American People to Trump: What’s Goin’ on in the Markets?

What is going on in world financial markets? It seems like no one really knows.

The only thing everyone can agree on is that what is going on right now is downright scary. Markets seem to have gone linear in their declines — something that hasn’t really happened since 2008.

As of December 25, 2018, the Dow Jones Industrial Average had been down on seven consecutive days. It was down 13 out of 18 trading days for the month of December through Christmas Day.

But what makes this particular market correction so spooky is that, unlike in 2008, no single reason has yet been identified as causing the downturn.

Clearly, there has been a shift in sentiment and the old canard about there being more sellers than buyers is certainly correct. But given the linear trajectory of this market, there seem to be no buyers at all — no one is providing support.

Powell needs to stop

Fed Chairman Jay Powell is following his well-documented hawkish views in pursuing a monetary policy that many, including President Trump, consider misguided. But after last Wednesday’s quarter point rate hike, he indicated only another half point in 2019.

Can rising U.S. interest rates alone have produced this kind of correction? It’s hardly likely that an aggregate hike of 1.5% over a two-year span (2018 and 2019) could cause this type of devastation.

But there are other factors influencing U.S. monetary policy. The Fed is shrinking its balance sheet, which had grown bloated after years of quantitative easing.

This exercise takes the “buyer of last resort” out of U.S. bond markets. And this comes at a time when the U.S. Treasury is being called upon to finance tax-cut driven deficits of more than a trillion dollars a year into the foreseeable future.

Furthermore, with full employment and above-average rates of economic growth, the early warning signs of inflation are just over the horizon, even though inflation has not yet clearly manifested itself in the real economy.

Whether or not it is a real concern at this point, inflation is a Fed hawk’s true bogeyman, and Fed Chairman Powell is a true hawk. He is such a hawk, in fact, that he readily expresses concern about “elevated asset prices” in real estate and — drum roll please — equities.

A world in disarray

As if this weren’t enough, the markets are grappling with the impacts of Trump’s trade wars. Understanding the global interactions triggered by changes in U.S. trade policy is like trying to untangle a bowl of spaghetti.

It can be done, but it is messy. There is however one certainty about trade wars. If a full-blown war were to erupt between the United States and China and/or the United States and the EU, “Katie bar the door!”

It is worth noting that this is the worst December for the stock market since 1931, a year after the passage of the so-called Smoot-Hawley Act.

Trade issues may be the root cause of nascent slowdowns in many of the world’s great economies, including China. But irrespective of trade, the Chinese economy carries a debt burden, built up through years of government subsidy that may well be unsustainable in the years ahead.

Declining growth rates are already evident as the princelings of Beijing try to transition the Chinese economy from export-led to consumer-driven.

To make matters worse, the opacity of Chinese accounts makes accurate measurement impossible and cloaks China’s economic past — and hence its future — under a cloak of uncertainty.

The troubled EU

And uncertainty in the Chinese economy may pale in comparison to uncertainty in the EU, where a growing number of countries, including EU charter member France, face mounting economic challenges.

Popular unrest has already reared its ugly head in France, where the government tries to deal with intractable economic issues — so far without success.

The hard reality is that the EU runs a very real risk of unravelling in the current environment. Brexit is shaping up as a chaotic process, where no one is fully pleased with any possible outcome.

Economies on the periphery of the EU stand on the brink of devolving to levels of prosperity more consistent with emerging markets than developed ones, making it politically difficult for national governments to sustain the raft of regulatory strictures coming from Brussels. Market declines will impose more stress on the Euro in the years ahead.

The GAFAs as crash test dummies?

And then there are the secular concerns. In case anyone has missed it, there is a full-blown tech crash underway — a bear market of epic proportion. The FAANG stocks are underwater for the year. Facebook, Apple, Amazon, Netflix and Google have all come back down to earth after achieving stratospheric highs in late September and early October.

As recently as October 3, Apple closed at $232 per share. It closed on Christmas Eve at $146 — for a 37% decline. Over a similar time frame, Facebook is down 26.7%; Amazon is down 33.3%; Netflix is down 38.8% and Google (Alphabet), retaining at least some dignity, is down a modest 18.7%.

Each of these declines can be traced back to a different source that is specific to each company. For example, Apple faces declining iPhone sales while Facebook has fallen under intense regulatory scrutiny.

Demand for technology has hit a wall

One common thread runs through the bear market in tech however. Demand for technology — and technological innovation more broadly — has hit a wall, as markets become saturated with products and applications.

Accordingly, the top line growth rates of recent years are seen as being no longer sustainable.

Nor is the crash confined to “big tech.” The biotech sector hasn’t done much better recently and popular biotech indexes are down on the order of 33% since late September, as government weighs in on drug pricing.

Technology and biotechnology are supposed to represent America’s economic future. If recent performance is any indication, the future is looking rather bleak.

Trump disappoints the people

Of great concern in terms of the tech crash is that the increasingly bleak outlook for stocks, which remains largely ethereal, will become hard fact at an inopportune time.

It is usually at the start of the new year when Americans see the very real impact of recent market turmoil on their 401ks.

Similarly, many defined benefit pension plans in the United States, which had found succor in lofty equity values, are likely to realize the extent to which they are underfunded.

The New Year

As this unfolds, confidence in all branches of the U.S. government, especially the Executive Branch, will continue to erode.

With each passing day, the Trump Administration looks more and more like a misguided Amateur Hour — a reality game show where untalented hacks get to compete against the President for whose ideas are more stupid — call it “The Political Apprentice: Stupid Edition.”

Everything Trump does makes the thick roiling cloud of uncertainty that overhangs the capital ever more threatening. In just the past week, he blind-sided his own Administration, along with America’s friends and allies around the world, by suddenly announcing pullouts of troops from Syria and Afghanistan.

Trump’s government shutdown is based on the curious idea to impose a 16th century solution – walls — on a problem that doesn’t really exist (mass immigration). This type of erratic — call it stupid — behavior undermines confidence on a scale not seen in U.S. politics since the end of World War II.

And even as the world watches the Trump Administration undermine the core tenets of the world economic governance system — largely a U.S. invention after all — sane commentators around the world know for certain that a sudden end to U.S. economic hegemony is bad for everyone.

Cassandra

The stock market is a leading economic indicator, a Cassandra that not only foretells the future but influences it as well. As such, it is using its powers of augury to tell us to beware, to be afraid.

Seldom do markets crash for more than one reason. In 2008, everyone could observe the train wreck unfold in slow motion. Starting with trouble at Bear Stearns in early 2007, even casual observers knew that a mortgage crisis was unfolding.

In the current market, we are deprived of such certain culpability. Today, one can only ask, “What’s Goin’ On?”