Lots of Volatilty (Not Enough Bandwidth)

After an hour long delay on the tarmac at LaGuardia, I arrived in the wilds of Maine to find a) no connectivity and 2. the party in full swing at the lodge.

Its a pretty mixed crowd, with a few bulls but more bears than one might expect. The overall take was a mix — some believe that this too shall pass, while others await a replay of 2008.

I am away from the noise machine that tries to explain this, but what little I heard tried place the blame for this sell on a few of the usual suspects:

1. Europe: The problems in Europe were extremely well known prior to this week. For those who want to blame the whackage yesterday on the continent, why now and not 6 months ago? Nothing has changed, the PIIGs are just as insolvent as they were then.

2. QE2: The end of the Fed stimulus plan was known to the day. No one can are suprised that June 30th came and with it, went QE2. Yet that seems to be another non-surprise surprise.

3. Debt Ceiling Crisis Averted:  No one Wall Street really believed that DC would allow this to go bad. The ugly partisan, “country second” approach might have been painful to watch, but a deal got done and there was no default and no downgrade.

4. Slowing Economy: We have now had several months of data that suggest economic activity is slowing, but not sufficient weakness to guarantee a recession.  The pricing in of a weaker economy and softening earnings is a viable rationale, but I am hard pressed to explain why it finally took this week for investors to recognize this.

All of the above are Après moi, le déluge — excuses for what pundits cannot easily explain.

I am away from the data that would help me validate this, but the one aspect of these markets that leap out to me is that a major sell off such as this is rarely a one off.

