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Markets Get Ugly – and May Be Getting Uglier

17 | By Shah Gilani

Understanding what happened to the stock market last week is really, really important.

That’s because we’re at a place in time where it’s possible for time to go backward…

Markets Heading Toward Time Warp

We may not be heading back into the clutches of the Great Recession, which lot of middle-income and poor people never got out of. But if markets can’t rally from here, there’s a better than 50/50 chance we will fall back into an ugly time warp.

The importance of the market at this juncture has to do with the U.S. Federal Reserve’s prescription to get us out of the Great Recession in the first place.

The Fed told us that its zero-interest rate policies (ZIRP) would lead to higher stock prices, creating a “wealth effect.” The Fed hoped to push the economy along enough to let real GDP gather momentum and become the tailwind the economy needs for liftoff.

About that “wealth effect.” It never made sense to me. After all, if you don’t have any stock-market investments, you’re not going to feel better about other people’s wealth.

It certainly doesn’t make sense to the millions of people who can’t find a decent job, never mind a career. Or to the people who are so distraught after years of looking for work that they’ve given up.

And it especially doesn’t make sense to the millions of students who borrowed billions of dollars to get a degree to make themselves more attractive to prospective employers. Now, these students not only don’t have stock-market investments… they not only don’t have jobs, but they are shackled to the dirty, greasy, come-on loans that for-profit and not-for-profit schools peddled to them as another kind wealth-effect drug.

The wealth effect was supposed to make us all feel better as we watched asset prices rise, especially the stock market. If you feel wealthier, or at least you feel you could become wealthier, even if that must means getting a job, you’ll go out and spend, spend, spend.

And to spend, you’ll borrow. All that borrowing (at low rates, thank you, Federal Reserve) and spending will stimulate production, and more people will be hired to work factories and restaurants as demand for goods and services wafts us into the ether of economic nirvana.

Well, we’re not there.

The strong growth has never materialized. There are plenty of reasons for that, and the Fed knows them all.

What did work was the pumping up of the stock market.

Now, whether there’s been any wealth effect is about to be tested. If there’s panic-selling and stocks drop precipitously, stock investments will get hit hard, of course – and the whole economy could tip over into a massive double-dip Greater Recession.

Last week was a warning. The Dow Jones Industrial Average dropped 273 points on Tuesday, and a lot of people freaked out. Then Wednesday came along, and the Dow gained 274 points. So a lot of people figured, “That was scary, but it’s already over.”

Too bad Wednesday was methadone day. What sparked the market to erase the huge loss on Tuesday were the Fed minutes. The Fed said it was worried about the strong dollar and decelerating global growth. The market was relieved that there was no chance the Fed would let interest rates rise, and off it went.

Too bad the week doesn’t end on Wednesdays.

On Thursday, the Dow dropped 330 points. On Friday, markets tried to rally, but the Dow ended down another 100 points.

The average daily volume last week was 7.9 billion shares. That’s the highest daily volume in any one week since November 2011. In other words, not only were there more sellers than buyers, but those sellers were selling a lot more shares than usual.

Here Comes Trouble

Technically, as in “technical analysis,” all the major stock indexes are in trouble.

A week like last week doesn’t just happen out of nowhere. Forces congeal for a while before triggering bouts of selling. Last week, those forces were over in Europe. European stocks got killed last week, and U.S. markets traded off them.

What’s bad about that is that a lot of people expected sellers in a weakening European environment to park their money in U.S. stocks – but they didn’t. They still might down the road, but they didn’t last week and they certainly won’t this week.

As far as today – where’s the bounce? Europe bounced, at least some.

But there’s no bounce in the Dow as I write this at 10 a.m.

We opened higher, and there was a sigh of relief. But that sigh has turned into an audible whisper of worry.

Where the stock market is – that’s a big deal.

If the wealth effect evaporates, confidence in the Fed’s policies will go up in smoke, too. So will confidence in all the central banks’ abilities to engineer the world out of slowing global growth.

The Fed and the globe’s other central banks built dykes wherever there was water rushing into Great Recession sinkholes. Their pumping schemes seemed to dry things out.

But, “If it keeps on rainin’, levee’s going to break.”

Yep, I’m going to keep singing that Led Zeppelin line to you, ’cause I think it’s coming.

17 Responses to Markets Get Ugly – and May Be Getting Uglier

  1. Sabin Brunet says:

    What would happen to Canada? We are a big country but small economy compared to the U.S. The Canadian Banks are an Oligopoly, secretely borrowed a lot of money from the fed a few years back. Some organization in Europe recently concluded to sound Canadian Banks??
    Bank of Canada has no Gold in its coffers, the Canadian banks are heavily invested in Mortgages. If mortgage rates go up 1,5% those banks are probably all underwater as homeowners will be unable to pay their mortgages.

  2. Robert in Vancouver says:

    All of the information in Shah’s article has been known for quite some time, although he does a good job in recapping it all for us.

    So it seems to me that there are other reasons for the markets going up then dropping as they have recently, such as market manipulation by large traders.

    I don’t know how they manipulate the markets, but it seems to be the only logical reason for markets to swing so much over information that everyone has known for a long time.

    • HYMN says:

      It has been the large traders moving the market all along. There are some wise guy upstart day traders making money but they aren’t big enough to move the market. If the market was left alone to find itself this would be alot easier, but with the Fed and big houses attempting to steer it this way and that, it’s tough to tell where real value stands and what a truly “Free Market would show us.

    • Palle Eghjort says:

      I am a Danish investor. I feel that the manipulation of the market have been “operating” for some time. When you catch these crooks in a lie, they simply say it is because you don’t understand our alghoritms.

