Monday, August 24, 2015

News Note: Markets Need to be Watched Closely

By now it's obvious that the global equities selloff is continuing. It is always hard to know how to react to things like this when they start up. We never know if we are just seeing a sharp correction to a market that is overbought or we are seeing the start of something potentially worse.

Below is  a bullet point list of things I feel are important to watch closely as we follow this event:

- Do authorities have to resort to unusual methods to stem market selling (banning short sales, activating "circuit breakers" to try and slow selling, closing markets early, etc)

- Watch the prices of commodities like oil and copper - continued falling prices could be a warning that severe deflation is coming. These prices are already very low as it is.

- Watch China to see if they are able to get the selling there stopped, so far measures taken are not working well

- Watch to see if the global financial institutions (IMF, BIS, World Bank, etc) issue any kind of warnings or comment on the market selloff. So far we have only this from the IMF saying China is not in a crisis.

- Watch the price of gold (falling gold may signal deflation, rising gold may signal a flight to safety). Also watch the dollar in conjunction with gold prices (do both go down?, do both go up? do they diverge with one going up and the other down?, etc.). A move up by both gold and the US dollar is a clear signal of a flight to safety for example.

There are already many people who are predicting some kind of severe economic crisis to unfold in the September and October time frame later this year. Many of these people view this through a religious lense. We can expect that this market selloff will be viewed by them as a sign that things are going to get worse. This is important because there are a large number of people following this idea on the internet. If too many people become convinced, it can act like a self fulfilling prophecy as people take more drastic actions than they would under what they view as normal conditions.

I have reached out to some experts by email to ask if they see this market selloff as just a normal market correction or potentially something worse. So far I have one direct response. 

That response was "a correction (for now)."

Here is Jim Rickards twitter comment: Fed still has 4 options left.

He also said this in his latest article available to those who provide an email address:

"Where’s the snowflake? What is the particular catalyst that triggered this avalanche at this particular time?  The snowflake is Janet Yellen’s inability to grasp the statistical properties of risk, and her dismal forecasting ability based on obsolete Fed models."   . . . . 

Where do we go from here? The best case is that Yellen realizes her blunder, backs away from rate hike talk, and initiates some easing measures. These could include more QE, negative interest rates, a cheaper dollar (more currency wars!), or helicopter money. The worst case is that she persists in the tough talk and markets meltdown around her."

These comments from Jim are in relation to the market selloff that has been ongoing now for several days and not just the big drop this morning.

Nomi Prins twitter comment: "This is why I wrote Cash is King on July 3rd - artificial liquidity can dry in an instant"

If I get more responses or other credible information, I will post it here.

We are already seeing appeals in the mainstream media for people not to panic. That is always good advice. But it does not mean we should not monitor events closely due to the highly interconnected financial system we now have globally. A problem anywhere can lead to a problem everywhere as we have tried to point out here many times. And we know there are trillions of dollars of various kinds of derivatives out there tied to interest rate movements and also market movements. It's always wise to stay informed and even more so when markets are behaving abnormally.

Added note: We are already seeing a theme develop in the western mainstream media. The market rout is "China's fault."  We need to to step back and think about the big picture here. Note that earlier this year China (and the BRICS) started up the AIIB and the BRICS Bank which were widely touted as a challenge to the US/IMF/World Bank. There was considerable media coverage that the US was "embarrassed" when many nations in Europe (including the UK) decided to join the AIIB (over US objections). So, we have to consider the possibility that the effort to blame China could be related to ongoing chess moves between the US and China. It could just be coincidence, but it could also be part of the game.

Jim Grant offers this alternative view of who to blame on CNBC.

Politicians start the blame game.

Cuban blames China, Stephen Roach blames Central Banks

More twitter reaction: 

Rickards on gold

Rickards on conference call with his team at Westshore Funds

Final note 3pm: After an historic day, the US Dow closes down over 580 points and combined with the 530 point drop on Friday has dropped over 1100 points in two days. Volatility is off the charts with intra day swings in the hundreds of points. What we are seeing here is basically the complete opposite of systemic stability. Every day is going to be an adventure until we see some kind of market stability.

No comments:

Post a Comment