As long as debt’s too high, get used to the market gyrations

So…the markets.

As I begin writing this — and the only certainty right now is that things are uncertain — the Dow is down another 2 percent and the Nasdaq 3 percent. By now, all but forgotten are the morning’s jobs numbers: a small reduction in the unemployment rate, which is either a) worse than it looks because a whole lot of people have simply given up looking for work, or b) slightly better than it looks because the job-creation number is lower than it should be due to the Minnesota government shutdown.

It is overly simplistic to attribute the steep falls Tuesday, Thursday and today to the debt-ceiling deal. Mainly because a reduction of $7 billion in federal spending (a fraction of 1 percent of gross domestic product) between now and October 2012 isn’t the reason investors are worried about another recession. And it’s not a sign that investors think Washington is overly dysfunctional right now — otherwise, they wouldn’t be rushing to buy Treasurys and pushing down yields the way they are.

Or do you really think the markets would have reacted better to higher taxes on millionaires, billionaires, oil companies and corporate jet owners? Or a “clean” debt-ceiling increase?

Besides the yields for Treasurys, I think there are two other important data points right now. They’re the yields for Italian and Spanish 10-year notes, both of which have passed and remained above the 6 percent mark during the past week. The worry is that these countries — and the big banks that hold big chunks of their debt — are heading to bailout territory, and that no one can bail them out.

To understand why, consider the relative sizes of these countries and those which have already received bailouts: Greece, Ireland and Portugal. Spain’s GDP in 2010 was $1.4 trillion, and Italy’s $2.1 trillion.

The combined GDPs of Greece, Ireland and Portugal: $738 billion. Even Belgium, which is also making some people jittery, is about the size of Ireland and Portugal combined.

Italy represents about one-eighth of the entire European Union’s economic output, and Spain about one-twelfth. Together, they surpass that of Germany, the country called upon to bail out the first three little PIIGS.

All of these countries’ debt-to-GDP ratios, with the exception of Spain, are near or above 100 percent. Spain and Italy together have public debt of more than $4 trillion. They’re simply too big to bail out, which is even worse than too big to fail.

That, and the continued sluggishness of the U.S. economy, is primarily what’s driving down equities markets. And both problems are related to the deleveraging that the governments of major industrialized nations have yet to undertake.

The good news? Since I started writing this post, the Dow has recovered so that it’s actually up 1 percent and Nasdaq just above break-even. That suggests to me that people have money to spend when they see bargains, and there surely are a few after the routs of the past week.

But stock prices are ultimately a reflection of perceived future profitability. As long as we are undergoing — or, worse, trying to delay — the needed deleveraging, there’s going to be a lot of economic fear and a lot of bouncing around by the markets yet to go.

– By Kyle Wingfield

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89 comments Add your comment

Hillbilly D

August 5th, 2011
1:06 pm

The stock market and the real economy are two different things, in my opinion. The stock market is a lot like a poker game. There are winners and there are losers but the same amount of money leaves the table that came to it, just in different pockets.

MarkV

August 5th, 2011
1:07 pm

Kyle,
Thank you for one article I can agree with wholeheartedly.

JDW

August 5th, 2011
1:09 pm

One of the things that constantly amazes me about pundits, politicians and people in general is they have no clue what actually drives a market. You always hear the Fundamentalists talk about earnings, US debt, or PE ratios. Then you have the Technicalists (AKA Snake Oil Salesmen) that want to talk about support levels and Elliott waves.

Folks it is real simple…more people want to buy than sell the price rises…more people want to sell than buy the price goes down. It makes no different WHY those decisions are made simply that they ARE made.

Now here is the important part, people drastically underestimate the impact of pessimistic journalists, Teahidist politicians and all other sources of angst in our media addled society on markets. It scares them and makes them do dumb things like sell perfectly good stocks, coming off record earnings, at historical low PE’s (read cash flow valuation), save instead of spend, and horde cash instead of hire.

So as long as our journalists, politicians an other lunatic fringes are insistent on sowing FUD (Fear, Uncertainty and Doubt) you can be sure volatility will continue. Should those groups knock off the Chicken Little act things would get better quick.

