What's the U.S. stock market going to do on Monday?

Cran, Remember the other day I posted that someone (China?) was dumping U.S. treasuries like mad? It wasn't just me who noticed (it wasn't hard to notice if you are watching debt markets). Later that day, Bill Gross tweeted about it. And then this from Bloomberg yesterday: China Sells U.S. Treasuries to Support Yuan

During a stock market sell off, yields should be dropping like crazy. Instead, they were stable at best and actually rising. Whatever bond buying there was out there as a "safe" buy, was being more than offset by foreigners dumping our debt.

That creates a huge Catch-22 for the Federal Reserve. It creates a rate hike, even without them manipulating overnight rates. They effectively have lost control of their ability to manipulate those markets. If the selling keeps up because China has to support the Yuan, or if the other EM countries join in because the dollar is creaming them, higher rates will become a self-fulfilling prophecy. That is probably already happening. And that is how a credit crisis will happen.

This is demonstration of how manipulated everything is and how much they lost control of what they created. What has been happening is largely a result of them simply TALKING about a rate hike (which is ludicrous in and of itself) -- and creating a lot of confusion over the last few months. If they actually raise rates, it is going to put huge pressure on all of the emerging markets, which in turn, will dump whatever U.S. treasury holdings they own. Sending rates up even higher here.

Our treasury market has very little liquidity left in it. The Fed destroyed it. There are no buyers. Remember, the Federal Reserve itself, bought up huge amounts of our debt to suppress rates with its quantitative easing -- for more than a year, they were the only buyer out there. Those bonds are still sitting on their balance sheet. Without them, there are no buyers -- not at these prices, which are way too high (what happens when you stifle price discovery by manipulating markets).

There are two possible outcomes, and neither of them are good: 1) Either this plays itself out FINALLY and we see rates rise dramatically in the U.S., and the mess they created starts to fix itself -- with a disastrous time ahead for the whole world. It will be ugly. Or 2) They find a way to keep suppressing rates to desperately try to keep the fantasy they created going. The problem for them is that it is much harder to do in the face of selling pressure, if China (which owns more than a trillion dollars of U.S. debt), is no longer buying and holding and rolling over what they own).

If they do the desperation move, QE4, in which they start to buy up everything everyone else wants to dump, will just add more to the Fed's insolvency. And it's not guaranteed to actually work suppressing rates this time. The market pressures may be too great. Each dose of this needs to be greater to keep the scheme up.

They created a bubble, and then to try to keep what they created from collapsing, they bought up all of the mispriced debt at the bubble prices. So when it does deflate, our central bank is going to be the one left holding the bag. Doing more of that would be insane. It just makes the moment of their insovency worse. But what they already did was insane, so nothing ever surprises me anymore.

 

Someone at Reuters turned my post from this morning into article.

http://www.reuters.com/article/2015/08/28/markets-global-reserves-idUSL5N1133Q620150828

 

FYI for anyone who cares. U.S. equities are going to open very ugly today. Futures began selling off last night before the Chinese PMI number -- it's a measure of manufacturing activity.

It's why this isn't REALLY about China; global markets were selling off before the number (which is made up by China anyhow) was even released last night.

In any case, the open today is going to be brutally rough for U.S. stocks.

 

The sell off is intensifying into the close. The S&P 500 is down more than 60. The Dow Average is down more than 500.

 

That isn't that crazy. Tomorrow could be a tough day.

1) The shorts were pressing a lot of stocks today. It has been years since you saw that. I don't know how things finished, but at one point every stock in the S&P 500 was down for the day -- utilities and consumer staples stocks, where people might otherwise try to hide, were selling off hard. It's the first time in a few years that the shorts feel like they have an advantage and can make some money. Volume is restrained because so many traders are on vacation, so if there is going to be a concerted effort at a takedown, it would be a good time.

2) Long treasury bonds should be rising in an environment like this, but there is nowhere for them to go because the Fed has destroyed our debt markets. They were pretty flat today, at best. Maybe slightly up (yields down). The Fed screwed up. If the emerging markets are selling their foreign reserves, it is going to continue to drive up rates, which is going to continue to make the equity bubble their low rates created pop. Maybe that doesn't all happen tomorrow, but it's been happening throughout this sell off.

3) What happened two weeks ago was you had a sell off late in the week, and heading into Monday the mutual fund redemptions started. I think that probably contributed a lot to the really bad day Monday of last week. Everyone got so complacent. Mutual funds had a historically low allocation to cash, which means they had to sell stocks to meet the redemptions. So it may have fed itself that Monday. If there were redemptions today, same thing could happen tomorrow.

4) You rarely get a sell off of the magnitude of what you saw last Monday without the market at least first retesting the low it made before heading one way or the other. I said that last week. It may or may not happen tomorrow, but I figured at some point it would retest that 1835 level on the S&P before it either dumps or rebounds. Why I suggested that people don't run out and buy last week.

As an aside, I can't stress how overvalued this market is. I will warn anyone I care about to not f*** with it. It's all a fantasy. It's a creation of the Federal Reserve and they have lost control of the bubble world they created over the last 4, 5 years. There was nothing in the U.S. economy or corporate earnings that came through to justify how much stocks ran up over the last 3 years. Stocks could easily halve if this thing pops, from 2130 on the S&P it reached in May and still not be overvalued. A 50 percent retracement from the highs it made, if that is to happen, would take the Dow below 10,000.

 

Technically, the term has come to mean two quarters in a row of negative economic growth -- as measured by GDP.

That, of course, gets into the GDP measurements various governments put out. They are BS. The U.S. included. If you asked the BLS to count gumdrops in a jar, instead of dumping them on the table and counting them, they'd create a complicated and incomprehensible formula for how you have to adjust the count -- designed to obfuscate reality for political reasons.

But technically, a recession would simply be two quarters in a row in which the aggregate economy contracts.