Epochal Stock Market Flash Crash Reconnects Stocks and Bonds, Portends End of Fake Recovery

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by David Haggith, The Great Recession Blog:

It took sixteen months to build the exceptionally steep Trump Rally, and just one week to eliminate a quarter of it. While I wouldn’t call that jolting reversal a stock-market crash in the ordinary sense, the largest one-day point fall in the history of the market (by far) certainly marks a massive change in market conditions. From this point forward, it won’t be the same market it was.

Those who are critical of my belief that the US stock market would crash by January 2018, may try to dodge the significance of these tumbling days by saying that eleven-hundred-plus points aint what it used to be. While true, I’d point out that, even on a percentage basis, the Dow hasn’t fallen this much in one day since the belly of the Great Recession. That, being one of our greatest economic collapses in history, is a pretty low benchmark to match up to.

My detractors could crow that this was all the robo-trading algorithms’ fault, but I’d just say, “I told you so.” I have often written that one of the great perils of this present stock market is that no one really knows how those algos work if they suddenly get crammed in reverse and try to start bidding the market down, instead of bidding it up. I’ve said throughout my predictions of the coming global Epocalypse that I suspected the robo-traders would play a major role because they are a massive accelerant to any action. Hopefully, the market brains have them all unplugged now so they can put irrational people back in charge, but I’m certain they don’t.

As for my statements that I believed the stock market would likely crash in January, 2018, though (I gave myself a buffer until mid year when betting my blog on economic collapse), this great disruption, which quickly shattered the fatuous market confidence of the entire world, did begin in January. (No crash, of course, happens entirely in one day nor rarely all in one week. I’ve also said the Trump Tax Cuts do create extraordinary levity that should help lift the market back up, and that novel lift is why I gave myself a buffer until mid year. It looks, however, like my blog will be hanging around awhile longer.)

Bonds bust out of bondage

I’d also note to any crows on the wire that pretty well all commentators are agreeing that the stock market’s rocket-ride downhill in the last few days has been due primarily to bond interest rising. That, also, is exactly what I have said many, many times would precipate our economic collapse when it happens (and certainly any stock-market crash that plays into that).

I’ve not been sure whether the bond market would crash first, but my central thesis has always been that a rise in bond interest will be our undoing because the entire recovery was built over a cavern of debt that is continually caving in from the sides and falling away at the bottom. The abyss is, in other words, getting unstoppably larger at a frightening rate … if you’re paying attention and not maintaining delusions and denial by being dismissive. And that is exactly where the last week is a revelation of the coming collapse. That is its significance — not how far it the market has fallen nor even how it surprised so many, but all the reasons for which it fell and the exact timing of the fall, as I’ll lay out below.

Even one of the big Fedheads admitted today (Tuesday as I’m writing this) that this market gyration is largely due to the Fed’s movements: “Fed’s Bullard Calls Market Rout ‘Most Predicted Selloff’ Ever.” That’s both the cause and the timing part.

Now that the event has happened, there is not a lot of disagreement on the primary cause, but what I find remarkably telling is how minuscule the trigger turned out to be. There are certainly other dynamics and secondary causes involved than just the little bump in long-term bond interest, but that little bump created an avalanche that went all the way around the world for several days … and may continue to reverberate in the days ahead.

I’ve explained in my predictions of this event why bond interest, which has long been held in a narrow and low band, would break out, when it would rise (maybe late 2017 but most likely January), and why that would be such a disaster when it happened. So, when all of those things do, in fact, precisely line up … all over the world … in an event like this, maybe people should take note. Detractors could call one or two matches in how things played out a coincidence, but when everything matches, it is their criticism that seems stretched.

So, to lay out the precise details for the crows, let me note that the interest spike that has everyone riveted happened on the long-end bonds, which is where I said it would — the tens and thirties. And I’d note that the blip upward in interest that triggered this obvious panic was an even smaller blip than I thought it would take to get things sliding, which shows markets are even more rickety than I’ve indicated, in spite of the fact that many people have been claiming for years that the markets are stable and resilient. (Resilient to other shocks, maybe, but not at all to interest increases in long-term bonds. We haven’t even hit 3% on the ten-year yet! The big interest moves will come later in the year, which is why I felt safely hedged with a mid-year bet. What we see happening in global markets now is mostly speculation in anticipation of what is coming — a beginning attempt to figure it out and price it in.)

