Yesterday I wrote that I expected the DOW to decline by at least another 1000 points on 2/28/2020. I admit when I am wrong and in this case I was. It only declined by end of day by -357 points.
Sometime during the day the unofficial damage control team jumped in and stopped the decline from being worse. Maybe a few large investors and/or algorithms decided to “buy the dip” with a low success rate. The result was a truly volatile day. When I say volatile, I mean look at a graph of the day and it looks like a raging fire.
I mentioned in my last article how I expect panic to set in when the market drops around 4000 points. The truth is, when you factor in the last two days of the previous week, the market has dropped very close to that number.
Media reporting. If you pay attention to something in financial media, you notice a trend. When the market increases by, say 1000 points, they say it rose by 1000 points. When the market declines, corporate media states the decline as a percentage, making the number seem smaller. This is one reason more panic has not taken hold. You will also notice that overall, they keep a narrow focus on daily changes when the market declines and a wider focus as it rises. Such as, “The market declined 5% today.” Yet they will say, “The market increased by 3000 points over the past month.”
Using real numbers. You will notice that when I state numbers going up or down, I use the actual numbers, not percentages. The straight numbers are far more illustrative and continuous. Percentages change, as is obvious. If the market is at 30,000 and suffers a sudden sharp drop of 1500 points, corporate media will report that as a 5% drop. The lower the numbers go, the same drop will indicate a much stronger percentage. Thus, when the market declines by 4000 points in a single week, I will state the market declined by 4000 points in a single week.
You’ll find lots of other tricks the media uses. Like stating a percentage drop over a longer time frame to use the largest beginning number to make the drop seem smaller.
The literal truth is that the nearly 4000 point drop in the past week represents trillions of dollars lost from the stock market.
Another truth is that investors have used so much of their liquidity to boost the market that they have no liquidity remaining. This is why the Fed has stepped in to bail out the Repo market and expand the balance sheet. They are being the cavalry for the rich.
Gold decline. One indicator of loss of liquidity is that gold has actually declined in price over the past few days as well, losing $66.92 per ounce over the previous week. However, it is still higher than one year ago by $293 per ounce. The reason for the drop over the past week is because of larger investors being forced to sell gold reserves for liquidity they have lost in stocks.
Personally, I rather hope the gold decline continues for at least a few days, so that smaller investors can afford to buy in before it rises again.
Bond market. In the same time frame as the stock decline, the total bond market has seen a dramatic rise. So a lot of investments have been moved into what is seen as safer territory. How safe that is would depend on what bonds that money is moved into. Keep in mind that bonds are a longer term arrangement, so investors are settling in for a long decline.
Bonds are debts. Something else to keep in mind is that bonds are loans taken on by companies. For investors bonds are safer than stocks. However, for corporations bonds are debts which must be paid out in the future. They may help a company in the short term but in the long term they are a liability.
So, again, I admit that I was wrong. The market did not decline by 1000 points on Friday. I stand by my statement that when it reaches an actual 4000 point cumulative drop, panic will set in. The market is nearly at that 4000 point mark now. In addition, with an extended decline lasting more than a week and gold also declining, this indicates investors are liquidating their positions. The combination of stock market losses and new debt taken on through bond issuance places many companies in long term debt which will take a serious toll on future profits.
Bankruptcies coming. This much of a decline in a short period will result in announcements of corporate and possibly personal bankruptcies starting next week. As those bankruptcies are announced, this will further depress the market.
Social impact. The obvious social impact is that as companies lose money and take on more debt, they will begin announcing further layoffs and closures. Expect announcements of corporate restructuring, a vague term I detest which means reducing wages, eliminating services and consolidating operations. As layoffs occur, more workers will cash out retirement accounts, causing more stress on the market. Consumer spending will decrease.
This isn’t likely to end soon. Once this trend has begun and continued for over a week with similar and related events in other countries, there is no reason to believe it will simply go away. I expect the decline to continue next week. For how long is anyone’s guess. I am of the opinion that the market will not rise near 30,000 again for years. If it does, it will be through some sleight of hand not immediately evident. There will be attempts at a negative interest rate, which will fail. For now, it may be best to keep cash on hand and wait to see what happens.