Tuesday, January 5, 2016

Dow industrials started the year horribly............Dow had its eighth-worst first day of trading ever.

Dow industrials start the year horribly. 

Dow had its eighth-worst first day of trading ever.

Stocks tanked all over the globe. Markets in Sea of Red!

Dow: 17,148.9, -276, (-1.6%)

S&P 500: 2,012.7, -31.2, (-1.5%)

Nasdaq: 4,903.1, -104.3, (-2.1%)

Stocks in the US followed markets in Asia and Europe lower to start the year deep in the red as the S&P 500 had its worst opening day since 2000 and the Dow had its eighth-worst first day of trading ever.

European Stocks plunged 2.5% yesterday which is the worst start to a year  ever. Germany led the collapse...the DAX was hit with a 4.4% kick in the pants.

China's main stock index, down almost 7%, setting off circuit breakers. Hong Kong, down more than 3%. South Korea, down 5.75%.....China's Shanghai Composite index down nearly 7% on the first trading day of the new year. This is worse than 99.6% of all trading days since the beginning of 2007.

Stocks are plunging, with the Dow industrials dropping more than 450 points at one point and the S&P 500 sinking below 2000 in a rough start to 2016.

In the US the Dow fell as much as 460 points while it was a sea of red across the board to start the year.

And as if there wasn't enough bad news on Monday, the Atlanta Fed's GDPNow tracker indicates that the US economy grew just 0.7% in the fourth quarter of 2015, well below current forecasts for a 2% increase from forecasters on Wall Street.

The first trading day of the year, according to conventional Wall Street Wisdom, is usually a bellwether of the full calendar year. The stock market's plunge on this first trading day of the year markedly increases the odds of a bear market in 2016.  We are likely to see this kind of volatility a lot in 2016.

That's because the stock market's direction in any given year's first trading day is more often than not a good indicator of how it does for the rest of that year. That relationship is significant at the 95% confidence level that statisticians often use to conclude that a pattern is genuine. Consider the historical odds of a full-year gain when the first day is positive: 74%, compared with 51% when the stock market fell on the first trading day of the year.

This isn't exactly how Wall Street was hoping to kick off 2016: The Dow Jones Industrial Average plummeted more than 450 points at one point on reignited fears about China's economy.

The most bullish thing the stock market can do is go up. That most definitely is not what it's doing to kick off 2016.

Why the carnage? It's simple, global stock markets have been splintered, limping along in a mirage based on a few high-flying stocks, for months now.

SECOND, the still-strong U.S. dollar is making DEFLATION worse on virtually every continent. That's because when global economies weaken and investors start to run for cover, the dollar strengthens by default.

THIRD, war cycles, the weekend's events of an escalating war of words between (a) Saudi Arabia/Bahrain and (b) Iran. The Saudis and Bahrain just ended formal diplomatic relations with Iran because … their embassies were attacked yesterday, due to the Saudi's beheading of a leading Saudi Shia cleric. So the fear now is a Saudi-Iran war, along with regional Shia-Sunni violence!

Today's action shows that it is a very dangerous world with more problems than solutions.

China is the big risk in the year ahead for global markets and traders hope that the first trading day of 2016 does not set the tone for the rest of the year. Thanks in large part to a circuit-breaking selloff in China, stocks are already digging a deep hole at the start of the new year.

Between a 7% fall in shares that triggered new circuit breakers on the Shanghai, and Shenzhen stock exchanges  -8.21%  and accelerated weakness in the yuan, there is ample fodder for China bears. China's rigged markets could fall much further.

Bank of America Thinks The Probability Of A Major Chinese Crisis Is 100%. "It seems to us that the government's policy options are rapidly narrowing – one only needs to look at how difficult it has been for the government to hold up GDP growth since mid-2014. A slow-down in economic growth is typically a prelude to financial sector instability. Putting it all together, it seems to us that many of these conflicts may come to a head in 2016."

A global financial crisis began during the second half of 2015 and now threatens to accelerate as we enter 2016.......the worst is yet to come.

This new financial crisis is going to intensify throughout the early months of 2016. By the time it is all said and done, this new crisis will be far worse than what we experienced back in 2008.

This will be a year when millions of people start to understand that our politicians and the mainstream media are not telling them the truth.

The global economy has become debt disabled and market prices have been massively distorted by governments and central banks.

The stock market's house of cards will collapse in 2016.... In 2015, nearly every asset class failed to provide returns. The S&P 500 has flat lined for the past 400 days, with hundreds of stocks well off their 2015 highs. The 30-year Treasury bond has fallen over 2.0 percent, cash in money market accounts have returned just +0.11 percent (so after taxes and inflation your return was solidly negative), and the CRB index is down nearly 25 percent.

The free market has been eviscerated and supplanted by money printing and deficit spending on an unprecedented scale. The bottom line is that there is now a historic and humongous gap between stock prices and economic fundamentals. And a gigantic gap between fixed income yields in relation to the underlying credit quality.

By many, many historically predictive valuation measures, stocks are overvalued to the tune of 50% to 60%.

In the past, when stocks have been this overvalued, they have often "corrected" by crashing (1929, 1987, 2000, and 2007, for example) . They have also sometimes corrected by moving sideways and down for a long, long time (1901-1920, 1966-1982, for example).

After long eras of overvaluation, like the period we have been in since the late 1990s (with the notable exceptions of the lows after the 2000 and 2007 crashes), stocks have also often transitioned into an era of undervaluation, often one that lasts for a decade or more.

In short, stocks are so expensive on historically predictive measures that the annual returns over the next decade are likely to net out to about 0% per year.

A stock market crash of ~50% from the peak would not be a surprise. It would also not be the "worst-case scenario," by any means.

The main lessons from today is that market shocks can be quite quick, when they suddenly unravel. There is no need for markets to follow an observable pattern (therefore casting an omen just for you). Recall as well that this is just "day 1"! There are ~20 additional dramatic trading days ahead this month, where anything can precipitously take place.

Much of the world is now running out of free candy. The latest version of Bread and Circuses is reaching its inevitable end. Each of us has the opportunity to make a choice as to whether we wish to be Takers, Payers, or Preparers. The choice we make may define our future.

Because our macroeconomic policies have false targets and actually incentivize short term strategies the Fed has directly led us off of an economic cliff. Now that the Fed has boxed itself out of any further action, the market is at the peril of a collapsing, so prepare yourself for the largest market 'correction' the world has ever faced.

There's really one supreme element of this story that you must keep in view at all times: a society (i.e. an economy + a polity = a political economy) based on debt that will never be paid back is certain to crack up. Its institutions will stop functioning. Its business activities will seize up. Its leaders will
be demoralized. Its citizens will act up and act out. Its wealth will evaporate. Given where we are in human history - the moment of techno-industrial over-reach - this crackup will not be easy to recover from. Things have gone too far in too many ways. The coming crackup will re-set the terms of civilized life to levels largely pre-techno-industrial. How far backward remains to be seen. Our so called leaders will pretend To The Bitter End!

Pay attention, things are beginning to get interesting.

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