Submitted by William Bonner, Chairman – Bonner & Partners
No More Juice
Friday’s 391-point drop in the Dow – a nearly 2.5% fall – ended the worst 10-day start to a year in U.S. market history.
The average stock in the S&P 1500 – which includes about 90% of all stocks in listed in the U.S. – is now down more than 26% from its high. The standard definition of a bear market is a sustained fall of 20% or more from recent highs.
The bear got loose somehow. Who let him out?
Photo credit: Lukas Holas
“Woeful earnings,” suggested MarketWatch as a cause. Another guess: “The stock market is freaking out over Trump and Sanders.” Barron’s was closer to the real source of the plunge: “Without Fed’s Juice, Market Suffers Withdrawal Pains.”
In 1971, phony fiat money replaced the old gold-backed dollar… and money that came “out of nothing” replaced real savings. At first, inflation rates rose. No one trusted the new fiat dollar. But then, incoming Fed chairman Paul Volcker showed the world that the U.S. could manage its currency in a responsible way.
Consumer price inflation fell, along with interest rates. Debt increased. And gradually, every Middlesex village and farm has become dependent on more and more bank credit.
The dot-com bubble blew up in 2000. The mortgage finance bubble blew up in 2007. Now, it looks as though another bubble is deflating…
In 2008, the Fed cut rates all the way down to the “zero bound” to try to keep the jig going. But after seven years of its emergency zero-interest-rate policy (ZIRP), it became obvious that something had to be done to get back to “normal.”
Like a long binge on booze and drugs, things were starting to get a little weird. The juice had to go. But we doubt that the syringes and the Johnnie Walker have been put away for long. Despite announcing a great improvement in employment, for example, there have never been so many American men without jobs.
Annual rate of change in total business sales (black line) vs. the FF rate (red line). Say what you will about the Fed’s decision to finally hike rates from nada to almost nada – the timing was definitely worthy of central planning bureaucrats – click to enlarge.
Retail sales are falling. The transport industry – ships, trucks, rails – is in a funk. And the energy sector is in crisis… with as much as one-third of the sector’s debt headed for default. What’s the matter?
The simple answer is that credit is not expanding fast enough. Lenders have become wary. Rolling over short-term financing is getting harder and harder to do. Yields on supposedly “risk free” Treasury bonds are going down (and prices are going up). Yields on junk bonds are going up (and prices are going down).
“Any time credit fails to increase by at least 2% a year,” said credit analyst Richard Duncan at Macro Watch, “the economy shrinks.” (We discussed Duncan’s theory in greater depth in the January 4th Diary. Catch up here.)
From Boom to Bust
And what’s happening now? How fast is credit increasing? Uh-oh – it’s not increasing at all. It’s falling… for the first time since 2009. Not only is the juice no longer going into the system, it is actually going out.
Which is just what you’d expect. The phony boom created and funded with the
Fed’s phony money is now turning into a real bust.
China’s foreign exchange reserves are falling. The ships sit idle in their ports. Orders for new trucks, new rail cars, new tankers… and yellow machines of all sorts… are hitting record lows.
The whole kit-and-caboodle creaks and groans to a halt. And now, Bloomberg asks: “Is it over?” At least that question is easy to answer: No, it’s not over. It has hardly even begun.
Charts by: StockCharts, St. Louis Federal Reserve Research, TradingEconomics
Chart and image captions by PT
The above article originally appeared at the Diary of a Rogue Economist, written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.