Fear grips markets

Risk aversion the main driver as oil and commodity prices sink, China worries grow, and the future gets cloudy. Bonds shine

16th Jan 16, 10:03am by David Chaston

Fear gripped markets today as the trading week comes to an end.

The price of oil is now US$29/barrel, mainly on concerns about an impending surge in supplies from Iran. At one point it was below US$29/barrel.

The gold price is up US$20/oz to US$1,094.

There is a rush to the safety of bonds with the benchmark UST 10yr now yielding just 2.01%.

On Wall Street, the Dow is down -2.6%, the S&P500 down -2.5% and the NASDAQ is down more than -3%.

Markets ignored the 'good news' of a rise in American consumer sentiment, its fourth consecutive rise.

Other American data out today was not so positive; the December retail sales numbers were not strong and held up mainly by good car sales. Those were the official numbers. The unofficial data from the retail trade shows retail sales up +3%, although less than the +3.7% expected by the industry association.

And the Fed reported a third straight decline in industrial production in December, revising down its November data, but also revising up its data for September and October.

Also behind the fear is a market that has no idea what China is trying to do with its economic policy settings. In fact, Chinese investors at home are equally confused, and the Shanghai market has now entered a bear phase. It fell another -3.5% yesterday bringing the total fall to more than -20%. Other markets reacted to the size of the decline and fell as well.

The reason fear is the dominant theme is that the market 'experts' don't seem to understand the forces at work. This is driving risk aversion.

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22 Comments

by King of the whiners | 16th Jan 16, 11:19am 1452896376

Come now, don't be forgetting that the US capacity utilization rate (the rather significant measure of ' the percentage of available resources being utilized by manufacturers, mines, and utilities' fell for an 11th straight month to levels last seen in mid-2011, or that the closely watched regional US Empire State manufacturing index collapsed from -4.6 to -19.4 (levels last seen in 2009 during the height of the financial crash).

Pesky data eh?

by Stephen Hulme | 16th Jan 16, 11:34am 1452897260

Corroborative evidence.

by Stephen Hulme | 16th Jan 16, 11:21am 1452896470

The reason fear is the dominant theme is that the market 'experts' don't seem to understand the forces at work. This is driving risk aversion.

One of the richest experts is totally confident having transferred $billions of other people's wealth into his and other's pockets.

In his e-mail, Gross said that zero-percent interest rates and quantitative easing created leverage that fueled a wealth effect and propped up markets in a way that now seems unsustainable. Read more

by childofthesun | 16th Jan 16, 11:41am 1452897660

Yep, it's all over...... wait a minute, what's that noise? ..... oh no, surely not, it's the printing press being wheeled over to Wall Street. OK evabody, stand back. Get that motor cranking!!!!!!..

by Stephen Hulme | 16th Jan 16, 11:50am 1452898224

Mounting bank penalties certainly warrant some sort of debasement to relieve shareholder losses.

Goldman Sachs said it agreed to a $5.1 billion civil settlement to resolve federal and state probes into its handling of mortgage-backed securities before the 2008 financial crisis.

The proposed deal, which the Wall Street giant announced in a Thursday statement, would settle “actual and potential civil claims” by the US Justice Department and the attorneys general of New York and Illinois, as well as state regulators, against Goldman. Read more

by Roger Witherspoon | 16th Jan 16, 6:36pm 1452922579

Got to keep up appearances by regularly slapping those naughty banks with wet lettuce leaves. Also got to maintain US global financial hegemony (hedgemoney??) by preserving their exorbitant privilege as a matter of national security.

by childofthesun | 16th Jan 16, 11:47am 1452898067

Rule 5.
The Road Runner must stay on the road, otherwise, logically, he would not be called Road Runner.

Rule 8.
Whenever possible, make gravity the coyote's greatest enemy.

by MortgageBelt | 16th Jan 16, 1:17pm 1452903452

Someone/some organisations will be making a lot of money from all this 'fear'.

by moa man | 16th Jan 16, 1:58pm 1452905918

Fear is an essential in any market.
Otherwise, there would only be greed.

by sharetrader | 16th Jan 16, 4:28pm 1452914892

those that shorted stocks and markets will be. stock markets are the first to fall then other assets follow I suspect most smart cookies have or are reducing leverage to be in a safe zone if GFC mark 2 hits

by MikeM | 16th Jan 16, 6:02pm 1452920566

Contrary to ANZ's 'positive' business survey, job applicants are competing fiercely for low to semi skilled positions. Our immigration policy is going to be a hot topic if unemployment begins to creep over 6%.