ByteMe

August 5th, 2011
1:13 pm

The stock market is about corporate profits, which have little to do with government deleveraging and everything to do with consumer deleveraging. Treasury yields have everything to do with government deleveraging and the bond market — which is usually smarter than the equities market — as you rightly noted is continuing to give a vote of confidence to our government… so maybe all is not as bad as it seems yet.

And “bouncing around” is what you get during a secular bear market. That’s one of its basic definitions.

Alice

August 5th, 2011
1:13 pm

So JDW, what you’re saying is when Kyle Wingfield talks, everyone listens. Hmmmm, interesting.

StevenH

August 5th, 2011
1:18 pm

Hillbilly is exactly right. When the analysts say the market has lost $2T in eight days, they really mean; $2T changed hands! The investment banks (Goldman Sachs) steer the markets to swing in whatever direction they choose. It’s illegal for an investor to buy his picks within 72 hours of tooting them. GS, on the other hand, can “recommend” a stock to their investors knowing full well they’ll be shorting or dumping it. Greed is the driving force behind investment firms, and casinos can only salivate at the house advantage these brokerages have created for themselves.

Has Goldman polished that revolving door to the Whitehouse this week?

ByteMe

August 5th, 2011
1:26 pm

When the analysts say the market has lost $2T in eight days, they really mean; $2T changed hands!

No, that’s not right. What they’re saying is that the aggregate current value of the equities that trade in a certain set of USA markets and are held by someone at a single moment in time is now $2T lower than it was at a single point in time a few hours/days earlier.

Ain’t computers amazing for being able to keep up with that?

Kyle Wingfield

August 5th, 2011
1:29 pm

JDW @ 1:09: “more people want to buy than sell the price rises…more people want to sell than buy the price goes down”

The problem with your line of thinking, or at least the way you’ve described it here, is that you’ve presupposed the upward or downward movement of the price. The price has to move in one direction or the other before what you’ve described could be true, and that movement usually happens for a reason (or, in more normal conditions, a plethora of reasons for the plethora of traders).

The pundits you obviously disdain are simply trying to explain that movement. If you think those explanations drive investors’ decisions, I’d say you have a pretty low opinion of investors.

JDW

August 5th, 2011
1:30 pm

Alice wrote…”So JDW, what you’re saying is when Kyle Wingfield talks, everyone listens. Hmmmm, interesting.”

Ahhh but if that were only true. No Kyle is a symptom and an example of a much larger universe of problems. He does however do his fair share of myth perpetuation. Others that enjoy larger bully pulpits bear a much larger responsibility.

Say for instance right wing politicians that think it is ok to create FUD regarding debts ALREADY INCURRED rather than actually working to fix the budgeting problems that created the debt.

Kyle Wingfield

August 5th, 2011
1:32 pm

ByteMe @ 1:13: But, as you’ve noted before, the current problems have much to do with credit. And as long as the banks that provide this credit are saddled (collectively) with trillions of dollars of public debt from governments whose ability to pay it all back is looking less and less credible, they’re less and less able to extend said credit.

JDW

August 5th, 2011
1:33 pm

Kyle wrote…”The problem with your line of thinking, or at least the way you’ve described it here, is that you’ve presupposed the upward or downward movement of the price.”

See there in lies the misunderstanding…there is no presupposed movement. The act of buying or selling CREATES the movement. The price you see for a given stock is the price at which the last transaction occured. No movement occurs until the next transaction.

Kyle Wingfield

August 5th, 2011
1:36 pm

JDW: Prices change every second of the trading day. There is no price from which all decisions flow. The “price at which the last transaction occurred” was established for a reason.

JDW

August 5th, 2011
1:40 pm

I missed this one Kyle wrote “I’d say you have a pretty low opinion of investors”

Yes, the average investor is completely unequipped to make market based buy/sell decisions, and that is based on 30 years hard evidence. The average investor should never try to time the market or make decisions based on current events. They should buy their choice of funds and let the market take its course over at least a 5 year time horizon.

