Weekly Article 02-06-2018
Is this the big one? I am referring to the recent down days in the market and the fact that many are asking if this may be “the” correction. As of Tuesday morning I would have to guess that no- this is not the end of the stock market moving up just yet.
There are many reasons- mainly that in a matter of minutes the Dow dropped around 800 points to over 1500 points lower yesterday. It appeared to be headed towards tripping the kill switch at down 7%. Almost immediately from down over 1500 points the Dow recovered 400 points in a few seconds. If we were indeed at an inflection point I don’t believe that this type of movement would have occurred. My opinion is that the central banks maintained control at that time.
As a matter of fact, I was pretty surprised to hear Jim Cramer on CNBC say at that time that this move was fake. Of course, this move was so ridiculously large and at “just the right time” that any pretense of a free market appeared to be thrown out the window.
One thing that is obvious- as I have said many times before the “markets” can rise quickly but usually when corrections come the moves are quicker and the gyrations are far larger. Both ways also. Many are surprised to learn that 6 of the Dow’s 10 largest up days in history occurred during the crash in 2008.
Overnight the Dow futures were down as much as 1200 points again only to go slightly positive in the early morning. By 9:30 the Dow shot lower by 500+ points and rallied to up over 350+ in the first hour of trading.
Yesterday the US dollar was stronger, bond yields were falling (prices rising) and gold and silver were up. This is the type of set-up that I would look for if investors were expecting the carnage to continue. Today, bond yields are flat (so far) gold and silver have pulled back and the dollar is weaker. Of course, I am writing this at noon and making observations that could totally change by 1:00 and could be ancient history at 4PM. I am just trying to make a point that this does not look like a typical “risk-off” day so far.
What this action does illustrate however, is that machines have no feelings- they have no emotion. If certain numbers are hit stocks are bought. If certain other numbers are hit- stocks are sold. All the Robo-advisors will do great on the way up but good luck when corrections come because as we saw yesterday when computers are doing the “thinking” many think alike- using the same algorithms. I will ask the same question as I have in the past- “When all of the machines are selling (about 70% of all market trades these days) who exactly will be there to buy and keep prices from falling and possibly flash-crashing? It appears that the answer yesterday was likely a central bank (or a few central banks?) because to move markets like they moved yesterday took some massive firepower. Mom and pop investors probably couldn’t move the Dow 400 points in a month let alone in 15 seconds!
The sad part is that if we do indeed recover and hit new highs “the” correction is just likely pushed off into the future. Many, with renewed confidence in the central planners, will jump back in and then “the” correction will likely come and many may not be able to get out.
Right now it appears that the “global reflation” trade has hit a snag but if the stock and bond markets are to recover here I believe that some fresh new money “printing” will likely have to take place. This should ultimately be bullish at least in the short term for gold, silver and commodities overall.
Let’s remember that this latest pullback started last week when, according to the Fed they retired around $22 billion of balance sheet assets last week. That is not a large amount when they have $4.4 trillion in assets- if this is a precursor look out as they increase their QT over time and other central banks buy less as they have been telegraphing for some time now. Of course, with this type of volatility these tapers and QTs just may not take place at all. We’ll see.
My take is that in 2008 we hit a wall where our economic output could not support al of the debt that had been issued. The whole system could have, and in my opinion, should have collapsed. Since then over $100 trillion in new “money” (debt) has been created. Central banks have purchased over $14 trillion in assets that include stocks, bonds, etfs and who knows what else. This liquidity has provided rising asset prices, low financing costs and kicked this massive can down the road to where we are today.
My belief is that if QT actually takes place- particularly globally- look for some serious deflation in asset prices. If however the central banks panic I believe we could see massive inflation as they try to prop stock and bond prices up with freshly “printed” currencies around the world.
Since it has been proven over the past few years that central banks will try just about anything it doesn’t appear to me that any action can be ruled out.
My opinion remains that bonds are in trouble either way. If we get inflation it is likely bond yields rise and bond prices fall. If we get deflation it is likely, in my opinion, that could lead to those in debt having a harder time paying interest due and a loss of confidence in the ability to carry- let alone repay the debts which would again lead to lower prices.
Cash would likely do well in deflation and would likely lose purchasing power in an inflationary scenario.
Stocks would likely do well in an inflationary environment and could suffer major losses in a deflationary event.
While silver would likely perform well in an inflationary environment like many other commodities I believe it could still perform well in a deflationary situation because of the lack of faith in the monetary system that may be caused by bond defaults and a falling stock market. Other commodities would likely suffer in a deflationary scenario.
I would expect that gold would be a winner in either scenario also. If confidence is lost during a deflationary event many will flock to gold to try and preserve their assets. This is one asset that is not someone else’s debt. In an inflationary scenario I believe gold would rise because of falling fiat currencies.
One thing for sure- there is no lack of action taking place right now!
Mike Savage, ChFC, Financial Advisor
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