By Catherine Austin Fitts
At last I can stop saying “the US markets are significantly overdue for a 10-25% correction.”
The correction is here. The S&P 500 is down 9.3% for the year and down 12.8% from its 2015 (and all time) high.
The corporate media has joined the alternative media chorus promoting emotion, anger and fear. Don’t join in. Financial market prices and volumes go up and down – that’s how it is.
Some of the dynamics at work:
Commodity prices continue to plunge: Painful for companies and countries that depend on commodity sales for revenue, lower commodity prices are a windfall for consumers and companies that are users – particularly in the developed markets. One of the surprises this year was how many so-called “insiders” were caught off guard by the significance of the continued price drops. Part of the plunge is over supply of oil and gas. However, the long term trend in the cost of energy from a variety of sources is down. Over time that is bullish for equity markets.
Central bank exhaustion: Quantitative easing has about run its course. Not to say that monetary and fiscal stimulus is over – the latest China stimulus is proof in point. However, fundamental supply and demand are limiting the multiplier through the economy as government and central bank largesse is withdrawn or where engineering centralized takeover and squeezing out the margins is complete. To paraphrase Bill King, intervention is losing its mojo.
Global slow down: Global economic activity is slowing down. In some instances it is being made to slow down as the United States whacks Russia and China when they try to grow independently – and they whack back. China has gotten double-binded over the SDR, the Asian Infrastructure Bank and over the strength (now gone) of their stock market this year. It will be interesting to hear the dialogue when Obama, Putin and Xi Jinping come together in New York on September 28th at the United Nations in New York.
Fed Tightening: If the Fed raises interest rates on September 16-17th, years of cheap dollars will come to an end. To some extent, this began last summer when the dollar index began to rise. A higher cost of capital is a double-whammy for commodity producers and nations with high dollar debt loads – add derivatives on top of that. That translates into serious problems in the emerging markets. The pressure to raise interest rates is significant. Pension funds and insurance companies and savers in general are paying a heavy price for subsidizing government and large corporation cost of capital.
Bonds are not what they used to be: As described in our 1st quarter wrap up, Planet Debt, the long term bull market in bonds is drawing to a close. The central banks have quite a challenge – to make sure that too much money does not leave the bond market too fast. It is hard to imagine that this will be an orderly transition.
Equity markets are converging: As described in our annual wrap up, Planet Equity, the global economy is rebalancing. That means global equity markets are growing and they are becoming ever more connected. It would not surprise me if the G-7 tried to pull the plug on the China markets and wound up this week inadvertently pulling the plug on global markets. We are connected – for richer and for poorer, in good times and in bad. To understand our interdependencies with China, read Stephen Roach’s excellent book Unbalanced.
Conquest or creation?: We are spending several trillion a year officially on military and more on black budgets. We could stand to start shifting investment to infrastructure ( See our 2nd quarter wrap up, Infrastructure: Conquest or Creation) and to more cooperation and less bullying.
What’s ahead? Keep your eye on the areas of long term economic strength and growth for opportunities in the US and developed markets.
The emerging markets may be headed into more than just a correction. If that is the case, the question is whether the divergence of recent years between the US and global equity markets can continue or whether the rebalancing of the global economy has brought us to a place where price will extract a hideous penalty for centralized control and intervention and the resulting lack of cooperation and trust.
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We post charts on US and global markets each Sunday evening based on the weekly close. Most recent is here: Money & Markets – August 21, 2015