There has been a lot of blame flying around. Investors have been looking for something to pin the market’s selloff on, and they’re getting desperate.
First, investors blamed the 10-year Treasury yield nearing 3% and the Fed hinting there are more rate hikes coming.
Now, the prospect of tariffs and trade wars are being blamed for the latest frightening drop off a cliff.
And, to be fair, we’re seeing crazy volatility. Markets have dropped hundreds, sometimes thousands of points at a time, then bouncing back only to drop a few hundred more points in the last hour or half an hour of trading, then gapping up or down the next morning…
But it isn’t being caused by the prospect of inflation, the 10-year yield rising, the Fed’s expected hikes, or the warning shots of steel and aluminum tariffs that were shot across the bows of some trading partners.
The market volatility that’s scaring the heck out of investors is about mechanics, not fundamentals.
Breaking: There is No Inflation Worth Worrying Over
Inflation is only just reaching the magical, made-up level of 2% that the Fed and every central bank around the world was preaching we needed to get to stamp out the bugaboo of deflation.
As if deflation was ever really looming over us like the Angel of Death. It wasn’t!
We had crazy asset inflation, the housing bubble, caused by crazy leverage that infected a lot of the world. Then that burst and led to the Great Recession.
Prices of goods and services fell, as they do in a recession. But we never had depression-style deflation, not ever even close.
Still, the Fed and central bankers drummed it into us that we were in danger of depression and deflation if they didn’t flood the world with money and turn deflationary tsunami waves into inflationary ripples.
What was really happening was the Fed had to flood failing banks in America. All of the biggest banks in the country, all the too-big-to-fail failing banks, had to get transfusions with free money so they didn’t fail and we didn’t end up in a depression that would have made the 1930’s look like a day at the beach.
All the world’s central bankers choose a 2% inflation target because they knew it would be at least a decade before we got there. A decade would be about how long it would take for ailing banks to get past insolvency and back into robust profitability, enough to capitalize economic growth to the point where some inflation would be a good sign.
Two percent? That’s the trophy that says we’ve arrived, we’re out of the woods and growing again.
A little inflation is what we get when the economy is finally growing at a decent pace, it’s good.
It’s a lot of inflation – stagflation – that’s bad.
Just barely closing in on 2% inflation, whether or not it’s sustainable, is good. It’s been what the Fed’s been striving for.
Now, suddenly, it’s a problem? Of course, it isn’t.
We Have a Bright Future Ahead of Us
If we can maintain between a 1%-3% inflation rate while the GDP grows between 2%-4%, that’s what economists would call a “Goldilocks Scenario.”
We aren’t there yet and may not get there. And if we do, we may not be able to sustain those twin positives for long.
But we are finally heading in that direction, and markets should be celebrating that.
For a moment, they were. In fact, they were cheering wildly. We were making record highs after more record highs.
Inflation isn’t a worry. Interest rates rising slowly, as they have been, isn’t a worry. That’s what happens when the economy grows: rates start to rise.
The Fed raising rates, so far, is a joke. They’re still near record lows. The fed funds rate is near historic lows, so is the 10-year, so are mortgage rates. We have to go back to the Depression to see rates across the board as low as they are today.
Rising rates are a sign of stronger growth. Markets aren’t freaking out about where rates are today.
The Fed may raise rates four times this year. If they do, it will be because the economy is growing gangbusters at 4% or more. On top of that wage growth is accelerating at more than 4% annually, AND inflation is steadily above 2%-4%.
If all that’s happening, the market will be soaring because fundamentally we’ll be in GREAT SHAPE!
None of that is what’s causing the market’s wild volatility.
And the couple of tariff cannonballs the President just lobbed at trading partners who’ve been dumping subsidized steel and aluminum products on us for decades are nothing. They aren’t nukes. They aren’t a formal proclamation of trade wars. They are long overdue.
Everyone knew Donald Trump was going to fight unfair trade practices. This is no surprise.
Fundamentally, the Trump Administration is leading the country into bilateral trade agreements and out of the regional or hemispheric trade agreements that favored weaker nations when the U.S. was strong enough eager enough to send production and jobs overseas, fattening profits of giant U.S.-domiciled multinational corporations.
Turning to bi-lateral agreements will bring production and jobs back to the U.S.
And while that may not be the best thing for huge multinationals, it will revive domestic manufacturing, generate better-paying jobs and career opportunities, broaden our manufacturing base, benefit a larger cross-section of consumers, and engender a positive economic feedback loop not seen in decades.
The stock market will love every minute of that, so once again, that’s not where this volatility is coming from.
It’s coming from what I’ve been you warning about.
The mechanics of the markets are broken. How markets are made, the methods of so-called “price discovery,” the inner workings of how orders get transmitted to exchanges, who’s doing what behind the scenes, it’s all broken.
That’s what is causing the hundreds and thousands of point moves down, then up, then down again, sometimes in a matter of minutes or less.
How is that even possible?
Ask the SEC. Ask the CFTC, the NYSE, the AMEX, the CBOE, the CBT, the Merc, BATS, the Dark Pool operators. Ask the HFT shops.
Ask the aiders and abettors of the Wall Street mafia how the mechanics of the market work these days.
And, if they don’t answer? You can learn all about it anyway, right here, where I’ve been writing about it for weeks.
As far as investing in manipulated markets, I’ll tell you next week how to survive them and how to run on the inside track like they do in “the club.”