It’s no surprise that U.S. stocks have dropped into a free-fall mode.
I’ve been warning about the risks that stock, bond and other financial-asset prices face for some time.
Now that it’s happening, though, you need to understand these two things.
- Exactly what’s happening…
- And what you can do about it – both to blunt your losses… and to make money.
In fact, while other investors are panicking – and see gloom and doom – I see opportunity.
This morning’s market plunge underscores my long-held mantra: “There’s always a place to make money… always.”
Today I’m going to show you a couple ways to put that mantra to work – so you can cash in…
Forgetting About the Fed
The big, big picture that too many investors lost sight of was that the U.S. Federal Reserve‘s “zero-interest-rate policy” (ZIRP) and massive quantitative-easing (QE) moves didn’t stimulate economic growth.
And it didn’t work when the European Union (EU), Japan and China tried this strategy for themselves.
What all that easy liquidity did do was lift asset prices – which, in the case of the Fed, was also an articulated policy goal.
In the Fed’s “wealth-effect” scenario, consumers would feel better about the economy’s prospects (and their own) by watching stock prices rise.
Aided by the Fed’s cheap-money tailwind, U.S. companies over the last six years helped their own cause with $2.7 trillion of stock buybacks. That boosted Corporate America‘s all-important earnings-per-share (EPS) metric (since the same earnings total is apportioned across a lower number of shares).
That additional boost of corporations buying their shares at ever-increasing prices and better earnings metrics made stocks look better and better to the untrained eye. And that created a “virtuous momentum” market where stocks were pushed to increasingly higher “highs.”
While other countries were following the Fed’s lead, China not only lowered interest rates but embarked on a debt-fueled stimulus tear – including runaway infrastructure spending.
According to McKinsey Global Institute research, China’s total public-and-private debt burden skyrocketed from less than $7 trillion in 2007 to more than $28 trillion by mid-2014.
Despite this, China’s GDP growth rate has been slipping badly.
For a couple reasons …
First, there were low interest rates that have been diverting investment capital and savings into capital markets – chasing stocks and increasingly lower-yielding fixed-income securities. Then there was China’s stimulus efforts to boost infrastructure, manufacturing and exports.
These two factors led to overproduction and the stockpiling of commodities. And they brought us to the point we’re at today.
That’s a big, big picture I just painted, of course. But beneath that, mechanical realities were signaling trouble.
The price of oil has been sliding. When the price of the most important commodity in the world skids precipitously, it’s not just because America’s new record production of 10 million barrels a day is tipping the supply side of the equation.
And it’s not that other producer countries desperate for revenue (which is another indication of trouble) are pumping furiously.
The price of oil – that critical bellwether – is crashing because global demand hasn’t been rising as much as before… because global growth is slowing.
That’s been a flashing light.
Then there’s Greece. It’s been a great 28-century run, but the “Hellenic Republic” is probably on its last legs. That’s another warning sign – not just about Greece, but about the burden of debt in general.
There’s no way Greece can pay the more than $350 billion it owes, and that’s just in bailout loans.
There’s no way Japan can repay its government’s $11 trillion in debt, which will be three times Japan’s GDP by 2030.
The United States is no slouch in the debt department either. Globally, debt burdens have been climbing higher.
And that takes us back for a moment to the big, big picture: By slashing interest rates, central banks are engaged in a scheme to cut the financing costs of the rising debt loads of each of their respective governments.
The only escape route out of everyone’s debilitating debt spiral is for economic growth to accelerate (that’s, of course, what everyone had hoped low interest rates would accomplish). Accelerating growth would boost the tax revenue needed to help pay down debt. And it would also fuel inflation, which reduces the cost of the debt.
That’s why central banks want inflation. But there is no inflation – which is another crystal-clear signal of trouble.
Then there’s China. The saying used to be, “When the United States sneezes, the world catches a cold.”
That’s now true of China. And China is sneezing, hacking, loading up on NyQuil and taking three days off work.
Beijing tried to push stock markets higher by cheerleading them on through party papers and TV shows.
Millions of new brokerages accounts have been opened since the end of 2014, and Chinese “speculators” have been lavished with margin to buy into the nation’s hot stocks.
The central planners had hoped to get China’s debt-ridden corporations – especially the state-owned and controlled entities – to be able to issue new equity to new stock investors. The goal: To offload balance-sheet debt onto stock-market “plungers” – a Wall Street euphemism for market players that make big-and-reckless bets.
Beijing’s plan didn’t work. When Chinese stocks crashed, that was another giant warning light signaling trouble ahead.
There’s just no good news left to lift stocks higher. There’s no market leadership from any industry, other than the brief momentum runs made by some tech darlings and a bunch of hot biotech companies that are promising next-century solutions to yesterday’s problems.
And there’s even another challenge looming: The Fed says it’s leaning toward raising interest rates.
How to Run the Table
All these signals were flashing yellow, then bright red in the past few weeks.
We caught them all in my Short-Side Fortunes trading service and are very short and very, very happy, because we are short China, oil, Europe and all the U.S. stock indices.
I’m looking for an oversold bounce at some point, but if we get one on thin volume, it will be a chance to just load up for the next downdraft.
There’s nothing holding markets up anymore. It’s truly frightening.
Central banks have shot their ammo. Their bazookas are smoking… and empty.
What the markets need now is a good, long flushing-out. Not that I want to see that, even though we are short, but that’s what they need to squeeze out excesses built into artificially inflated stock-and-bond prices.
It’s not too late to capitalize on this opportunity… to hedge against further downside moves, or to make money if stocks fall more – as I believe they will.
Because puts are now so expensive, the best way to hedge and the best way to profit from any further selling would be to buy “inverse” exchange-traded funds (ETFs) like ProShares Short Dow30 (NYSE Arca: DOG), or ProShares Short QQQ (NYSE Arca: PSQ).
We own both in my Short-Side Fortunes service, and they provide great short exposure to the big U.S. indices.
As sure as this sell-off was clearly signaled, there will be signals when we’re near the bottom.
We’ll continue to follow stocks down.
And we’ll be there for you when they’re ready to rebound.
As they always do…
- Wall Street Insights & Indictments: It’s the “Real Flash Crash”… and It Will Scare You to Death.
- Wall Street Insights & Indictments: A Wall Street Whodunit: Who’s Killing the Stock Market?
- Wall Street Insights & Indictments: If the Stock Market Crashes, These Four Investments Will Put You on Easy Street.