This is a warning shot across the bow, and a 15-25% correction is now increasingly likely. Adjust your risk parameters accordingly.

~~~

NOTE: I am doing a quick Bloomberg TV hit at 7:30, pre NFP.

Category: Investing, Markets

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

43 Responses to “Market Wobble is a Warning Shot Across the Bow”

  1. dougc says:

    On bloomberg they interviewed a trader and her rationale for the severity of the drop was to blame the boomers, they control most of the individual wealth and they are nearing retirement and unwilling to ride out a correction or bear since they are nearing retirement . I would add they they have seen this cyclical event, recession or slowdown, about every 3 to 4 years. I know if I was younger I would not of sold my oil stocks but I am too old to ride out a bear . It is difficult not to buy them back.

  2. bda_guy says:

    The S&P blew threw a level that to me appeared to be a key support. However, the Nasdaq and DJIA have yet not broken through comparable levels although are close. If the indices show weakness today and close below their support levels, my next target for the S&P is around 1,100.

  3. Greg0658 says:

    I buy that too DougC .. as well as “do something” besides sit on hoards of cash you corps

  4. Julia Chestnut says:

    The only factor I see that is genuinely new to the market is the new austerity program out of D.C. Perhaps it took everyone a little time to calculate exactly what this will do with the forces already in play, perhaps read the “deal,” and decide “risk off.”

  5. dougc says:

    @greg I did something I bought a 42 inch LCD and plan on doing nothing but eating pizza and drinking Heinekin and watching football,

  6. Petey Wheatstraw says:

    You know you’re in trouble when you take a shot across the bow, and you’re in a lifeboat.

    Julia Chestnut:

    That would seem to be the proximal cause, however, the insane display of brinksmanship and hostage taking that led to the austerity program probably did more to kill any faith in what backs our system than the actual legislation did. “Do what I say, or I’ll kill us all,” isn’t the kind of leadership that inspires confidence.

  7. ilsm says:

    ‘We the People’ figured it out.

    Washington is filled with liars and snake oil peddlers who are running the whole place down.

    Panic over a percent cut in the war profiteers’ bubble. Debt deal a sad joke on the people.

    Give us a break!

  8. mark says:

    “The pricing in of a weaker economy and softening earnings is a viable rationale, but I am hard pressed to explain why it finally took this week for investors to recognize this.”

    The stock market has not been a leading indicator for some time. It was a concurrent indicator for the last two recessions. The bond market has been the more reliable indicator during this time (although recently many pundits have lacked an understanding of the yield curve in a zero interest rate environment).

    I think that right now many people are looking to the wrong precedents, i.e., US 1937 or Japan 1996. This is global and comes while interest rates are already at the zero limit and gov’ts are instituting austerity measures in their fiscal budgets. As such, it looks more like the spring of 1931.

  9. m111ark says:

    Asking why “the market” does anything on any particular day is a dangerous endeavor. Get’s ya’ to thinking you can anticipate moves if one knows enough of what’s goin’ on. Personally, I prefer the 100 monkey excuse.

  10. DebbieSmith says:

    One of the frightening side effects of a major and long-term drop in the world’s equity markets is its impact on our pension plans. As interest rates remain at generational lows, pension plan managers are increasingly desperate to “stay ahead of the curve” and keep the future liabilities of pension plans funded as shown here:

    Both private and public pension plans are, on average, only 80 percent funded on a forward looking basis in the United States and the situation in Canada is just as dire with the CPPIB increasingly using equities to make up for low rates of return on bonds.

  11. JerseyCynic says:

    Grego658

    NEW YORK — Bank of New York Mellon Corp. said Thursday that it will charge its customers a fee to hold cash deposits over $50 million.

    The bank said it has seen such a large increase in deposits over the last month that it will charge a 0.13 percent fee to clients with “extraordinary high deposit levels.” Bank of New York Mellon ( BK – news – people ), which has $23.6 trillion in client assets under its custody, said customers have moved money to cash as a safe haven in the past month as investments like stocks and bonds have become increasingly volatile.

    http://www.forbes.com/feeds/ap/2011/08/04/general-financials-us-bank-of-new-york-deposits_8602175.html

  12. rktbrkr says:

    JC…the next obvious step for the Fed is to declare an official negative interest rate policy, or a national imposed tax on deposits of a certain sum.

    It’s what Switzerland has already been hinting heavily it will do if the Swiss franc remains “massively overvalued”.

    And yes, if you think that’s effectively nothing more than a wealth tax on the extremely rich, you’d be extremely right. Unfortunately, it might just be the incentive needed to get hoarded cash circulating through the economy once again.

    http://ftalphaville.ft.com/blog/2011/08/05/643796/introducing-the-2011-deposit-crisis/
    If not, welcome to an eternal and global “liquidity trap“.

  13. JerseyCynic says:

    dougc — is it a Sony?

    I’ll bring my “Best of George Carlin” for half-time

    MR. RITHOLTZ — you look good in purple

  14. DeDude says:

    I agree with Petey. The extend to which 60 tea-hadist in the house is running the show really didn’t come to light until the final deal was revealed. Even Grover Northquist was forced to pull back after his corporate handlers had allowed him to express a slight flicker of common sense. The extend to which the corporate creators of the tea party have created a monster they cannot control really was revealed, when we got a deal with no revenue enhancements. Everybody knows that we will have to implement stimulus in the short term and revenue increases in the long run, yet there is no way to get it in the current political situation.