JDW

August 5th, 2011
1:44 pm

Again Kyle you don’t understand how it works. What causes the price to change is the last transaction. It was established by what a Marketmaker was willing pay for a stock or sell a stock.

The only reason that a price is established is in fact the last transaction.

Kyle Wingfield

August 5th, 2011
1:47 pm

“The only reason that a price is established is in fact the last transaction.”

So why does the price ever change? Or does that bring us back to blaming the pundits?

JDW

August 5th, 2011
1:51 pm

Kyle wrote…”So why does the price ever change?”

The law of supply and demand.

Kyle Wingfield

August 5th, 2011
1:53 pm

And why does demand change?

JDW

August 5th, 2011
1:53 pm

Each stock has a variety of Marketmakers. Those Marketmakers publish the prices at which they are willing to buy and sell and the amounts they will take at that price.

When an order comes in they simply go down the line until the order is filled. The published price is the one that executed last.

Kyle Wingfield

August 5th, 2011
1:56 pm

You still haven’t explained why “an order comes in.”

Joe the Plutocrat

August 5th, 2011
1:57 pm

KW, you should have shut down the thread after Hillbilly D’s post at 1:06. the stock market is no different than any “market”. what was once a measure of business/vis a vis the “value” of a company when compared to other companies in the market (does it SUPPLY goods and services as DEMANDED by the market?) has become a casino for a handful of gamblers (speculators). in addition, in order for these Wall Street cowboys to ‘gamble’ the Federal Reserve Bank must make money “cheap”. back to housing: when interest rates dropped, air was pumped into the housing market (ever heard of INFLATION?). this invited speculators at the Main Street level (”flipping” and fraud), and Wall Street level (buy as much bad loans as lenders – big and small – approved, securitize the loans and sell them to others, AND insure yourself agains lost via the derivitive scam). then, when the “pot” gets to be about $800 or $900 billion, and the hand is “called” – claim you are “too big to fail” and the US Taxpayer will cover your losses. AS HD points out, that (TARP) money didn’t disappear; it simply went to the the players with the good cards (and ability to bluff a bad hand); aka Goldman Sachs. check this out; my IRA has lost 2/3 its value since ‘08. my home has lost about 40% of its value during the same period; and I don’t “gamble”.

Lil' Barry Bailout (Revised Downward)

August 5th, 2011
1:59 pm

Most shares are traded by professional investors working for large institutions, not by individuals. Although I agree with much of what JDW says above, professional investors are not frightened into selling by “teahadist” politicians. That’s just your hatred of your Idiot Messiah’s betters showing through.

JDW

August 5th, 2011
2:00 pm

Kyle wrote “And why does demand change?”

You have to break it into two parts long term and short term.

Long term you would hope a companies fundamentals would rule the day but in practice if that were true Warren Buffett would not be a rich guy. He has made his fortune finding situations where a companies value is not reflected properly by the market, to his way of thinking, and changing the equation.

Now to the short term, which was your topic…volatility. Almost always 100% hype. A news or other event creates an imbalance in the flow of orders and supply and demand kicks in. Then remember the Marketmakers? They shoot the average investors like fish in a barrel…that’s why they make the big bucks.

JDW

August 5th, 2011
2:02 pm

@ Lil Barry…wonders will never cease…and I aggree the Pro’s aren’t spooked they are taking advantage of those who are.

JDW

August 5th, 2011
2:03 pm

Kyle wrote…”You still haven’t explained why “an order comes in.”

Because someone picked up the phone called thier broker and said sell or buy.

Kyle Wingfield

August 5th, 2011
2:07 pm

JDW: The only part of your 2 p.m. that I’d disagree with is the “almost always 100% hype” part. Some news and other events have more substance than others.

But I would point out that, whether it’s fundamentals or finding undervalued companies or news or some other event, these are all things that cause demand to change.

If you can agree with that, I think we can shake on this one.

