I haven’t witnessed this kind of a bloodbath on Wall Street since the great financial crisis of 2008. Before this week, the biggest single day decline for the Dow Jones industrial average that I had ever witnessed was 777 points. That record was completely destroyed on Monday when the Dow fell 1,175 points, and on Thursday the Dow slipped an additional 1,032 points. This was the third decline greater than 500 points within the last five trading days, and the Dow is set to post its worst week since the dark days of October 2008. So is this just a “correction”, or has the financial crisis of 2018 officially arrived?
At this stage, a number of the experts are pointing to the bond market as the main explanation why stock prices are crashing. The subsequent comes from CNBC…
There’s a not-so-quiet rebellion going on in the bond market, and it threatens to take 10-year yields above 3 percent much faster than expected just a few weeks ago.
As a result, the bumpy ride for stocks could continue for a while.
And without question, analysts such as Jeff Gundlach obviously cautioned that there would be huge problems for stocks as bond yields rose…
Gundlach had correctly predicted that if the 10-year U.S. Treasury note yield went above 2.63 percent, U.S. stock investors would be spooked.
“Clearly, the market gets shaky when the 10-year hits 2.85 percent,” Gundlach said. “Just look at this week, and today. Makes one consider what could be coming if 10s push over 3 and 30s (30-year Treasury bond) over 3.22 percent.”
The 10-year yield is currently trading around 2.83 percent. Gundlach said it is “hard to love bonds at even a 3 percent” yield. “Rising interest rates are a problem and the U.S. is in debt and there is massive bond supply,” Gundlach said.
Continuing to move forward, it will be critical to pay close attention to bond yields. Every time they begin going back up, we are in all likelihood to notice stock prices go down…
“We’re in a vicious cycle here. If the yields go up, you have to sell stocks. If you sell stocks, and they crash, yields come back down,” said Art Hogan, chief market strategist at B. Riley FBR.
The bond market’s struggle to price in higher interest rates has been kneecapped each time the stock market reacts and sells off. Strategists expect the two markets to ultimately find an equilibrium but not without more sharp swings.
This is one of the factors why the budget deal going through Congress at this time is such a awful plan. Hundreds of billions of dollars of added spending on top of what we are presently doing is going to push up bond yields, and that is just going to make the strain on Wall Street even rather more serious.
Needless to say the people over at the Federal Reserve could get involved, but they don’t appear likely to do that at this point. Late last year the Fed eventually removed artificial life support from the financial system, and at first everything appeared to be going well. But currently a different crisis is brewing, and we shall find out if the Fed still remains determined to keep raising rates. The subsequent comes from Peter Schiff…
“The Fed were dragging their feet in raising rates while Obama was president. They talked about raising rates but at the end of the day, they barely moved them up. The pace of hikes has increased since Trump was elected, but part of the reason for that…I mean, the media is not talking down the economy; if anything they’re overhyping the economy. Everybody’s talking about how strong the economy is, how everything is great. Everybody is taking credit for this great economy. The Fed wants to take credit for it, Trump wants to take credit for it, so if everybody wants to talk about how great the economy is, the Fed doesn’t have any excuse if it doesn’t raise rates…in order to keep up the pretense that the economy is as strong as everybody thinks, the Fed is in this box where it has to raise rates.
But they [the Fed] can’t tell the truth that it’s really a bubble, and if we raise rates, we’re gonna prick it, so they’re kinda in this bind. And they are still telegraphing that they’re gonna raise rates three or four times this year. And that is the problem.“
It has become my contention for some time that the greatest financial bubble in human history wouldn’t be able to continue without artificial support from the Fed and other global central banks.
Once the Fed finally completed their artificial support for the markets late last year, I envisioned that there would be problems, but stock prices carried on to increase through the holiday season.
But currently reality is setting in, and investors are rushing like crazy for the exits. I really enjoy how Brandon Smith explained the current state of affairs in his latest post …
After I predicted the election of Donald Trump, I also predicted that central banks would begin pulling the plug on life support for equities markets. This did in fact take place with the Fed’s continued program of interest rate increases and the reduction of their balance sheet, which effectively strangles the flow of cheap credit to banking and corporate institutions that fueled stock buybacks for years. Without this constant and ever expansionary easy fiat, there is nothing left to act as a crutch for stocks except perhaps blind faith. And blind faith in the economy always ends up being smacked down by the ugly realities of mathematics.
With no artificial support, gravity will attempt to pull stock valuations back to their long-term averages. That would indicate a decline for the Dow of at least 10,000 more points, but major financial institutions are so highly leveraged and Wall Street has develop into such a giant casino that our system practically cannot handle that sort of a decline.
The only way that the game can proceed is for the Fed and other global central banks to get involved and prop up the ridiculous financial bubble that they initially produced.
Absent that, this meltdown appears to go from bad to worse, and we might soon find ourselves confronting a financial panic unlike anything that we have ever witnessed before.
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