Wall Street veteran Art Cashin warns of a currency war among emerging nations similar to the Asian financial crisis in the late Nineties. He doubts that the Federal Reserve will be able to raise interest rates this year.
Financial markets around the globe are panicking. After a wild ride on Monday, US stocks closed another 4% lower. Since the record high of May they’ve lost over 10% and are now officially in correction mode. The last time stocks dropped that much was four years ago. Everything depends now on China, thinks Art Cashin. The director of floor operations for UBS at the New York Stock Exchange and highly respected Wall Street Veteran compares today’s situation with the Asian financial crisis of 1997. He severely doubts that the Federal Reserve will be able to raise interest rates in this environment.
Mr. Cashin, the global stock markets are in turmoil. What’s going on on the trading floor at the New York Stock Exchange?
On Monday morning, traders were looking at two aspects in the opening. One concern was that sellers from other markets, perhaps from Europe and from Asia, with their markets down significantly more than ours, decided to raise money over here. That’s because when you can’t sell what you want, you sell whatever you can.
And what was the second aspect?
In recent weeks, mutual funds in the United States had the lowest percentage amount of cash in history. So when you had a negative week like last week that might get some people concerned. They go for redemptions, trying to get their money out. But if a fund does not have that money handy because of the low amount of cash, it then has to sell stock to raise money.
Why is that concerning?
It becomes a self reinforcing problem: The more the redemptions come in, the more the funds have to sell stocks and the more the market looks weak causing even more redemptions. So the key thing is now what happens in China.
What are your thoughts on China?
There were two surprises: Number one, there was a great believe over the weekend that the People’s Bank of China was going to move in to try to provide some economic stimulus and get things moving. Then there was also an expectation that if the Chinese stock market shows weakness that the government would come in and buy securities as they have done in the recent past. Neither one of those things happened. And that was a double shock to markets everywhere. People said: «Woah, wait a minute! This could turn into free fall if they’re not going to try and protect their markets.»
Is the situation in China out of control?
It’s not necessarily out of control yet. But if they don’t provide some stability pretty soon it will begin to affect not only the markets over there, but – as we saw today and somewhat last week – it affects markets all around the world. Financial markets are correlated. We learned that back in 2008 when the fall of Lehman spread all around the globe.
During your career on Wall Street, you’ve seen many stock market corrections. How severe is the situation right now?
It resembles the situation during the Asian financial crisis in 1997 and 1998. That is part of the concern that is developing here: It’s not only China. China’s move toward a devaluation began to spark emerging countries into freeing up their currencies or to devaluing them. And that’s the equivalent of a currency war among the emerging nations.
Another scary development is the crash in energy markets. On Monday, the price of WTI oil dropped temporarily below 38 $. How does that affect the stock market?
People keep talking that cheap oil means more money to spend. But we’re not seeing that at all. I think that the weakening of the oil price is counter-beneficial: Here in the United States, a lot of the employment that we picked up after the recession came from energy related areas like fracking. And now they’re certainly not employing any extra people and in some cases they’re laying off. Also, as oil is going down it is putting more pressure on stocks. You see the big oil companies trading lower and they're all prominently represented in different stock market averages.
Way down are also the shares of investor darling Apple. How concerned are you about the bear market in Apple?
Apple is the most capitalized stock in the world. That’s why they use to say: «As Apple goes, so goes the nation». The stock has been down almost since the day they put it in the Dow Jones Industrial. That’s kind of an irony. Some people in the trading community are beginning to go beyond the idea that iPhone sales in China are slowing or not growing as fast as they hoped. And there is some concern about new local competitors like Xiaomi. And that’s a whole new thought: People hadn’t thought of true competition for Apple and that’s one of the things that’s beginning to weigh on the stock price.
Everyone is looking at the Fed now. Do you think they’re going to raise interest rates despite the panic attack in the financial markets?
I have said all along that I did not believe that they would hike rates this year. As much as they want to hike rates, they have a problem in that the IMF and the World Bank asked them not to raise interest rates. That raises the bar a great deal because if they raise the Federal Funds Rate despite those warnings and something happens they would lose their credibility. People would say: «Hey! You have been warned about this and you went ahead anyway. Now, look what’s going on.» That would be a great loss of credibility.
But doesn’t it hurt the credibility of the Fed too, when it gives in to market pressures and thereby looks like it’s susceptible to blackmail?
Vice-Chair Stanley Fischer will be speaking later this week at the Jackson Hole conference. I think he will be addressing the problem of inflation and that it’s not growing in the pace they want it. That will give the world a hint that the Fed is not quite ready to raise interest rates.
What are the signals you are looking for to stay on top in such a market?
I continue to monitor the high yield market and see where that goes. The high yield market has been of some concern of the last several weeks. If that begins to show appreciable weakness than I would think the caution flags stay up.