Summary: stocks tumble as investors update their models of policy rates, inflation, buybacks, bond yields, DCF models, refinancing hurdles, italian banks, Emerging Markets worries and trade wars
Thought of the day: how nimble and smart they are, investors!
What the pros are saying
WSJ, CNBC, Reuters and other news outlets have explained in detail the last two days why the stock market is crashing:
-Investors realized inflation is gaining momentum, and that the US Fed and other central banks will have to counter with rate hikes. Higher policy rates and less QE (money printing) feed into higher market yields for bonds, which in turn acts as both an alternative investment in a TINA* world, and a higher discount rate in investors’ Discounted Cash Flow models. The latter is particularly important for tech stocks that are expected to make most of their profits far into the future (if ever).
Not least investors took just 24 hours to realize that with inflation looming and interest rates rising into the low single digit space (the horror!) will become more difficult to finance the outlandish projects that warrant current double digit P/S valuations, as well to re-finance the already hugnormous piles of debt lingering from past stock repurchase programs — not to mention future stock buybacks that might very well have to be cancelled.
Can you imagine a world where corporate investment budgets shrink from year to year, and where dividends and stock purchases have to be financed with free cash flow stemming from profits rather than free bank money?
Finally, many models were swiftly updated with new currency prices and trade tariffs, as well as the endgame result of recursive doom-loops (government-bank insolvency and runaway financing rates), triggered by recent Italian bank bankruptcy jitters.
- TINA = There Is No Alternative To Stocks
TINHIW
That Is Not How It Works!
No, no, no! No!
That’s emphatically not what happened this week. That’s not how the market works. There are hardly any investors left that take time off their days to think about thing s like that, and certainly not in that manner.
There are but a few fundamentally inclined outfits that do meet once a week to discuss similar things. However, A) they have not had their meetings yet this week, and B) they are quite few compared to passive funds, momentum investors, CTAs, daytraders, index huggers etc.
Ask yourself: Do you know anybody who claims they sold for the reasons listed above? That they updated their models and sold due to inflation gaining steam and all or any of the variables and repurcussions? I didn’t think so. There probably are quite a few talking about why the market sold of, why others sold, whether it’s thoughtful and smart of others to sell for those reasons, but just about nobody went through the calculations above and concluded it was time to sell this week. Nope.
The butterfly effect
If you stretch conditions far enough, e.g., with debt upon debt, derivatives upon derivatives, ever higher valuations on ever higher adjusted, manipulated numbers, based on unsustainably low costs for debt and wages, and resulting unsustainably, historically perverse margins…; then any little flap of the wing can set off an avalanche.
Do you know anybody
who claims they sold for above reasons
I’m not saying the last few days is an avalanche, an earthquake, a tsunami, the beginning of the big one. I mean, the small correction, which isn’t even a correction, let alone a “crash”, is hardly visible in a stock chart.
I’m just saying the conditions are already there for a massive re-set of stock markets and bond markets alike. And that means no other reason is needed for stocks to fall… or crash for that matter.
So, no, investors aren’t cooly and rationally updating their excel models with new assumptions and recent data publications, or discussing said inputs during partner meetings. Nope, they are selling because somewhere in the market someone’s sell order pushed one stock below a level that made somebody else sell – on a hunch, as a stop loss, a machine learning model, some esoteric and spurious correlation between normally unrelated instruments; I don’t know and it doesn’t matter – and that in turn made somebody else sell that or some other instrument.
Enough debt, enough leverage, enough trend following and passive investors, high enough valuations, too few short positions, too little cash reserves in big mutual funds and so on mean at a certain point there are no value based buyers left to mitigate the selling.
Again, whether this proves to be just a two day mini downturn, or the beginning of the worst bear market since the 70’s, doesn’t matter. The point is that nobody really knows what set off the selling. It wasn’t Powell, Trump, treasury yields or cash flow models. It was simply one eager seller too many — and that seller was baked in the cake since several years back, just being temporarily on hold due to increasingly deranged central bank policies.
Happy trading!
P.S. Bookmark my site, subscribe to my newsletter by entering your e-mail address, and finally DO CHECK OUT my recent podcast interview with the one and only Erik Townsend of Macro Voices (you can find the interview and Future Skills podcast on any podcast platform… and here).
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Thanks for bringing this to English.
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I appreciate writing like this. Not one person predicted the timing.
“Don’t fight the fed” is good advice, but it’s not a precise timing model. I’ve seen before where fed rate hikes were shrugged off for a year or more, then suddenly mattered rather dramatically. Yes, I have a long memory.
Forgot to mention — those “gurus” you see on TV. They write a reason the market went up and a reason it went down. Then when they see what happened they pull out the script that fits the data.
Nothing smart about them. Just pulling a con job to look smart.
This is the most neutral and logical article of all. There’s really no need to pretend to know, or act smart and think that you know (that’s the rest of the world). Once in a while, someone claiming not to know is so refreshing.
All speculative bubbles are unstable. Erratic “corrections” (just like sudden “gains”) are proof that the market is overvalued.
Interesting thing: your second chart matches, qualitatively, a graph I once made of the ratio of the DJ to US GDP. The bubble that irrupted in the Nineties was unprecedented except in… when was that… something about Herbert Hoover… ah, never mind, history is boring.
Interesting article.
Bubbles burst like nuclear bombs – one particle sets off another, which sets off two more, which sets off four more, and if there’s enough particles being set off, there’s a fiery explosion.
I’m curious Mikael, do you still hold gold?
I’ve been predicting (read: hoping) for a crash since late 2016 – gold hasn’t lost much or gained much over the past two years.
Yes, I privately own a gold mine in Colombia, among other gold holdings (mining stocks, physical)
2y? Remember that 10 years is a short time period in the markets.
Hi Sprezza,
Do you still walk 3 hours a day when you are lifting weights like you mentioned in the email?
Marco.
Yes, the dog doesn’t walk itself
haha!
The market didn’t crash, other in Aftonbladet terms perhaps…
I take it you never read the post :D
“I mean, the small correction, which isn’t even a correction, let alone a “crash”, is hardly visible in a stock chart.”
“What the pros are saying…”
“WSJ, CNBC, Reuters and other news outlets have explained in detail the last two days why the stock market is crashing”…
I’m a layman, but please tell me again that I should NEVER heed advice from so called Pros on TV.
Just because you can hear thunder, doesn’t mean you have a keen ear…
I’d assume ‘smart money’ knows and has already priced in, what these so called pros are spewing on TV.
And what’s purpose of these pros/gurus being on TV supposedly divulging insider knowledge? They seem to salesmen promoting their spiel.
What percentage of the stock market are retail investors?