http://www.stuff.co.nz/business/75953876/job-market-skewed-in-favour-of…

by mandalay | 16th Jan 16, 7:37pm 1452926231

No one will care, as long as house prices double ever 18 months....
Am looking for a one roomed apartment in South Auckland for around 600k

by sharetrader | 16th Jan 16, 9:29pm 1452932981

good luck with that, house prices normally don't rise during recession , that's right this is NZ house prices don't fall so I'm told

http://www.smh.com.au/federal-politics/political-news/australia-has-few…

by mandalay | 17th Jan 16, 11:15pm 1453025742

The local palm reader and tea leaf expert have as much 'know how' as the flippen 'experts!' Please excuse incessant (but essential) use of 'inverted commas..'

by steven | 17th Jan 16, 10:44am 1452980690

It will go past 6% but frankly as long as its few in the middle income bracket and most of these ppl see their houses going up in value it will be f*** other NZers just like its been for the last 2 elections.

by Afewknowthetruth | 16th Jan 16, 8:02pm 1452927732

We have known since the system was propped up in 2008 that another crash was inevitable because none of the fundamental faults in the system were addressed -just papered over.

And we have known for years that the longer the crash is delayed, the bigger the eventual crash will be.

Dmitri Orlov suggested 'collapse early and often' to avoid catastrophic collapses.

http://cluborlov.blogspot.co.nz/2016/01/my-prescription-for-2016-collap…

However, the dominant paradigm is to try to hold everything together as long as possible, by any means possible, thereby ensuring collapses are catastrophic.

We in NZ have to wait till Monday evening to see whether the 'hold everything together by any means' mob can win this particular round. It looks extremely unlikely.

by steven | 17th Jan 16, 10:42am 1452980556

Please dont use "we" you and I sure, most though dont believe it, dont want to and some will never accept it because of,
a) the Govn huge "interference" that well be needed.
b) they think the free market can cure all when all it does is make swings more extreme IMHO.

Otherwise, 2008, yes indeed its not been fixed (see b). Matt Simmons suggested it would take 3 "resets" for us to finally recognize the effect of Peak oil, and then oh boy....

" 'hold everything together by any means' mob" they have succeeded for 7 years and after listening to some ppl predicting within 6months 6 years ago I'm not willing to say this time it will be it. Certainly I cant believe we'll survive 2016 but its quite possible.

by Mike B | 17th Jan 16, 4:33pm 1453001639

Will the DOW completely collapse?

Apart from a total collapse of the economy this is what i see.

As far as i can tell no one else sees the DOW as i do, so perhaps i am wrong. Nevertheless this is what i think.

Economists and financial wizards are reporting that all this quantitative easing by the FED, and other Central banks, coupled with very low interest rates, are causing asset bubbles.

Sure we have asset bubbles but the DOW is different according to me.

Since the early eighties the number of pension funds, globally, has risen sharply. Not only that, but individual contributions have also risen.

Just STOP and think about it.

Every week billions of dollars globally are being paid into super funds. People are paying into these funds week after week regardless of the economy doing good or bad. Not only that, but it has been going on for month after month, and year after year amounting to trillions of dollars. Where does it all go?

I say it is going into share markets and bonds. This money keeps pouring into the super funds week after week and has to be put somewhere.

Now take a look at this graph.
To see more clearly remove ticks from "Log Scale" and "Inflation-Adjusted"
http://www.macrotrends.net/1319/dow-jones-100-year-historical-chart

See how the share market remained low until the 1950;s then a very, very slow gradual climb until the 80's then it starts a long steep climb.

What do you think caused the DOW to start its steep climb starting in the 80's?

Well blow me down Ronald Regan started it all. He gave tax incentives if people paid into a super fund. Low and behold the rest of the world followed..

The increase in pension funds matches the increase in the DOW. Is that a coincidence?

So where are we now?

As I see it the recent decline was due to the 1% profit taking from the pension funds. Yes money grabbing from your pension. For the rest of 2016 I believe the DOW will experience some volatility but we will see an average of 16,000 for the whole of 2016 then the declines will start.

People born in 1950 reached retirement age in 2015. We are now seeing the Baby-boomer generation moving into retirement. These BB's are not only collecting their retirement savings but no longer paying into the scheme.

As more and more BB's start to retire and withdraw their funds a point will be reached where pension funds will be paying out more money than they are receiving and the ponzie scheme will collapse.

We can keep the super funds topped up by bringing in more immigrants to pay into the scheme. But eventually there will be too many BB's retiring and the poo will hit the fan.

Of course they could hide the truth by having a financial crash and blaming the loss of pensions on the crashed economy.

Time will tell if I am right.

by Afewknowthetruth | 17th Jan 16, 6:26pm 1453008367

'What do you think caused the DOW to start its steep climb starting in the 80's?'

Concurrent with the factors you described was the ending of the 1970s energy crisis, which was largely a result of exploitation of North Sea and Alaskan oil. Once the initial costs were accounted for, it was like money flowing out of a pipe......hundreds of millions of pounds/dollars every week. The flow was enough to break OPEC control and eventually resulted in oil falling to below $20 a barrel, which amounted to a huge subsidy for all economic/financial activity.