      People in USA should consider, that some of the nearest advisors in the Obama-administration, are crooks who made a lot of money at the 2007/2008 catastrophic and criminel sub-prime loans. And you Wonder why european’s
      don’t buy US-stocks. The Obama administration allow US to spy on their Allied politicians. And they allow using spy-data in a corrupt way to destroy the possibilities of many European Companies when they negotiates contracts
      around the World. Will you US-people ever ever do something about it ???
      You are not to trust as long as you behave like crooks. Wake up all of you “over there”. And good luck if you try to do something about it.

  3. northwind says:

    the “wealth effect” had the effect of making the big banks wealthier. and that’s what it was for, public statements are for public consumption and may not reflect reality.

  4. Joe Fit says:

    In a recent study, it was determined that the wealthiest 10% own 75% of the nation’s wealth. Combine that with the fact that our GDP is 70% dependent on consumer spending and what do you get? A refutation of the infamous “trickle down” theory whereby as the wealthy get richer, wealth will trickle down to the rest of us making our lives better. Well the so-called “wealth effect” created by the rise in stocks helped the wealthy (e.g. dividends and interest earned) but was not accompanied by the creation of well-paying jobs resulting in stagnant or declining wages for the overwhelming majority of middle class and poor Americans and a reduction in their spending. There’s not enough buying by the wealthy to create greater demands for goods resulting in job creation, resulting in more spending, more demand for goods, more job creation etc by the 90% of Americans. That requires the other 90% of the population to be spending as well.The biggest link in that economic cycle has not happened. The “wealth affect” created by the Fed & Wall Street hasn’t reached 90% of Americans and our “bought and paid for” politicians (thanks to the dark money flowing into their campaign coffers from wealthy donors) don’t have any desire to address the problem.

  5. R. Patrick says:

    we have taken our profits and moved on and not a minute too soon as far as I am concerned. We have bought into the middle of a mineral correction and hope to reap benefits from that in the long term. We are sick and tired of the banks and the markets manipulating for the benefit of only one percent. So I could spend and spend heavily I am NOT going to do it. I don’t wish another depression on this world but maybe a wake up call is in order. We are long on gold and silver physical. If it drops so what? Time will tell which is truly an asset? Paper or Coins and bars! I want the latter..

  6. Will H. says:

    Typical beginner economics class problem – 10/19/2014: “Butter or bullets?”… “Land O’ Lakes Butter $5.68/16oz” Walmart/Tulsa; “Winchester/Colt .308 NATO 168gr FMJ zinc plated steel 2650 fps $12.05/20rds” CheaperThanDirt.com 10/19/2014… and actually in stock; Advanced Finance: Gold or Dollars? “Gold $1235.76/oz” goldprice.org 10/19/2014; “Gold was just a windy Kansas wheat field…” John Denver in a song named “Matthew” in the 70s… I’m truely sorry for the farmers losing money on their investment *this year*, but thank God we had a bumper crop of corn, so *maybe* the rest of us can afford to eat next year?; Last but not least, trying to stay in line with Shah’s opener “There’s a lady who’s sure all that glitters is gold…” Led Zepplin/Stairway To Heaven… But is she still around?

  7. locohoya says:

    Gawd, you’re so stupid. As of this minute (3:15 pm) stocks are way up. Quit trying to scare everybody into a mass sell-off so you can get rich on the rebound. Wish I’d had the money to invest yesterday. As Warren Buffet says, be fearful when others are greedy, and greedy when others are fearful.

  8. Thompson says:

    Fukushima and Chernobyl are world disasters killing and maiming thousands, polluting land and sea and there is no end to the ecological destruction so our leaders set out to destroy the use of coal which still provides 40% of our electrical power. We are so blind to truth. Where and when will this insanity end?

  9. phil maffia says:

    In the UK monetary policy is in the hands of Mr Carney, a Canadian whos just spent many recent years messing up the Canadian economy. The UK thinks and acts like a ‘Commomnwealth’ . Its banking all its chips on a future when commonwealth nations provide the wealth to keep the Queen and landowners afloat. Our immigration issue stem from these deliberate long term policies and the large number of foreign students in the UK are at present, being indoctrinated with colonialist propoganda so they can support the ‘ commonwealth’.
    Britains future involves dumping its vast debts and economic weakness on its former colonies, called the commonwealth.

  10. Ferdinand Holcapek says:

    The government tries to tell us “You can spent yourself out of debt” they are showing us how, but is the government successful? I would say they are idiotic.

    The economy will not stabilize or get better as long as these idiot keep printing money.

  11. Buffalo Bill says:

    I have all the work I can handle . 12 to 14 hours a day , 7 days a week … For half of what I used to make in 2007 . Then the Feds took the 5 % interest I used to make in my savings account , and turned it into .5 % . Every time I go shopping , prices are higher while packaging is smaller . Get a traffic ticket , and they will take a week’s pay from you . Every time there is an election , each political party candidate attacks the other candidate . Whomever gets elected is bought and paid for by special interest groups . They hire their family and friends to high paying cushy jobs . I watch the business news . They say the recession ended years ago . Really ?! Lets leave the borders wide open . Plenty of jobs for millions of poor uneducated illegal aliens . Work for the government , and retire on a nice six figure pension paid for by us poor taxpayers who compete for minimum wage jobs with the immigrants . It has happened slowly over the past 40 or so years . what used to be the MIDDLE CLASS is now , at best , the upper poor . Thank you Democrats and Republicans alike for eroding a once decent country to make a decent living . Now , when I wake up , all that I ever think about is working all day for peanuts so that I can barely survive . And I’m probably one of the lucky ones . At least I have a minimum wage paying job . I just have to work 90 hours a week and I’ll get by somehow . Thank you everyone at the top for ruining a once great place to live / :

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