Joe the Plutocrat

August 5th, 2011
2:12 pm

JDW, has anyone (besides Glenn Beck) broached the subject of a “gold bubble”? do the rubes who are buying gold actually think it has ANY value? it’s like the housing market; it “bubbled” because speculators and individual investors foolishly believed they could “flip” a property, when in truth the MORTGAGE was the asset, not the property. see if you can follow this; GOLD (Au) has no value; the “value” is in the increased price and as we saw yesterday, when the stock market hiccupped, so did the price of gold.

JDW

August 5th, 2011
2:15 pm

Lil Barry wrote…”Most shares are traded by professional investors working for large institutions, not by individuals.”

Shares yes trades no. Individual trades are about 60% of the total last time I looked. Share volume is much more institutional. But remember that many of those institutions are acting on orders from investors, say a mutual fund, or they are hedging…those guys drive volume but in many cases they will take pennies per share net and go have a cocktail. The volume that really drives price shifts are the market orders…might as well walk around with a kick me sign.

JDW

August 5th, 2011
2:17 pm

Kyle wrote, “Some news and other events have more substance than others.”

Agreed, some things have more substance.

JDW

August 5th, 2011
2:19 pm

@Joe…Gold is in a different world right now. I thought about shorting it at $1200 and thankfully decided I have better sense. Again it is supply and demand. This time on the upside. I have an inkling that some of this is being caused by governments diversifying thier dollars.

Lil' Barry Bailout (Revised Downward)

August 5th, 2011
2:25 pm

Obozo will be feasting and partying at a $71,000 per couple dinner while over 45 million regular Americans struggle to get by on food stamps. That would be your lead story on the news tonight, ‘cept the media isn’t so interested in bashing their Idiot Messiah.

Joe the Plutocrat

August 5th, 2011
2:26 pm

JDW, I disagree (as best I can) re: gold. I think it’s solely “demand” and has nothing to do with “supply”. (don’t tell anyone), but I find it hard to believe the gold beng sold at $1600 actually exists; as if Armeggedon does arrive and people are going to line up (as they did at the Bailey Building & Loan in “It’s A Wonderful Life”) and collect their gold. I am not some looney “survivalist” but lets be honest, bottle water ($3/case), 00 buckshot ($250/500 rounds), and canned food (2/$1 “with your Kroger Plus Card”) are far better investments. This is perhaps the only “light at the end of the tunnel” – namely that the real players can’t kill the goose that lays the golden eggs (John Q. Public).

Hillbilly D

August 5th, 2011
2:26 pm

JDW, has anyone (besides Glenn Beck) broached the subject of a “gold bubble”?

From the outside looking in, it looks like there is a permanent speculative bubble, just moving from place to place. It’s been in oil, housing, gold, etc. Wish they would just find themselves a good poker game and leave the rest of us alone.

It is jobs not the debt, stupid.

August 5th, 2011
2:30 pm

Debt schmet.

The market is gyrating because nobody is hiring and the last 2-3 weeks proved that (conservative) leadership is more interested in political gain than economic gain. We don’t need austerity at this time. We need stimulus. Austerity has been practiced all over Europe for the last 12-18 months and economies are cratering!!!!!!!!

The last, stripped-down stimulus didn’t do the job completely. Businesses are sitting on cash because people aren’t buying.

Look at FDR’s response to the great depression. When the federal government was helping to create jobs with massive public infrastructure investment the economy was growing. When FDR decided to cut spending in the middle of an economic downturn the results were disastrous.

When FDR decided to move away from big government spending policies that saw the unemployment rate fall from a high of 25% in 1933 to 14% by 1937, he launched one of the sharpest economic downturns in American history — the “Roosevelt Recession” of 1937-38. In just a few short months, the GDP declined by 13 percent; industrial production by 33 percent; wages by 35 percent and an estimated four million people lost their jobs.

FDR and Congress reversed course and passed a massive stimulus bill to put people back to work and repaired the damage to the Depression-era economy. Within three months growth had returned and the economy was back on track.

People who collect unemployment spend that money. They don’t add it to their balance sheets. Construction workers working on public infrastructure projects (or merely leaning on their shovels in the shade) spend that money.

