The Stock Market Bloodbath And The Fed's Diversionary Jibber-Jabber

Authored by Mike Whitney via The Unz Review,

Monday’s 1,000 point bloodbath was followed by Tuesday’s 879 point rout, lobbing 8% off total market value in less than 48 hours. The two-day drubbing has left traders and fund managers in a state of shock. Growing pessimism and uncertainty are pushing markets to the brink of a vicious downward spiral which will lead to heftier margin calls, more liquidations and fire sales, more knock-on pain among blindsided counterparties, and mounting defaults in the oil sector. So far, the Fed has waved off demands that it implement further easing by dramatically slashing rates, but its resistance will not last for long.

As institutional investors pile into risk-free assets and equities continue to swoon, the Fed will be forced to intervene once again this time buying up ETFs and individual shares to prop up inflated values and stop the hemorrhaging. While this latest iteration of QE could slow the selloff, it will forever undermine confidence in free market capitalism. Even so, the scheming miscreants at the Federal Reserve would rather save their own constituents than preserve the system that created the biggest and most prosperous economy on earth. It’s a question of priorities.

On Tuesday, Fed Vice Chair Richard Clarida said in a speech in Washington,

“It is still too soon to even speculate about either the size or the persistence of these effects, or whether they will lead to a material change in the outlook.”

This is just more diversionary jabber. The Fed spent the last 10 years fine-tuning a system that faithfully transfers trillions of dollars to its fatcat friends on Wall Street while the real economy sputters along at an anemic 2 percent. The Fed is certainly not going to throw in the towel now especially when its crooked pals are getting clobbered daily by a pandemic they never saw coming. Despite its vehement denials, the Fed has already settled on a Plan B that will involve a direct market intervention to purchase a set amount of individual shares per month that will be added to its already-bulging balance sheet. If the bloodletting persists throughout the week, we could hear the Fed make some type of announcement as early as Friday.

No one dreamed that a mutant virus could cause this much trouble and, in fact, very few have yet to grasp the long-range implications. The worst part for the markets is the nagging uncertainty. How long will the crisis last and how damaging will it be to the global economy? Will researchers find a cure or will the pandemic spread like wildfire incinerating the flagging economy on the way? No one knows for sure, which is why the only rational option for investors is to take some chits off the table and wait til the storm passes. This, of course, is a prescription for a full-blown stock market crash the likes of which we haven’t seen since 1929.

According to market analyst Mohamed El-Erian, “Coronavirus cannot be countered by central bank policies”. This means that slashing interest rates and injecting liquidity into the financial system (QE) will not prevent the widening economic carnage or stop the bleeding on Wall Street. This could be true, but we’re betting that the Fed will expand its existing toolkit and buy stocks directly hoping to put a floor under share prices. This is the only strategy that has any prospect of calming the markets and preventing a catastrophic “reset” that would essentially push stocks off a cliff.

On Tuesday, the benchmark 10-year Treasury yield fell to a record low of 1.32% while the 30-year Treasury dropped more than 3 basis points to a new all-time low of 1.7%. These rates are considerably lower than they were immediately following the terrorist attack on 9-11 which attests to the level of terror that has engulfed trading floors across the planet. What these rates indicate is that the markets are in deep distress, the lights are flashing red and the Wall Street sirens are howling. Investors are willing to lend the government money for a mere pittance in exchange for assurances that the government will repay them sometime in the future. The yields suggest that despondent investors see no sign of inflation or growth for the foreseeable future. The yields are an indictment of central bank policy which engineered the weakest recovery in post-WW2 era, inflated the biggest asset-price bubble in history, and is presently on-track to oversee the biggest stock market crash in the last century. The vast devastation of the US economy and financial system is largely the work of the Federal Reserve. Here’s an excerpt from an article at CNBC:

“The Centers for Disease Control and Prevention said that the coronavirus, or COVID-19 as it’s officially known, is “likely” to continue to spread throughout the U.S. and outlined what schools and businesses should do if the disease becomes an epidemic.

“Ultimately we expect we will see community spread in the United States,” Dr. Nancy Messonnier, director of the CDC’s National Center for Immunization and Respiratory Diseases.

Total confirmed cases globally have surged to more than 80,200 and at least 2,704 people have died of the coronavirus. Overnight, South Korea reported 60 new cases to bring the country’s total to 893 infected, while China’s National Health Commission reported 508 new confirmed cases and 71 new deaths.” (CNBC)

The virus, that has not struck the US in any meaningful way, not yet at least. But it has reined down holy hell on the markets. It has pummeled the the airlines, the banks, technology stocks and the oil sector which is now on life support. The problem with domestic oil production was poignantly explained in a short video on CNBC. Here’s a clip:

“Capital’s John Kilduff said that the $50 level is critical for energy companies. “This is it, this is the line in the sand. This is where they really start to hurt. This is where they start to not be able to service their debt, this is where the expense ratio does not work for Wall Street, for private equity, for anybody,” he said Monday on CNBC’s “Worldwide Exchange.”

It’s getting grim in Galveston (Texas) because you have $87 billion in debt that is due between now and 2024 and 60% of that is speculative “junk”. The bonds of some of these companies are down to 50 to 60 cents per share. These were once $8 and $10 billion dollar companies. You have hundreds of companies in this space that are struggling to meet their debt obligations. I’ve said it before, Oil is a four letter word, D-E-B-T, and this is the last thing that an industry that is already crushing under the weight of debt, needs.” CNBC–See video here)

So, the oil producers are going bust which hurts the banks and private equity firms who loaned them money. Those debts may have been insured with derivatives that create a whole new layer of knock-on pain for other financial institutions which, in turn, contracts the system putting deflationary pressure on businesses that no one knew were connected to oil. It’s all one big daisychain that falls apart when the thread is broken.

So it’s not just the fact that the world’s biggest oil consumer, China, is down for the count or that oil is currently the worst performing sector on Wall Street or that oil has slipped below the magic “$50 per barrel” mark. It’s also linked to the Fed’s cheap money policy that has kept poorly-managed, over-extended companies puttering along while sinking deeper and deeper into the red ink. Coronavirus is pushing these companies towards a painful reckoning that will greatly impact the lenders who threw them a lifeline figuring that oil could only go higher. Their miscalculation will undoubtedly intensify a broader selloff in the market forcing the Fed to respond.

It helps to read Keynes theory of how markets perform in times of great uncertainty. During periods when the economy and society seem relatively stable and information seems somewhat reliable, it is easier to make informed investment decisions based on the way things have unfolded in the past. But in times of political and financial upheaval, investors are more likely to pull back and divest until they feel less anxious. Stock prices don’t reflect the current value of the stock as much as the expectations of shareholders who anticipate greater value in the future. The investors greatest enemy is uncertainty, the inability to feel confident in one’s view of what will take place in the future. A pandemic, about which little is known and for which there is no cure and no way to know how extensive the damage will be, could be the greatest challenge that global markets have ever faced.

Investors do not yet understand that the markets have entered uncharted waters. There are no familiar points of reference or stars to point the way forward. The only rational choice is to bail out until the situation clarifies itself and one’s objective again becomes visible.