The Real Reason the Market’s Tanking

OUR prophecy has come evidently to pass…

On September 3, we warned that September — not October — is the stock market’s most treacherous month.

With the pleasure of repeating ourself:

September is the great thief of investor money, not October. Here is his evidence — the red-handed evidence:


Three weeks into the month, our alarms are vindicated…

All three major averages have lost their steam since early September — and all three at once.

The Dow Jones careened another 940 points yesterday before finding a toehold. It nonetheless reeled 509 points on the day.

The S&P shed 1%. The Nasdaq fared best — yet still ended the day stained in red.

Gold took a similar trouncing yesterday, dipping below $1,900. Gold has likewise followed the stock market’s downward ways since cresting in early September.

Yesterday’s Harrowing Plunge

Why was yesterday’s stock market plunge so vicious?

The reasons — we are told — reduce to three:

Bank stocks dragged down the overall market. That is because a fresh report by the International Consortium of Investigative Journalists harpooned the large banks.

The report accused them of profiting from “powerful and dangerous players” these past 20 years — contrary to United States law.

These powerful and dangerous players include criminal and terrorist organizations.

Hence the bank stock massacre.

We are further informed that investors fear renewed economic lockdowns following a resurgence of the coronavirus.

Thirdly, the world of politics casts its heavy shadow upon the market…

Another Political Showdown

“Fiscal stimulus” was already uncertain — would Democrats agree to stimulus that might assist President Trump ahead of the election?

A package appears even more unlikely now that a fresh Supreme Court melee nears.

Democrats have even threatened impeachment if the president attempts to nominate a successor to the late Ms. Ginsburg.

Mr. Trump has announced he intends to do precisely that. And by the end of this week.

What is more, a government “shutdown” is in prospect.

The fiscal year ends in September. Absent a budget deal, the lights go dark in December — at least the “nonessential” lights.

Triple Threat

Lance Roberts of Real Investment Advice in summary:

    1. With the election fast approaching, Congress does not want to pass a fiscal support bill to help the other Presidential candidate. Such is why there are dueling bills between the House and Senate currently.
    2. September ends the 2020 fiscal year of Congress. Such requires either a “budget,” or another C.R. (Continuing Resolution) to fund the government and avoid another shut-down.
    3. Lastly, the death of RBG will have the entire Democratic Party, which controls the House, focused on how to stop President Trump from nominating a replacement before the election. All Trump needs is a simple majority in the Senate to confirm a justice that he can likely get.

“The market remains concerned about the broader risk emulating from the U.S: Covid, the Supreme Court fight and the upcoming presidential elections,” affirms Swissquote Bank’s Peter Rosenstreich.

Just so. Yet the stock market — and gold — attained high water nearly three weeks prior.

The trend has since run lower.

Why Did Markets Turn in Early September?

The market was not confronting a Supreme Court rumpus three weeks ago.

And should not gold be rising on the tide of woe presently rolling in?

Yet it wallows with the stock market on a falling tide. Thus arises the question:

Why did the water stop rising in early September?

After all, the Federal Reserve is still at the business of quantitative easing. It continues to purchase $120 billion of assets per month.

Yet as the aforesaid Mr. Roberts reminds us, many of its recent Treasury purchases have merely replaced maturing Treasury notes.

A replacement is not an increase.

Thus, the Federal Reserve’s balance sheet has largely held steady since June… following its spring delirium.

From flood tide to neap tide it has run:


“Not Enough”

Perhaps assets peaked in early September as the Federal Reserve’s previous gravity wore off. It takes time of course.

Now the market demands more flooding to lift all vessels.

The Federal Reserve’s pledge to anchor rates down to zero is “not enough,” argues Peter Schiff of the eponymous Schiff Gold:

That’s not enough. The markets need more. This bubble is so much bigger than the one that we had back then (2008) that it requires far more air coming from the Fed to keep it from deflating. So, we need more. The Fed needs to talk about negative interest rates. The Fed needs to commit to bigger quantitative easing.

Yet the Federal Reserve’s tide-lifting capacities are currently restrained by the Department of Treasury — and Congress.

Returning to Mr. Lance Roberts:

The Federal Reserve is trying to plug a hole that fiscal policy was widely expected to fill by now. However, the Fed’s ability to expand on current programs is limited to the Treasury Department’s issuance of additional debt. Without another “fiscal relief” bill, there isn’t enough debt issuance to support another round of interventions by the Fed.

“Apocalyptic Fall”

A “fiscal relief” bill — again — appears unlikely. Assume for the moment none is forthcoming.

Who will exert the gravity to swing the tides higher?

We do not know. Perhaps the coronavirus and its punishing lockdowns will go away and leave us be.

Yet the scaremongers already wail about an “apocalyptic” autumn:

“We may be in for a very apocalyptic fall, I’m sorry to say,” warns Dr. Peter Hotez — dean of the National School of Tropical Medicine at Baylor College of Medicine.

We are not half so convinced of a pending apocalypse. Yet the doomsayers have many state and local officials by the ear.

And heavy lockdowns, lightened in spots, may resume under medical advice.

The virus will menace greatest in blue states, we hazard — at least until the election ends.

We therefore anticipate little cheerful economic news to lift the stock market.

We could be wrong of course. We have been surprised before. We could be surprised again.

More Stimulus Equals More Debt

Yet we are unruffled by the likely absence of additional fiscal stimulus — it would only add mass to the debt millstone already hung around the nation’s neck.

Today the Congressional Budget Office (CBO) issued its latest forecast…

Pre-pandemic, CBO had already projected $1 trillion deficits. Yet its latest forecast points to its previous forecast… and laughs.

This year’s budget deficit will exceed $3 trillion. And the longer view?

Deficits grow from an average of 4.8% of GDP from 2010 to 2019 to an average of 10.9% from 2041 to 2050, driving up debt…

Federal debt held by the public surpasses its historical high of 106% of GDP in 2023 and continues to climb in most years thereafter. In 2050, debt as a percentage of GDP is nearly 2.5 times what it was at the end of last year… The economic disruption caused by the 2020 coronavirus pandemic and the federal government’s response to it contribute significantly to that difference.

How can an economy grow when loaded down with so much debt?

It cannot… as an airplane cannot rise from the runway when loaded down with too much weight.

We do not know when. But this debt-loaded airplane will eventually run out of runway.

And just beyond the runway is the cliff…


Brian Maher

Brian Maher
Managing Editor, The Daily Reckoning

The Daily Reckoning