Stocks have been plummeting. Last week was brutal for stock investors and the damage has continued. I saw some talk about a “turnaround Tuesday”. And it looked for a while like the markets were turning around.
The Dow was up over 400 points at one time during the day. But the people calling for a turnaround Tuesday got a bigger turnaround than they anticipated. In the last hour of trading, all gains were wiped out, plus some. The Dow ended up down over 200 points.
If the market had opened down 200 points and it finished that way at the end of the day, then it probably wouldn’t have seemed so bad. But this was another 600 point swing in one day.
I don’t believe this is just a brief correction. I wrote recently about how this is just a bubble bursting, as we should expect based on the Austrian Business Cycle Theory.
Many people, including some presidential candidates, are blaming China for the problem. But if U.S. markets are reacting this dramatically because of China, then U.S. investors better watch out because things are going to get a whole lot worse in China too.
Of course, China is not to blame for the underlying problems. China and the U.S. are similar. They have both experienced artificial booms due to bad government policies and loose monetary policies from their respective central banks. The problems in China are just worse and more magnified.
It is also interesting that most of the major world players are currently in a state of loose monetary policy. The one exception is the United States. The Fed ended QE3 back in October 2014. It has been almost 10 months.
Since the stock market bubble was blown up as a result of the Fed’s easy money policies since late 2008, it should not be a surprise that the bubble is deflating. This is what happens when the easy money dries up.
It should be more concerning for China, Japan, and much of Western Europe. These places still have easy money flowing and yet still face recessionary conditions with falling markets.
For example, the Bank of Japan has been creating new money out of thin air on an unprecedented scale. The debt keeps growing to huge levels there as well. Yet the economy is basically in a recession, even with the easy money. How bad will it get when the new money entering the economy slows down or stops?
Some U.S. investors are saying this is a healthy correction. I say it is healthy only in the sense that it is revealing the prior malinvestment. But I don’t take this as a signal to buy.
I advocate a permanent portfolio, but beyond this, I would be mostly out of stocks. If I had to speculate right now, I would be betting on lower markets.
This isn’t to say it will be a free fall. We will probably see some “up” days soon. There might be some really big “up” days. But the volatility will remain and overall we should be very bearish on stocks right now.
There is talk of the Fed delaying a rate hike in September, but the rate hike is mostly meaningless anyway. I have already read predictions of a new round of quantitative easing (money creation). This is what we really have to watch out for.
If the Fed does come up with any kind of new money creation scheme with any significance, then this could change the whole investing game quickly. If it is significant enough, we will be watching gold closely.
Stay tuned for more roller coaster rides.