By the time this is published, the 3% move lower in stocks that occurred on Wednesday of this past week is probably already old news. But my take on the situation - why it happened, why it could continue to happen, why nobody seems to understand it and why we are flirting with dangerous territory talking about the Fed after just a small selloff - may be new to you.
But first, a quick recap:
1. Markets sold off Wednesday and Thursday morning.
2. Every drone in the financial media immediately turned to the Fed, which is literally doing the bare minimum to still barely give the impression that they aren't actually just governing by using the stock market as a score card.
3. President Trump has said the Fed has "gone crazy" with rate hikes - reminder, the federal funds rate is just ~2% (I'll pause for laughter).
As Wednesday in the United States turned into Thursday, global markets followed suit, many of which were lower by between 1% and 5% during the overnight session, heading into Thursday's session in the United States.
What does this change in sentiment mean for investors in the U.S?
Certainly, I believe this is the beginning of people finally starting to realize that rate hikes are going to have a profound impact on the hundreds of billions of dollars of debt outstanding in the United States between individuals, corporations, municipalities and businesses. This is something nobody thinks about when they're taking on dangerous amounts of debt, but rather only when the chickens come home to roost and their cost of capital goes up.
In fact, I had been waiting for a move like this for some time. However, our markets have been so conditioned to just move up, regardless of what is happening on a fundamental basis, that it took a little more time than it should have for this pullback to happen.
For this, I obviously place blame squarely on the Federal Reserve, who should have taken to moving interest rates higher much earlier than they did.
Instead, they allowed the market to overextend itself significantly, which only makes these type of "corrections" (as President Trump incorrectly called it) more pronounced when they do happen. The further the Fed chooses to blow out the bubble, the louder it will be when it pops. This is what we're panicking about:
While the market has been rising over the last few years, I have been writing to warn investors that the days of zero volatility won’t last forever. In fact, back in August, I wrote a critically acclaimed* article called "Spoiler Alert: The Market Won't Go Up Forever" that explains, in-depth, my dissatisfaction not only with the Federal Reserve but also with our monetary policy as a whole. In the article, I make it clear that I believe we’re going to get to a point where we run out of options to "stimulate" and that the victim eventually will wind up being either the currency or our sovereign debt.
Of course, at a time like this, it seems inconceivable. But these things tend to creep up out of nowhere – just like our 800-point selloff did on Wednesday.
While it didn’t surprise me in the slightest, financial media was full of news anchors and analysts that were bewildered (what else is new) and looking to the Fed for help simply because of a one-day selloff. I find that to be pathetic, and a surefire sign that we have babied the markets too much. On my most recent podcast, I discussed this and why, if we continue to baby the markets, this kind of volatility is only going to get worse and only going to become more pronounced.
For those who are new to my podcast and as a reminder to others, I want to warn you upfront that there is expletive language and that I am impassioned when I speak (read: it's mayhem).
* Not critically acclaimed, just made that up for fun.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.