Then, around 2000, North Sea oil and Alaskan oil peaked, and the money flow and energy flow started to decline. Oil prices rose from $30 to $60 to $90 to $120, and then spectacularly to nearly $150 before it all went splat, back to $30, after which prices rose to a level oil companies and the general economy could cope with of $100 to $120.

Pouring hundreds of millions of cheap (low interest) money into tar sands and fracking temporarily increased oil and gas extraction. But now that game is coming to an end: current prices ($30) do not justify investment in either.

We are now in the dangerous situation of being post Peak Oil with oil prices extraordinarily low and economic stagnation or contraction throughout the world.

The substantial increase in energy prices needed to rescue the oil western sector would immediately choke off general economic activity: on the other hand, current prices or further declines in oil prices will cripple oil majors and many national economies.

There appears to be no way out of this self-made trap.

As for the Dow, well the US government and central bank need to prop it up in order to keep up the pretence that the US economy has a future -the so-called Plunge Protection Team. But tightening economic conditions will likely cause investors to pull out..

We will find out over the coming months (weeks).

by David Chaston | 17th Jan 16, 8:26pm 1453015606

Plunge Protection Team ?!!? How does your [painfully oft-repeated] conspiracy theory tie in to today's announcement of the end of sanctions on Iran? That will bring a huge new oil supply to markets, and is probably the single most influential factor in the current low oil price.

This is a deal hatched in Washington - to normalise relations - one that hurts US oil majors heavily, and the US fracking industry. This hardly fits the usual conspiracy meme that the US Govt is in conspiratorial cahoots with the oil industry.

I think you describe a 1980's world with shallow 1980s thinking.

In the 2010s we have already learned how to adapt and adjust to these oil threats. The fact that - despite very low current oil prices - every car company on earth has an electric car strategy, and every household appliance manufacturer is prepared, and Foxconn is now making solar panels (one reason their cost is falling so fast), among many other strategies. Ever wonder why Vector wants to supply solar without batteries? Traditional energy enterprises don't like this rapid change. But there is nothing they can do about it. Energy efficiency is today's game, doing [much] more with less energy.

We will adjust, are adjusting. Expecting the transition to be smooth is naive. Be thankful you can hold conspiracy views freely. But also remember, you are in a community that is pretty marginal, always disappointed that cataclysmic predictions never actually seem to come to pass. Which must be infuriating.

by steven | 18th Jan 16, 7:29am 1453055397

I assume he doesnt really mean a "team" but a collection of players acting together that stemmed the all to probable melt down from Lehman Brothers etc.

https://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%9308#Gover…

Iran's oil will indeed be interesting just when oil drops below $30USD.....ouch, (hello $20?)

If however you look at a reasonable mbpd annual reduction rate of 2~4% post peak oil then the resulting extra needed is 1.5~3mbpd / annum. The US shale is giving us about 4.8mbpd?, so 2 to 3 years losses. Iran's production about 3mbpd?, 2 years. So we might see a) oil at $20USD b) the oil production plateau might well extend to 2020 maybe 2024 (previous assumptions were no later than 2018). This of course assumes no meltdowns/riots/arab springs from the producers some of whom who socially cant survive 5 years of $60 I suspect. The fact that Saudi is floating an idea of an IPO of Aramco should tell you a lot.

Oil threats, interesting but I suspect the timeline will be rather fast, I suggest youtube and the 2005 Robert Hirsch report [1][2]

or his book which I recommend on kindle (except the bit where he denies CC).

As for "marginal" the quality of the people seriously looking at the subject is way beyond the "tin foil hat" brigade. Infuriating? um no. The thing is to look at the data and logic we are on a finite planet with finite oil in the ground. We simply have to reach a maximum in production at some point and there after decline, the only Q is when.

Never come to pass? what do you think the GFC was? oil to $148USD a barrel in July 2008 and our world economy tipped over into the worst recession since the Great Depression. Matt Simmons predicted a series of these, actually 3 before we wake up, we have had one, this looks like no2.

[1]https://en.wikipedia.org/wiki/Hirsch_report
[2]https://www.youtube.com/watch?v=Am1DGjzxBrI

by linklater01 | 18th Jan 16, 8:18am 1453058322

I have read all the comments and clearly,you are all much cleverer than me.I am only a simple long-term investor in dividend paying equities.It's a strategy that has served me well for over 30 years through a variety of financial conditions and I don't know what else to do.So,if financial armageddon is just round the corner,then I'm stuffed(I was thinking of another word).
M.aybe,just maybe,we will only experience a sharp correction and I will be able to buy more shares at lower prices and therefore,higher dividends.If however,we are facing total meltdown,then so long,farewell,it's been fun.