  15. sailorman says:

    I agree with many here that the debt ceiling negotiations proved conclusively that our country is run by people that either don’t understand basic economics or put their personal interests over that of the country.

  16. rktbrkr says:

    I think the current situation is much worse than 2008 back then the US and Fed had lots of tools left in their toolboxes, right now the US is out of ammo, busted and the Fed has used all the tools they thought would work thru two QEs. Also the Euro zone has gotten much worser in the intervening months (even German industrial output is down – reported today)

    The Teabaggers are hellbent on setting up free-market Hoovervilles coast to coast ( I heard a Bloomberg talking head say he didn’t think the unemployed were “looking that hard” for work!).

    The banks seem to have cleaned up their credit card problems, don’t know about commercial loans but their foreclosure pipeline and shadow inventory is really the elephant in the room, eventually they’ll have to start recognizing those losses and there may be too much political heat to toss them any more lifelines this time.

    I think the dismal GDP report, the income revisions down the past two years and the Eurozone meltdown were triple fuses for the current excitement.

    Those income revisions reiterate the jobs problem and call into question the ability of US corps to keep increasing earning without increasing consumption.

  17. BusSchDean says:

    The word is “trust” or if you prefer “confidence.” Since an investment is a bet on a future outcome, can ANYONE not have less trust or confidence in decisions makers who influence what happens next? Though the debt ceiling itself was not the crucial in terms of our economic growth over the next few years the process certainly destroyed any remaining trust in a thoughtful, functioning political process. The private side has not had time to repair some of the lack of trust brought about with the credit crisis. The problem isn’t mechanical but rather, if you will, spiritual (in the secular sense of the word).

  18. MayorQuimby says:

    Anyone railing against tea party people who simply want to reign in a gvmt that is out of control is a loon.

    Talk to me when debt to GDP is at Greek levels and we lose reserve status and get to enjoy $5 gas.

    That is coming the more we deficit spend interest rates be damned.

    Children.

    There’s always an easy answer and justification for more debt.

    Boy, they must be giving out PhDs like cracker jack prizes.

    Grow the he’ll up before the whole country is wrecked.

  19. Raleighwood says:

    Now that the Kabuki Theater is over (for the moment) I guess Americans got back to realizing how tenuous their positions really were – and it scared them.

    Watched Jon Stewart at breakfast this morning – the online extended interview with Senator Dick Durbin – where Durbin had a few interesting things to say about the Supreme Court and the political financing that has thoroughly corrupted our government.

  20. danimal says:

    3. Debt Ceiling Crisis Averted: No one Wall Street really believed that DC would allow this to go bad. The ugly partisan, “country second” approach might have been painful to watch, but a deal got done and there was no default and no downgrade.

    Says who? Avoiding a default doesn not guarantee there won’t be a donwgrade.

  21. super_trooper says:

    BR, 15-25% from where we are today?
    We are already down 10% in the last 1-2- weeks, if you’re thinking 15-25%, we only got another 5-15% to go.

  22. danimal says:

    I do enjoy all the teaparty bashing on this site. You guys are all correct. I’m sure if they weren’t there, the regular dems and gop would’ve fixed everything and we’d be just fine by now.

    dedure said “Everybody knows that we will have to implement stimulus in the short term and revenue increases in the long run”

    We have a debt crisis, stimulus will not fix the underlying problem, just mask the symptoms (maybe). I know everyone wants tax rate increases, but that is no guarantee of a revenue increase ( a bigger peice of a smaller pie). You need economic expansion. I realize most will think of that as a catch 22. What we will need is debt destruction, but what we have done is follow the Japanese model.

    rhtbrkr said” The Teabaggers are hellbent on setting up free-market Hoovervilles ”

    Maybe the free market would help! We don’t have one now. To have the gov bailout an isolvent bank (ally) so they can afford to pay higher interest rates than your responsible local bank is the opposite of free market. Teabaggers don’t want unregulated markets, just the gov to stop picking winners and losers .

  23. rootless says:

    @MayorQuimby:

    You are advocating the economic collapse, a Greater Recession or a depression (e.g., a certain consequence of not raising the debt ceiling. This is what the Tea Party wanted) for what reason ever (driven by the delusion that will bring a free market paradise?), but you call others here loons and other names again and again? The question is who really is the lunatic here (no, not really a question).

  24. Petey Wheatstraw says:

    OT, (this could be completely off base, or completely obvious to others, but for me it is the pivotal question regarding what’s to come):

    The surge in the dollar index as a result of the market sell-off clearly illustrates the power of holding the world’s reserve currency (after all, cashed-out stocks must be “cashed” into USD). But the dollar, over it’s entire history, isn’t safe as a store of value, and despite banks recently charging major depositors to hold their cash, only a total fool would not diversify their dollar holdings in the current unstable environment.

