In recent weeks, the U.S. stock market has experienced extreme fluctuations, reflecting deep-rooted fears about the economy. Panic selling from last week was quickly replaced by panic buying on Monday, revealing how years of Federal Reserve interventions have ingrained a risky investment mentality in the market.
The Dow Jones Industrial Average (DJIA) surged by an impressive 1,290 points, marking its largest single-day increase on record. This brings to question whether the extensive economic damage caused by measures to contain the coronavirus can be mitigated by what former New York Fed President Benjamin Strong once termed a “coup de whiskey.” Our skepticism remains strong.
However, it is likely that the Fed’s stimulus measures will only exacerbate the disparity between soaring asset prices and faltering economic indicators. Fed Chairman Powell is acutely aware of this reality but proceeded with significant actions nonetheless.
Following a teleconference with key global leaders on Tuesday, Powell lowered the federal funds rate by 50 basis points, adjusting the target range to between 1% and 1.25%. Ironically, the move produced the opposite effect of what was intended.
Rather than rising, U.S. stock indexes plummeted, with the DJIA dropping a staggering 785 points. Here’s the reason for this downturn…
The rate cut signified fear, and investors quickly recognized it, circling back like a pack of wild hyenas. While Powell can increase the money supply and credit availability, he cannot reverse the economic devastation inflicted by a global halt aimed at curbing the coronavirus. A mere 50 basis point cut doesn’t suffice.
“This Sucker’s Going Down”
In America, bull markets, much like myths and legends, are hard to extinguish. By Wednesday, optimism returned as investors began bidding up share prices, reminiscent of the tulip mania in the 17th century. The DJIA shot up 1,173 points, surpassing the 27,000 mark once again.
Could it be that the bull market isn’t over after all? Is Dow 30,000 back in consideration?
Not quite. On Thursday, uncertainty prevailed, and the DJIA tumbled by 969 points.
The truth is that these erratic market movements do not indicate a robust market. They reflect a troubling environment that, based on sound reasoning, should be deflating, yet is being artificially propped up by the Fed’s desperate measures.
Remember, Chair Powell’s primary obligation is to the member banks of the Federal Reserve system. When his actions align with the Fed’s overarching goal of continuous credit creation, he will heed the calls from President Trump.
The real development that investors should pay attention to is the yield on the 10-Year Treasury Note, which fell below 1% for the first time ever. This trend signals that Treasury investors recognize the ominous message from late 2008: “This sucker’s going down.”
Destruction By Definition
The fear of coronavirus is spreading globally — this week, it even reached our own community. The Los Angeles County Department of Public Health declared a local health emergency on Wednesday.
In a precautionary move, the City of Long Beach also declared a local health emergency, despite there being no confirmed cases in the area yet.
However, it’s widely understood that hidden carriers may already be present, roaming from Pine Avenue to the Belmont Veterans Memorial Pier. It’s better to be vigilant than complacent.
Regardless, the damage to the economy is already evident. From our vantage point over San Pedro Bay, the gateway for Chinese imports to the U.S., the early signs of a looming economic crisis are unmistakable. For even the least observant, certain indicators are hard to miss. For instance, foghorns are becoming a rare sound. Zero Hedge has reported the following distressing observations:
“The Port of Long Beach, the second-largest container port in the US, has seen two top officials issue warnings over the chilling impact of supply chain disruptions from China in recent weeks.”
“The Deputy Executive Director of Administration and Operations for the Port of Long Beach, Noel Hacegaba, warned that China’s economic lockdown has led to significant reductions in shipping between China and the US. He noted a drastic decline in port activity during January and February, with continued weakness anticipated through March.
“Hacegaba remarked that the slowdown at Long Beach is beginning to affect the local economy, suggesting it could only be a matter of time before it triggers a broader downturn in the region and possibly the overall U.S. economy.”
What we’re witnessing is truly destruction by definition. Supply chain disruptions lead to shortages of consumer products, which in turn cause declining sales, vanishing cash flow, layoffs, reduced vehicle sales, shrinking tax revenue, unmanageable public and private debt, mass bankruptcies, and ultimately a catastrophic failure for many.
Indeed, whether or not the coronavirus spreads significantly throughout the LA Basin, this situation is likely to lead to a downturn — and it will drag the stock market down with it. In the meantime, for those looking to refinance, you can currently secure a 30-year fixed mortgage at rates below 3.5%. Yee-Haw!
Sincerely,
MN Gordon
for Economic Prism
