The Dow Jones Industrial Index was the one shining light in President Donald Trump’s unconventional administration. No matter how perplexing his tweets were, there was no denying that Wall Street investors loved his pro-business posture. That is until now.
The massacre that occurred on Wall Street on Black Monday, February 5, 2018 was the largest one -day loss on the New York Stock exchange. This comes after a bad week on Wall Street, meaning all of the gains trumpeted by Trump have been erased. Of course, there will be pundits claiming that this is just a temporary correction. But is it?
After a decade of money printing and near zero interest rates undertaken by central banks around the world, but especially by America’s Federal Reserve, inflation fears are returning with a vengeance
It must be recalled that a major reason the world supposedly escaped a massive economic depression following the global economic crisis of 2008 has been money printing by central banks and massive borrowing by sovereigns. This borrowing binge continues to the present day. Up till now, zero interest rates have enabled major sovereign borrowers, especially the United States, to service its growing government debt. However, should interest rates return to anything approaching normal historical levels, then many countries, the USA being in the lead, face the prospect of a massive insolvency crisis. Fear of this approaching fiscal Armageddon may be what is animating the growing fear among Wall Street investors.
Black Monday may very well be a sign of much worse to come.
Wall Street has incurred 2-days of brutal losses. Friday’s drop of more than 530 points follows Thursdays’ decline by more than 300 points on the Dow Jones index. The NYSE collapse parallels that of major bourses across the world.
The sudden crash in stock prices will undoubtedly send the various plunge protection teams of the world’s major central banks into action, seeking to reverse the sharp losses. In spite of what the central bankers do, they cannot much longer hide the fact that the world barely recovered from the global economic crisis that emerged in 2008, and the likelihood of a return to the Great Recession has grown exponentially, with the accumulation of bad economic news, especially from China.
Two contradictory financial trends are in evidence, in effect the Ying and Yang of the global economic crisis. The NYSE has experienced a steep Bear Market rally from its March lows, setting the stage for the Dow Jones to pass above the 10,000 level. On the other hand, the American greenback is plunging to new lows, having previously demonstrated impressive strength as a safe haven when the global economy imploded after the demise of Lehman Brothers.
Actually, there may be less of a contradiction than meets the eyes. If the U.S. national debt and annual budget deficits continue to expand with reckless abandon, it is inevitable that global market forces, especially the bond market, will set in stage a deep contraction in the U.S. dollar’s relative value. The apparent replacement of the Japanese yen by the U.S. dollar as the preferred vehicle for the carry trade seems to point in the direction of growing weakness. In that scenario, equities may, for a time, become the new flight to safety for investors.
The rise in equity prices may reflect an inverse relationship to the decline of the value of the American dollar, as opposed to a realistic market appreciation of economic fundamentals. Now, when the value of both the dollar and the Dow Jones plummet, what would that convey?
A global economic depression, most likely. At present, however, the inverse relationship of the U.S. dollar and NYSE merely reflects a synchronized global recession. The dangerous moment will come when the world’s central banks begin to engage their long-speculated exit strategies. Then, I think, we will witness volatility with both the American dollar and equity prices.
