All Bets Are Off

Stock markets across the planet gazed out across the economic landscape yesterday and vomited all over themselves.  After that, they convulsed and dry heaved again and again.  For the global economic disfiguration has grown so grotesque, so awesomely awful, that the collective stomach of world markets has wrenched into knots.

Japan and China started the great purge.  In the land of the rising sun, the Nikkei 225 expelled 895 points.  The Middle Kingdom followed this up with a remarkable feat…the Shanghai Composite Index projectile spewed 8.49 percent.

Unfortunately, the sickness spread to Europe and the United States.  The German Dax gave up 4.7 percent and, in London, the FTSE gutted out 4.7 percent.  The Dow followed this up with an initial 1,089 point freefall…before crawling its way back to just a 588 point discharge.

What’s next?  No one quite knows, for sure.  But something different is underway.  Over the last six years there’s hardly been a notable stock market decline.  Any short correction has been quickly overcome with a greater leg up.  Those who bought the dip were rewarded with quick and easy gains.

Certainly, the market could level out this week.  It may even rebound some.  But the notion this is a buy the dip opportunity should be exercised with caution.  Here’s an opinion why…

Not a Buying Opportunity

“Don’t be surprised if stock markets stabilize or bounce back in the next couple of days,” opines Brett Arends at MarketWatch.  “Markets are due at least a short-term rally after [last week’s and Monday’s] dramatic plunge.  This usually happens after a sell-off, no matter what the next big move is going to be.  It doesn’t mean anything.

“But anyone who automatically assumes this is another easy ‘buying opportunity’ is talking nonsense.

“I don’t mean to be alarmist or to induce panic,” continues Arends, “but someone needs to tell the public that there is a plausible scenario in which the U.S. stock market now collapses by another 70 percent until the Dow Jones Industrial Average falls to about 5,000.”

A 70 percent collapse…yikes!  That would be brutal.  About $2 trillion household and nonprofit stock wealth has already been vaporized over the last several months, with most of those losses being racked up over the last three trading sessions.  A 70 percent collapse would up that number from $2 trillion to $16 trillion of implied wealth…poof, gone.

However, Arends is careful to note that he’s not predicting this will happen.  What he’s doing is identifying that, based on past bear markets, this is a possible scenario.  Moreover, it’ something the public should be aware of, which has received little attention…

All Bets Are Off

“A true understanding of stock market history shows that Wall Street in the past has moved in long, long swings upwards and downwards, often taking years or even a generation or two.  There is a great deal of evidence suggesting that the upward move that began in 1982 is one of them — and that the downward move that first began in 2000 has not ended.

“The real reason to be worried right now isn’t that these scenarios are guaranteed or even likely.  It’s that 99 percent of the people managing America’s money, probably including yours, assume that they are completely impossible.  And no, they aren’t.”

For memories are short.  On March 9, 2009, just a little over six years ago, the DOW touched down at 6,547.  Sure that wasn’t DOW 5,000.  But it was pretty darned close.

The point is, the massive volumes of monetary gas that were pumped into the financial system to combat the last deflation have reversed.  Market forces are repelling them back out…stocks have plenty of room to fall.

The deflation with a capital D we recently warned about is gnashing its way through world stock markets.  Soon this deflation will be shredding its way through the world economy too, producing the dreaded self-reinforcing deflationary cycle.  This is where prices rapidly decline but so does spending, which accelerates personal, business, and government bankruptcies.  As businesses fail the unemployment rate skyrockets…causing prices and spending to decline further, thus accelerating bankruptcies.

Big bank failures and extreme and emergency government intervention into markets and the economy are next.  After that…all bets are off.


MN Gordon
for Economic Prism

Return from All Bets Are Off to Economic Prism

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