“If there is no struggle, there is no progress.”
– Frederick Douglass
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August 6, 2024 — After going 356 straight sessions, the S&P 500 finally had its first 2% down day on July 24.
It then went just eight more sessions before its first 3% daily drop since September 2022.
Along the way, the index logged a second 2% down day. And an up day of nearly 2%.
But the overall trend has been down, and not in a slow, gentle pullback typical of the slow summer season in the markets.
Instead, we’ve seen pure chaos unfold in just a few days.
Today, we’ll share some insights from our Grey Swan Investment Fraternity members about this unfolding crisis.
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Right now, markets are embroiled in a crisis primarily of their own making. As our managing editor (and portfolio director for our provisional members) Andrew Packer notes, several events have occurred at roughly the same time to strike fear in investors:
The biggest fear right now is for short-term traders. Japan surprisingly raised their interest rates last week to curb inflation. This has made the “carry trade” far less profitable. The long-term good news is that with less money in the carry trade, there’s essentially less leverage in the financial system. Worst-case scenario, it’s arguably a deflationary shock.
“Last week’s jobs data showed a big slowdown. Sure, that’s what the Fed has been trying to engineer to bring on inflation, but the market narrative has rapidly shifted from soft landing to “they waited too long.” One indicator suggested we’re now in a recession from the rise in unemployment over the past few months, but the GDP data and even tech earnings don’t support that (yet).
Add in a few other minor events – saber-rattling in the Middle East, Warren Buffett selling half his Apple stake (which stood at 44% of Berkshire Hathaway’s total stock portfolio at the end of the first quarter of 2024), and some market fear is justified.
However, the extent of that market fear may have overshot, at least in the short term.
Witness the volatility index, or VIX:
Yesterday’s pre-market rise to a reading of 65 marks the third-highest reading ever.
The previous high occurred when the global economy started shutting down during the Covid-19 outbreak. The first spike occurred during the housing market meltdown in 2008.
Do the events of the past few days rise to that level? A mere quarter-point rate hike by the Bank of Japan? A slowing job market in the U.S. still reporting strong GDP data and cooling inflation?
Time will tell. It’s more likely that leveraged traders got caught on the wrong side of the carry trade, and events fed on themselves. But we could still see the market dwindle lower in the coming months as more deleveraging occurs.
Given that events are starting to take on the shape of a classic crisis, particularly with a major market shock as leveraged trades unwind, the real question is how policymakers may react—or overreact—to them.
Policymaker Response:
Grey Swan Contributor John Rubino notes that when it comes to the government and central bankers like the Fed, “Their policy and interest rate proscription is always to sacrifice long-term stability for the short-term facade that everything is just fine.”
Indeed, that’s always the government’s first course of action. Following the Crash of 1987, then-Fed Chairman Alan Greenspan came out to soothe markets. Eventually, this would result in a series of policy decisions dubbed the “Greenspan Put.”
As Rubino notes, “…lather, rinse, repeat each time, making the bubble grow and the dollar weaker for citizens.”
How this policy could play out while markets are undergoing the unwinding of the carry trade with the Japanese yen may include the involvement of Japan’s government as well.
But Japan isn’t too happy that their currency gets shorted by traders simply so they can acquire cheap capital. So the Fed may end up doing the heavy lifting, likely by starting with a 0.5% interest rate cut come September.
Geopolitics: The Wild Card
Meanwhile, the rest of the world could continue to impact markets in surprising ways. John Robb notes that the global picture continues to decline.
Part of last week’s market selloff may have related to the assassination of a Hamas agent in Iran l and talks of a response against Israel.
That event has shades of this spring’s market pullback on war fears. As Andrew Packer notes, it’s rather telling that defense contractor Lockheed Martin surged 20% in the past month amid the market mayhem.
With the BRICS meeting in October, China grumbling over Taiwan, Ukraine and Russia still duking it out, any significant escalation in any of those markets could lead to another big swing for markets – and the first response will likely be lower, not higher.
Investment Implications:
Amid this market pullback, it’s easy to be a deer in the headlights and do nothing. If you’re not leveraged, you’re facing a painful drop that’s part of the investment process.
But if this pullback leads to changes in investment strategies or consumer spending patterns, you may want to make some portfolio changes.
Contributor Mark Jeftovic noted a long-term conviction in bitcoin (and only bitcoin among the cryptos).
If that’s a space you’re still bullish on, Mark has some guidance now:
The only decision during volatility events like these is whether to hold or buy more (this applies to the stocks, Bitcoin, and the alts).
If you know longer believe the thesis – either the macro crypto thesis or your position in an individual altcoin or stock: you sell regardless of the price.
Anybody who tries to preserve profits or minimize losses on their crypto positions from here (as distinct from say, 24 hours ago) runs a very real risk of being whipsawed and chasing. Nothing reverses and runs like crazy in either direction more than crypto – nothing.
There are no circuit breakers, no plunge-protection team and no stabilizers. This is about the only true market out there, and it’s not for everybody.
For those who own more conventional assets, Grey Swan Contributor Zoltan Istvan provided a priceless response:
If you’re Warren Buffet who’s in the highest percentage of “cash” in Berkshire’s history… or the millions of people that are weighted heavily in real estate… you’re watching the turmoil in a high concentration of tech stocks in the market with a certain amount of relief and schadenfreude… lower rates mean you can get back into business…
If you know struggle, you know peace.
Perhaps that’s the real takeaway from the current market chaos is time to focus less on the market hype, ensure you’re prepared and protected from volatile markets, and focus more on the businesses and skills you know best.
So it goes,
Addison Wiggin
Founder, The Wiggin Sessions
P.S.: We provide a more in-depth look at the high concentration of capital in A.I. stocks in the stock market, how it compares to the tech wreck of the early 2000s and what you should be doing with your money right now in the current issue of the Grey Swan Bulletin, to be published later this week.
If you’re already a paid-up member, keep your eyes peeled. Ready to become a paid member? Click here to get access.
P.P.S.: How did we get here? An alternative view of the financial, economic, and political history of the United States from Demise of the Dollar through Financial Reckoning Day and on to Empire of Debt — all three books are available in their third post-pandemic editions.
(Or… simply pre-order Empire of Debt: We Came, We Saw, We Borrowed, now available at AmazonandBarnes & Noble or if you prefer one of these sites:Bookshop.org; Books-A-Million; or Target.)
Please send your comments, reactions, opprobrium, vitriol and praise to: addison@greyswanfraternity.com