Tax breaks for large corporations don’t result in more jobs. It doesn’t matter how many times Rush and Hannity say it does. It is not true.

Companies hoard cash during recessions. The unemployed and blue collar employees DO NOT hoard cash during recessions. You want the economy to pick up? Make sure people who will spend money get some money to spend.

Look at GE, Apple, Google, Oracle, Microsoft. They are swimming in cash and not using it to hire.

Joe the Plutocrat

August 5th, 2011
2:31 pm

Li’l Barry, vent much? do you actually think ANY OF THIS has to do with Obama, his re-election fundraising, or food stamps? we have been a bedt-fueled economy for the past 30 years. Remember the “deficits don’t matter” mantra of the Reagan Administration? Our economy mirrors the housing bubble, because Wall Street is a “bubble, bust, bailout” system. If anything, Obama is no better or worse than any of his predecesors. You can not like him because he’s a Democrat or not like him because he went to Harvard, or not like him because he has big ears, but to think he has the intelligence to plan and execute such a conspiracy is lunacy. don’t get me wrong, somebody planned this, but Obama is like Oswald in Dallas, he’s a patsy at best.

I Report (-: You Whine )-: Thee Magnificent!!! mmm, mmmm, mmmmm! Just sayin...

August 5th, 2011
2:34 pm

They could be jittery because we have a total clown in the office of the Presidency, no?

Joe the Plutocrat

August 5th, 2011
2:40 pm

I Report, or, as George Bailey noted in the aforementioned “It’s A Wonderful Life”; “…because we’re panicking and he’s (old man Potter) not…”? if you feel good about yourself because you didn’t vote for Obama and you think he’s a “clown” consider America a circus and start humming “Send in the Clowns”. Clowns are not the reason the circus exists (or people attend the circus); the circus is the reason the clown exists (distract viewers when acts change, or divert attention from a accident). Ergo, Obama may be a clown, but so was Bush, Clinton, Bush 41, Reagan, et al…

JF McNamara

August 5th, 2011
2:48 pm

The markets are jittery because they know that their lifeline won’t be able to help them out anymore. If they need help and the Tea Party says no, then they are hung out to dry. No more stimulus packages. No more bail out money unless they hide it through the Fed.

No matter what rhetoric people push, government spending is a key driver of our economy. Reduce that and reduce our growth. Europe is a big problem, but American consumers largely aren’t holding foreign debt. A prolonged slowdown with no stimulus would stagnate us. That’s bad news.

Either way, we’ll see next week. Its probably just a trading thing. Traders and Hedge funds sell any uncertainty.

It is jobs not the debt, stupid.

August 5th, 2011
2:51 pm

“No matter what rhetoric people push, government spending is a key driver of our economy. Reduce that and reduce our growth.”

Amen, JF McNamara!!!!!!!!!!!!!

Cut government spending during a recession, things don’t improve.

Finn McCool

August 5th, 2011
3:03 pm

Now here is the important part, people drastically underestimate the impact of pessimistic journalists, Teahidist politicians and all other sources of angst in our media addled society on markets.

Um, now who isn’t being realistic? You really think day traders and people popping in at lunch time to trade on rumors and fear is enough activity to change the market?

Employees in the trading houses that represent the vast majority of market trades aren’t tuning into the Street.com or whatever popular show/blog/magazine/podcast to figure out what to do next. They aren’t swayed by fear or popular thinking, they are making the market. They determine where the next bubble will be and when things will look rosy for the small investor and know when the small investor isn’t looking (which means it’s time to swipe all the small investor’s money off the table while they are distracted.)

Wake up. Read some Matt Taibbi or somebody with a clue!

saywhat?

August 5th, 2011
3:04 pm

Rob the rich (in the form of higher taxes, closed loopholes etc), give to the poor (unemployment insurance, public works projects, domestic spending), and before long, all that was robbed will be returned twofold (in the form of increased consumer demand, resulting in greater business/investment profits, as a result of growing economy.)When it is no longer necessary to give to the poor, use revenues to pay down the debt.

