WASHINGTON, February 9, 2016 – In volatile Monday trading action, all U.S. markets crashed. That is, until the “Buy Program Express”—a phenomenon first noted years ago by ETF Digest’s Dave Fry—left the station at approximately 2:30 p.m., its usual departure time. Buying action accelerated near the market’s close.
The result: Instead of closing down over 400 points, a mark the Dow had exceeded earlier in the day, that major stock average closed down a mere 177 points and change. The other averages followed, more or less in lockstep, with the NASDAQ lagging due to its smaller tech and biotech stocks becoming radically unfashionable to own in 2016.
Things aren’t quite so hot in Tuesday trading action. After opening up—along with the price of oil—markets are tanking again this afternoon due to—wait for it—a nasty drop in the price of oil, which has reversed course and is now trading close to its recent all-time-low. Want to place a bet we’re getting ready for another short squeeze by the HFTs, which are probably also behind the current oil price decline?
For a variety of reasons, some good, some idiotic, 2016 markets have been trading in lockstep with the price per barrel of crude oil. In general, if those prices are going up, so does the market. If they’re going down, so does the market. If oil prices should spike up or down by 2,3,4, 5 percent in a single day, the markets will surge or crash by a similar percentage.
It’s this kind of mindless and irrational volatility that’s driving most retail investors back out of the stock market, reversing a positive trend that began slowly in 2010 or so. Already burned once in recent years, small investors sense these markets are entirely rigged and they’re absolutely right.
America’s once-robust stock, bond and futures markets are clearly broken. The backbone of the system that helped make America great is broken as well. But official Washington doesn’t give a hoot in hell about this as long as you’re sending them your tax dollars, most of which go to support a corrupt and counterproductive government that wants to redistribute what they can of your dwindling salary.
Making matters worse, not just the U.S. but the international banking system seems to have entered a state of slow motion implosion, again for a variety of reasons.
Given a growing lack of liquidity in the system—due in large part to the ruinous, panicked regulatory overreach being imposed in the U.S. by the complex, boneheaded Dodd-Frank Let’s-Completely-Ruin-the-Banks legislation; and throughout the rest of the world, including the U.S., by the creeping (and stifling) Basel accords—it seems as if international governments have somehow colluded in squeezing to death the systems that have made them rich rather than cleaning up the mess those governments collectively caused earlier in this century.
We get an interesting take on this mindless descent into hell this morning, via a fascinating piece in ZeroHedge, those friendly economic cynics we read whenever we need a fresh dose of fiscal horror.
If you believe reports in the international financial press, the latest Ground Zero for fiscal disaster would seem to be the huge and prestigious Deutsche Bank (DB), a German institution that currently seems to be in the kind of pickle that ended badly for Lehman Brothers a few years back.
Why is this? ZH’s “Tyler Durden” quoted Domenic Konstam, “one of DB’s most respected credit analysts,” who, in a very pointed email, bulletizing the real problems plaguing international economics along with a chilling prescription for curing them. (Bold text provided by ZH):
“So back to the original question WHAT NEEDS TO BE DONE. Simple?
- “Recognize the problem. It is not oil, it is not in the banks..it is a run on central bank liquidity, especially dollar based and there needs to be much more ($) liquidity. Keynes said to deal with overinvestment boom you cut you don’t raise rates. QE is impractical but getting the dollar down would greatly lift dollar based liquidity. So for a starter Fed shd stop raising rates and clearly signal an extended time out.
- Draghi shd follow up with a one 2 punch, not to get rates down but open the refi spigot to banks and ease liquidity concerns.
- China needs to come clean. Devalue, stabilize reserves and then allocate 1 tn+ to short up strategically important institutions. Stop intervening in equity markets.
- And Basel 3 (?4) should be delayed specifically regarding leverage ratios and threat of higher. As a token move there shd be deemphasis of the SSM/bail in rules until there is clarity from the ECB on liquidity sources for stressed banks.
- how about some fiscal stimulus on negative rates — instead of making them punitive on the banks allow the banks to earn the spread, make them punitive to savers.. Cash shd be charged interest — put the micro chip in large denom notes/tax cash withdrawals.. encourage spending not saving .. mortgage rates can be negative and banks can still earn a spread. The spread is the problem not the rate.”
In other words, we need to make both peasants and corporations alike spend every last cent they have, not save. In a way, this makes sense. Since the world economy, rightly or wrongly, has long been a consumer economy, it can’t grow if consumers won’t spend.
More to the point, though, why aren’t consumers spending? Once again, it’s very simple. The average worker is either
- Living paycheck to paycheck with no surplus to spend
- Is still deeply in debt at high interest rates and doing everything he can to pay it down
- Is long-term unemployed, unemployable and thus on a fixed dole
- Or is gainfully employed, making moderately decent money, but putting all surpluses in the bank or in his mattress to guard against another 2007-2010 which he figures is inevitable anyway.
In other words, the consumer is out of it. He’s correctly concluded there is nothing in this game for him. So now he’s getting out of the market once again because he sees that every damned stock on all exchanges moves in the direction of oil prices, which lately seem determined to carve out new lows. So why bother when individual or group investment choices or sectors no longer matter?
As happened in 1929, the worst thing of all has happened once again: the general populace no longer believes. The system is broken and the trust, painfully built since the Great Depression, has now been eviscerated once again. In the U.S. at least, that’s why a pair of candidates not really associated with either corrupt political party are currently running at or close to the top of each party’s ticket.
This general loss of faith is being played out in the stock market where clever machine videogaming by the HFTs has driven out rational investing unhindered by any law or regulation.
As the machines manipulate the price of oil up and down to cop a quick multimillion dollar trade on each round trip, modern economies as we know them are already on the Road to Oblivion. Investors who don’t want to follow them are quietly exiting, perhaps to lick their wounds and await the Second Coming of John Galt.