    Where will the money go next? Right back into the burning barn that is the markets (to catch a bounce, if nothing else)? I doubt it (futures now at -47, but that means diddly in this environment).

    Ouick! Somebody name me some tangible (non-currency) assets (the more liquid, the better), that might hold value in a time of uncertainty . . .

    Oy.

    Also, I think that a strong dollar will absolutely crush what’s left of (middle class) consumer purchasing power. A strong dollar cannot settle our current debt (public or private). There are lots of folks already hurting, and they have been since 2008 (despite what anyone says about the misnamed “recession” having ended, and/or this market correction being a possible portent of another, different “recession”). Their numbers will swell and their situation will get worse. So far, they’ve been relatively easily ignored, but as their numbers come to include better educated and those used to living in the Leave It to Beaver, Easy Credit world, things are going to get very interesting.

    We live in interesting times.

  25. rootless says:

    I miss cognos. I would like to hear more about how this was just the normal recovery, how things were getting better and better, and the stock market was going up, up, up, buy the dips, and that everyone who doesn’t believe this was just an idiot.

  26. whskyjack says:

    And to add to the problem the cost of my morning gruel is up 25% over last month,
    In the last 2 years my morning oatmeal has went up from $1 a box to $ 2 a box. 50 cents of that in the last month.
    So I can’t even afford to be poor ;-0

    Jack

  27. Petey Wheatstraw says:

    rootless:

    I was just wondering where he’d gotten off to.

  28. rktbrkr says:

    Whiskey, but if you keep eating oatmeal breakfast you’ll be healthier than the bacon & eggs crowd! AND you’ll be getting those SocSec payments for many more years!

    Big bounce in the market after a meh jobs report, classic dead cat bounce? End of day selloff going into the weekend Euro-land drama?

  29. Greg0658 says:

    I gotta sign in:
    1st on that Bank of Mellon taxing cash on accounts of $50M at .0013cents .. I was wondering what the FDIC tax is for a bank like that .. break even or making a penny?

    2nd “increasingly using equities to make up for low rates of return on bonds” .. are you seeing the round’n’round of that dog chasing tail .. we loan corporations money on their terms via stocks – they decide midstream upstream downstream EVERYTHING .. M&A, dividends, CEOpay, layoffs, invest here or over there, advertising workcations …. stealthy disaster capitalism

    longtail gradual increase’g taxes .. leave something on the table .. no capitalist will ask for Robinhood outloud – but deep in Langones heart I heard him asking for it (for the one in Beckys oven and his own)
    http://video.cnbc.com/gallery/?video=3000035110

  30. diogeron says:

    @MayorQuimby:

    Just in case you missed this post from a few days ago, I thought it might be worth revisiting:

    Cause of Decline in U.S. Financial Position
    Posted By Barry Ritholtz On August 2, 2011 (2:30 pm) In Credit

    Interesting discussion from of all places Wikipedia:

    ~~~

    Both economic conditions and policy decisions significantly worsened the debt outlook since 2001, when large surpluses were forecast for the following decade by the CBO. The Pew Center reported in April 2011 the cause of a $12.7 trillion shift in the debt situation, from a 2001 CBO forecast of $2.3 trillion cumulative surplus by 2011 versus the estimated $10.4 trillion public debt in 2011. The major drivers were:

    Revenue declines due to two recessions, separate from the Bush tax cuts of 2001 and 2003: 28%
    Defense spending increases: 15%
    Bush tax cuts of 2001 and 2003: 13%
    Increases in net interest: 11%
    Other non-defense spending: 10%
    Other tax cuts: 8%
    Obama Stimulus: 6%
    Medicare Part D: 2%
    Other reasons: 7%[2]
    Similar analyses were reported by the New York Times in June 2009,[52] the Washington Post in April 2011[53] and the Center on Budget and Policy Priorities in May 2011.[54] Economist Paul Krugman wrote in May 2011: “What happened to the budget surplus the federal government had in 2000? The answer is, three main things. First, there were the Bush tax cuts, which added roughly $2 trillion to the national debt over the last decade. Second, there were the wars in Iraq and Afghanistan, which added an additional $1.1 trillion or so. And third was the Great Recession, which led both to a collapse in revenue and to a sharp rise in spending on unemployment insurance and other safety-net programs.”[55] A Bloomberg analysis in May 2011 attributed $2.0 trillion of the $9.3 trillion of public debt (20%) to additional military and intelligence spending since September 2001, plus another $45 billion annually in interest.[56]

    The extent to which the deficit and debt increases are a cause or effect of wider systemic problems is frequently debated. For example, in January 2008, then GAO Director David Walker pointed to four types of “deficits” that cause the overall fiscal problem: budget, trade, savings and leadership.[57]

    ~~~

    Sources:

    ^ NYT-America’s Sea of Red Ink was Years in the Making-June 2009
    ^ Washington Post-Running in the Red-April 2011
    ^ CBPP-Economic Downturn and Bush Policies Continue to Drive Large Projected Deficits-May 2011
    ^ NYT-Paul Krugman-The Unwisdom of Elites-May 2011
    ^ Bloomberg-Bin Laden Exacts Multitrillion-Dollar Toll on U.S. Taxpayer-May 2011
    ^ a b GAO-U.S. Financial Condition and Fiscal Future Briefing-David Walker-January 2008
    ^ CBO-Monthly Budget Review-October 2009
    Article taken from The Big Picture – http://www.ritholtz.com/blog
    URL to article: http://www.ritholtz.com/blog/2011/08/cause-of-decline-in-u-s-financial-position/

    Reply
    Forward

  31. Greg0658 says:

    T-party just wants the reins for THE JOB .. I haven’t heard or even believe that politicians will do what they promise after in the seat .. they all bend to money and to paraphrase Sen.Durbin “capital owns the place”

