We haven't seen this kind of bloodshed on Wall Street since the 2008 financial crisis. Until this week, the largest single-day decline for the Dow Jones industrial average we have ever seen was 777 points. That record was completely shattered on Monday when the Dow fell 1.175 points and the Dow fell another 1.032 points on Thursday. It was the third decline to exceed 500 points in the past five trading days, and the Dow is poised to announce its worst week since the dark days of October 2008. So is this just a "correction" or has the 2018 financial crisis officially arrived?
At the moment, many experts point to the bond market as the main reason why stock prices are falling:
"The thorny path for stocks will continue."
And, no doubt, analysts like Jeff Gundlach have clearly warned that there will be more trouble ahead for stocks as bond yields soared …
Moving forward, it's important to keep a close eye on bond yields. Every time they start coming back, we will see the stock prices fall …
“We are caught in a vicious circle. If the yield rises, you have to sell the stock. If you sell a stock and it crashes, the returns come back,”said Art Hogan, chief market strategist at B. Riley FBR.
This is one of the reasons why a budget deal going through Congress right now is such a bad idea. Hundreds of billions of dollars in additional spending on top of what we're already doing will drive bond yields, and this only adds to the pressure on Wall Street.
Of course, the people from the Federal Reserve can intervene, but at this point they are reluctant to do so. At the end of last year, the Fed finally removed life support from the financial system, and at first everything seemed to be going well. But now a new crisis is starting, and we will see if the Fed still intends to continue raising rates. The following comes from Peter Schiff …
Promotional video:
“The Fed was barely dragging its feet into raising rates while Obama was president. They talked about raising rates, but at the end of the day they could hardly raise them up. The rate of growth has increased since Trump was elected, but one of the reasons for this is … I mean, the media doesn't tell the truth about the economy; if anything, they avoid economics. Everyone talks about how strong the economy is, how great everything is. Everyone is taking loans for this great economy. The Fed wants to take on the loan, Trump wants to take responsibility for it, so if everyone wants to talk about how big the economy is, the Fed has no excuse if it doesn't raise rates … to keep the impression that the economy is so strong as everyone thinks, the Fed is in this vicious circle where it needs to raise rates.
But they [the Fed] cannot tell the truth that this is indeed a bubble, and if we raise rates, we will puncture it, so they are in this situation. And they are still telegraphing that they are going to raise rates three or four times this year. And that's the problem."
It has been my point of view for a very long time that the greatest financial bubble in human history cannot continue without artificial support from the Fed and other global central banks.
As soon as the Fed finally ended its artificial support to the markets late last year, I expected problems to arise, but stock prices continued to rise during the holidays.
But now reality has come, and investors are rushing like crazy to exit. I really love the way Brandon Smith described the current state of affairs in his recent article …
“After I predicted the election of Donald Trump, I also predicted that central banks would start pulling the plug of life in the stock markets. This is indeed the case with the Fed's ongoing program of raising interest rates and shrinking their balance sheets, which effectively stifled the flow of cheap loans to banking and corporate institutions that have forced them to buy stocks for years. There is nothing there that can serve as a crutch for supplies, except, perhaps, blind faith. And blind faith in economics always ends up in the ugly realities of mathematics."
Without artificial support, gravity will try to bring stock prices back to their long-term averages. That would mean a decline in the Dow by at least 10,000 points, but the big financial institutions are so understated and Wall Street has become such a giant casino that our system literally cannot handle such a decline.
The only way the game can continue is for the Fed and other global central banks to step in and prop up the absurd financial bubble they originally created.
If it doesn't, this crisis will go from bad to worse, and soon we may face a financial panic the world has never seen before.
Michael Snyder