The increased consumer demand and growing economy will more that replace business revenue losses due to taxes. Think of it as the reverse Laffer curve.

Ayn Rant

August 5th, 2011
3:13 pm

Kyle, markets fluctuate, as J. P. Morgan noted in 1908. Nothing scares investors and sensible citizens more than the thought of trimming the federal deficit, which is 10% of our GDP, without a plan for, or a hope of, replacing the jobs and consumer spending that the deficit supports.

Big Business is rumored to be sitting on $1.5 trillion waiting for an uptick in consumer demand. The foreign sovereign funds have $4 trillion dollar-denominated accounts parked somewhere awaiting the opportunity for loss-free investment or exchange. And, our Congress has just passed a hare-brained plan to cut our GDP. Hardly, an incentive to coax the parked trillions of dollars into job-creating investment in America, would you think?

Republican/Tea Party slogans and propaganda fool unthinking people but not Investors and investment managers. The purpose of the Republican BS is not to cut the deficit or create jobs; it’s to keep taxes low for the ultra-rich, and keep subsidies and tax breaks high for Big Business. The middle class can dwindle away; the poor can go to hell.

marko

August 5th, 2011
3:16 pm

the whole dismal planet sits on the edge of financial collapse. Kyle seems mystified that global markets aren’t leaping for joy over the Tea Parties smashing victory. Kyle and his Tea party pals remind me of the fleas on an elephants back. They just sit back and marvel over all the dust they make.

itsmeagain

August 5th, 2011
3:24 pm

Ok, i’m gonna play a game. Before i read the article, i’m gonna guess that its a rant about how the market will swing due to something Democrats have done or will do… Lets see if i’m right

MarkV

August 5th, 2011
3:29 pm

Ayn Rant @ 3:13 pm: “The purpose of the Republican BS is not to cut the deficit or create jobs; it’s to keep taxes low for the ultra-rich, and keep subsidies and tax breaks high for Big Business.”

Perhaps something else should be added to the purpose: To make sure that Obama does not succeed in anything.

Kyle Wingfield

August 5th, 2011
3:31 pm

saywhat @ 3:04: Yes, because spending an extra $800 billion *without* paying for it worked so well — spending another, say, $800 billion with one hand while taking it out of the economy with the other hand is bound to be even better!

Ayn @ 3:13, meanwhile, still believes that growing government spending more slowly means “cutting our GDP.”

And now I’ll play a game: Whatever I actually wrote, itsmeagain will claim I blamed it on the Democrats.

Lil' Barry Bailout (Revised Downward)

August 5th, 2011
3:35 pm

When Obozo succeeds, America fails. That’s his plan.

Kyle Wingfield

August 5th, 2011
3:35 pm

Btw, could it be that *Italy* will have a balanced-budget amendment to its constitution before we do?

http://online.wsj.com/article/BT-CO-20110805-715008.html

Lil' Barry Bailout (Revised Downward)

August 5th, 2011
3:38 pm

“government spending is a key driver of our economy”
——-

If only they didn’t have to first take the money from the more productive private sector first!

I Report (-: You Whine )-: Thee Magnificent!!! mmm, mmmm, mmmmm! Just sayin...

August 5th, 2011
3:40 pm

The libs like to quote Thomas Jefferson, so chew on this-

“Suppose that a majority, on the first day of the year 1794, had borrowed a sum of money equal to the fee-simple value of the State, and to have consumed it in eating, drinking and making merry in their day; or if you please, quarrelling and fighting with their unoffending neighbors.”

If that generation tried to pass that debt to the next generation, “Every one will say no,” Jefferson wrote, “… the laws of nature impose no obligation on them to pay this debt. And although, like some other natural rights, this has not yet entered into any declaration of rights, it is no less a law, and ought to be acted on by honest governments.”

If we only had an honest government….

By the way, nowadays dummycrats are “eating, drinking and snorting” their way through other people’s money, just sayin…

Road Scholar

August 5th, 2011
3:45 pm

lil barry: What do you suppose rich people should do with all their money, esp after the tax break?