If this market collapse, as some fear, is the big one, it will be driven by a realisation that all the Fed’s horses and all the Fed’s men can do nothing to put the economy back on the rails again
: The United States of America heads into the Presidential Elections today which is an event that has kept global markets turbulent over the past few weeks.
Ever since the belief that ‘easier-than-easy monetary policy can fix everything’ took hold after the 2008-09 crisis, many observers (including myself) have been concerned that it can’t end well. Simply pumping in oceans of money into the system helter-skelter would only lead to soaring asset prices and the rich getting substantially richer—and, indeed, it has. In parallel and unsurprisingly, the real world impact of this has been the ascendancy of autocratic leaders—Trump being the loudest one (both because he is personally the loudest and the US is the loudest economy in the world)—who have broadly exacerbated the strains that countries all over the world have been feeling.
The Dow rose from a low of 6,545 in March 2009 (after a drop of over 53% from its 2007 high) to an extraordinary high of 29,550 in February 2020. The rise was virtually uninterrupted except for a few brief periods of contrition in 2015 and in 2018, both driven by, amongst other things, fear that interest rates—Fed funds had been steady at 0.25% since 2009—would rise (2015) and, later, that interest rates were rising too fast (2018). In 2019, the Fed, despite the fact that US unemployment was at a record low, started cutting rates, which, of course, quelled the “crisis” and primed the market for the new highs.
And then, early this year, came the coronavirus, which made all of the above much worse, driving many more millions into poverty the world over. The stock market tanked, with the Dow losing nearly 38% in a matter of a month. The Fed and the US Treasury poured gazillions of gallons of money into the economy in an attempt to get some control. Economic activity slowed sharply but the market—hey, it has nothing to do with the real world, does it?—rallied again. It nearly recovered all of its losses in about six months, seemingly oblivious to the reality of the compounding epidemic.
Over the last few days, however, with an increasing likelihood that Trump will lose the election on November 3 and the fear that he could yet throw the country into chaos by refusing to leave the White House, markets have turned suddenly nervous. The VIX has risen to its highest level is 6 months and in the last four days the Dow has dropped 7%—as sharply as it did at its peak weakness in 2018. Some technical observers are pointing out that the Dow has formed a double top.
Now, whenever something like this happens—in 2015, 2018 and again in February this year—the old-fashioned conservative budhhas in brightly-coloured shirts (like me) think: Is this it? Is judgment day coming?
I note that if this market collapse has to go down as a bigger daddy than 2008-09—as many people believed when the coronavirus first hit—it will have to lose more than 53% from its high, which would take it to 13,600, a drop of another 12-15,000 points from the current level. Clearly, the Fed will be out with all guns firing to prevent anything like this happening, except that if this is the BIG ONE, it will be driven by a realisation that all the Fed’s horses and all the Fed’s men can do nothing to put the economy back on the rails again.
Indeed, there are already signs that all the Fed (and other central bank) action over the past couple of years is finally igniting inflation. The US yield curve is steeper than it has been in nearly three years, copper has hit $7,000—again, a level last seen in 2018—and other industrial raw materials (natural rubber, in particular) are soaring. The IMF’s industrial inputs price index is at its highest level in more than five years. The only saving grace is that oil remains soft, as a result of which the prices of a whole raft of other industrial raw materials remain subdued.
And, of course, growth everywhere—except China, of course—remains in the gutter. And, indeed, autocrats everywhere—again, China the shining exception—are feeling the heat.
So, will this be the wipe-out of equity markets that finally compels governments to look at the real economy and address the problems of real people? Is this a signal of the revolution that has been brewing in several countries as more and more increasingly diverse groups of citizens are demanding fundamental change?
It is certainly more than time. But, then again, markets are known to make even the smartest people (???) look foolish, and they NEVER turn if there is even a single contrarian around. www.mecklai.com