether regions. Somewhere in the southern Hemisphere!
Alleluiaaaa !
Wait for the NEW AWaKENINg !
theres no dissuion to have, just reading the proof zh puts out, this is the BIS owners, and the want to be NWO royality wet dream.
the older savers burning through their savings, entitlements soaring, churning just enough cash, and credit to make any numbers work.
em's, dm's, for that matter, 90% of all countries have a BIS owner cb sucking their assets dry, per political agreements with elected, or unelected criminal politicians.
I hope when you speak of productive farm ground your speaking of a few acres for food for you, and a few other family, and friends.
I'm sure your fema sector manager knows what productive farm ground," ie it's production"will need to be traded to other fema sectors for redistribution.
BTFD is what everyone likes to say. Well - in the not too distant future (way closer than we realize actually) when this dip hits - there will be no way to stop it and there will be absolutely nothing to buy. Remember - the bottom is always zero.
Don't forget to mention that US and EU enables China's corruption to continue by providing a safe place for money laundering. Asset prices in US are dramatically effected by China and other EM's corrupt practices