    our elected government:
    The White House CEO, The Senate Accountants & Lawyers, The House Corporation Managers
    our planted tree & root government: (no particular order)
    The Supreme Court, Pentagon, Attorney Generals, NASA, Labor Dept, CIA+FBI+NSA
    all the vested government employees and their ideals running the keyboards in the background

    we need another HOUSE of the PEOPLE (a realtime referendum machine) … I’m not sure what the initial % of Democracy ‘ism over Republic ‘ism we need at the get go … in my opionion we are nearly molded into the Idiocracy by the 4 Estates
    Idiocracy c2006
    http://www.imdb.com/title/tt0387808/

  32. ironman says:

    The big “new” factor is the data revisions to GDP and income – the sudden realization that things are quite a bit off from many thought they were.

    That said, the data is indicating that the selloff is a noise event, which means there’s a buying opportunity in the works once the smoke clears.

  33. JerseyCynic says:

    Greg0658 1st….good question.

    My concern:

    “Geller believes that the fee on deposits could soon trickle down to consumer deposits too. He said the same economic conditions and nervousness are impacting the American people as managers of pension funds.

    “At some point, the safety and security of an insured cash deposit becomes so appealing that people will be willing to pay a small premium for that,” said Geller.

    I – DON’T – THINK- SO mr. market rate analysist — Time to head over to the credit union or community bank

    Yesterday was my tipping point when I noticed the ATM w/d fee is up to $3 now and will no longer reimburse for non-bank atm withdrawals.

    A fee to take your money out of the bank

    A fee to keep your money in the bank

    “Whenever a situation develops to its extreme, it is bound to turn around and become its opposite”
    ~Frank Capra – http://thinkexist.com/quotes/with/keyword/turn_around/

  34. JerseyCynic says:

    Hey maybe the solar storm that is headed our way today will wipe out all of the markets (electronic trading ones anyway) and we can start all over again.

    DAMN it’s going to be cloudy on the east cost so we won’t get to see any possible auroras

    http://www.washingtonpost.com/blogs/capital-weather-gang/post/significant-solar-storm-headed-to-earth/2011/08/04/gIQA9XzquI_blog.html

  35. Chief Tomahawk says:

    BR, I forget the chartist CNBC had on yesterday, but he said the “key chart” he was watching most closely showed the surge in CDS spreads for Germany, the UK, and France. Why was this important? In his opinion this marked a change from containment of the PIIGS to contagion to the strongest economies of Europe.

  36. MayorQuimby says:

    @rootless-

    I’ve never been less impressed with a group of people online.

    Really.

    You think you can eat your selves skinny. You think you can borrow yourselves to prosperity. It’s insane. Really, take a good look in the mirror and think about ridiculous what you’re proposing and supporting is.

    You’ve ALREADY BORROWED FIFTEEN TRILLION. It cannot work. The economy needs to grow its own money by producing and with a balanced budget.

    I’m not cheering for a collapse, I’m trying to save you all from a complete unwinding of the entire western economic system.

  37. [...] is Barry's economists' getaway up in Maine going?  What do economists dream about in the wee small hours of the night?  Do they [...]

  38. wally says:

    “You think you can borrow yourselves to prosperity.”

    You think you can contract yourself to growth. That’s insane.

  39. DeDude says:

    @danimal;

    “We have a debt crisis”

    What makes the debt a crisis at this time? How do you define when debt goes from being a problem to being a “crisis”. To me the debt becomes a crisis when the interest payments begin to swallow a large proportion of the economy. But currently we are paying less in interest than we did most of the previous 25 years. Only 1.6% of GDP goes to interest payments on the national debt now, whereas most of the previous 25 years we had much higher payments of over 3% of GDP (http://moneyland.time.com/2011/07/15/the-u-s-is-not-drowning-in-debt/)

    To me the real crisis is unemployment. Calculated risk has a number of postings and graphs regarding unemployment today (http://www.calculatedriskblog.com/). It is clear that for almost all parameters except the top number for U3 unemployment we are much worse off that we have been since the great depression.

    I have yet to see any rational argument for why we should be more concerned about our minor debt problem than our unprecedented huge unemployment problem. Now if the tea-hadists were fighting for debt-destruction I would take them serious. However, what they were demanding when they tied a ticking bomb around the neck of the economy was job-destruction.

  40. Greg0658 says:

    Dedude posts “How do you define when debt goes from being a problem to being a crisis” .. good question ..

    I agree employment is our primary problem .. if our country began producing for export more than it imports .. or equalized laboring at unproductive efforts towards a real balance * .. many of our problems would be gone

    the questions answer – in a low interest rate environment – its more fair play across all sectors and an “eyes not bigger than the wallet” education for all … nearly free money HARDLY exists for most … we need more doctors not MBAs .. and this policy can be Inflation waste producing until the Equalizer Deflation hits

    in an increasing interest rate environment (or the threat of) .. its a gun to the head of policy setters .. or just a road to ruin

    *coda – another good one in this country – we are full of fluffy job functions that burn world resources with no export value

  41. [...] previously noted last month, I am sitting in 50% bonds and cash, the rest in high quality dividend paying equities with a [...]