Then I’d note that the sudden rise in bond rates happened for the very reason I said it would happen — as a reaction to the Fed’s Great Unwind in that the slide began in the first week the Fed finally got serious about its balance-sheet reduction and actually unwound the amount it has been promising it would (but which it had not done until last week). Proving that this was not an anomaly, a similar interest bump happened again on shorter-term debt with today’s treasury auction where the three-year yield moved up to the highest its been since 2007 (2.28%)!

Blip or Kaboom?

While today was volatile, the market did seem to be catching its balance. Maybe the Fed has let it fall as far as the Fed is comfortable with, and is now sending in the plunge-protection team — their fellow central banksters who buy US stocks directly (like the Swiss National Bank) as well as the members of their own cartel, whom they lead with nudges in futures. As of Tuesday evening, however, futures and foreign markets are still pointing the way to hell.

Monday was, in the very least, a game-changer for the stock market for months to come. It will be a different market when it does begin to rise again. Here’s a good summation from someone else of what happened:

“While the roots and drivers [of the selloff] are sure to be discussed for days, it looks to emanate from a perfect storm of reasons including, but not restricted to, a strong 2017 rally extending into January, low volatility, low interest rates, over-optimism and complacency, over-leverage and financial engineering, all coming to a head as investors react to the possibility of higher/faster interest rates rises with bond yields creeping higher to jeopardize the current market situation,” said Mike van Dulken, head of research at Accendo Markets, in a note. (MarketWatch)

Yes, fundamentally, a lot of flaws are built in to how the markets operate in a “financially engineered” manner, but it blew for the simple reason that interest rates nudged upward at the end of January as soon as the Federal Reserve got serious about its quantitative squeezing. That strongly supports my central thesis of this blog that this economy, built on caverns of debt and riddled with market design flaws, is too fragile to absorb any reduction in the Fed’s balance sheet. And that’s why I was able to time when the first crash would be likely to hit. It’s simple: When is the Fed scheduled to start getting serious in its Great Unwind? January. What week did they actually do it in? The last week of January. Kaboom!

The Fed cannot ever unwind. It will try because it believes it can, but kaboom! We’ll find ways to recover from this first shock over what happens to interest when they stop rolling over government debt. The government will adapt. It will find other buyers. But the cost will go up. And the kabooms will keep happening. I’ve always maintained that the failure of the recovery is baked in by design and will show when the Fed’s artificial life support is actually withdrawn. (Whether it is there by intentional design or design flaw, I’ll leave up to one’s conspiratorial imagination, as it doesn’t matter to me; both get you to the same place: kaboom!)

Some bigger voices than mine are saying the same thing:

Carl Icahn says he expects stock markets to bounce back after the massive sell-off Friday and Monday, while warning that current market volatility is a harbinger of things to come…. The volatility of recent weeks is cause for concern, Icahn said, adding thathe doesn’t remember a two-week period as turbulent as this one. He said the problem is that too much money is flowing into the index funds, where investors don’t know what they’re actually investing in. “Passive investing is the bubble right now, and that’s a great danger,” he said. Eventually, that will implode and could lead to a crisis bigger than in 2009, he added. “When you start using the market as a casino, that’s a huge mistake,” Icahn said. (“Carl Icahn Says Market Turn Is ‘Rumbling’ of Earthquake Ahead“)

The fact that the market has completed its de-evolution into a casino, rather than a place to buy ownership in a company, is part of the rickety framework I’ve described for our economy — part of what makes it easy to shove over with a nudge in interest because the entire economy has been made utterly dependent on low interest.

Global stock rout

After witnessing Wall Street’s carnage on Monday, European stocks closed Tuesday at five-month lows. The Stoxx 600 logged its largest one-day percentage drop in twenty months. Hong Kong got a King-Kong-sized kink on the head. I write of global economic collapse, and this event certainly showed how instantaneous global contagion is across market classes and nations — bonds, stock, even some commodities, got clobbered almost everywhere.

Nevertheless, those who are starting to get it still don’t get it:

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