Morning Report: Shades of 1937?

The #1 trending topic on Twitter is #BlackMonday.

The global stock market sell-off continues this morning, with S&P futures down 64 handles. Bonds and MBS are up small.

Markets sold off hard overnight, with Japan down 4.6%, China down 8.5%, and Europe generally down 4.5%. Commodities are getting clocked, with oil down to $39 a barrel. Emerging markets are getting crushed.

The Chicago Fed National Activity Index rebounded from -0.07 in June to 0.34 in July.

The sell-off in risky assets over the past week has pushed out the market’s forecast for the first rate hike out of the Fed. Futures are pricing in a first hike in the Dec – March timeframe. Over the weekend, Larry Summers penned an editorial in the Financial Times encouraging the Fed to stand pat for a while. He makes the point that the sell-off in assets has a tightening effect all by itself, and hiking rates in this disinflationary environment risks another 1937.

After stocks bottomed in 1932, the Dow Jones Industrial Average went on a tear, increasing almost fivefold in 5 years. In 1937, however they started a brutal 1 year bear market, where stocks got cut in half. The most common explanation for the sell-off was the Fed’s tightening in late 1936 and early 1937. Now, there are a lot of reasons for the sell-off in the 1930s (markets sensing something afoot in Europe, FDR’s undistributed profits tax, etc), but the Fed is very cognizant of their role in the “recession in the depression” and this will certainly guide their decision-making.

With stocks hitting air pockets on the downside, you would expect to see Treasuries flying. Yes, they are up, but not by as much as you would expect. Supposedly there has been massive supply of Treasuries coming out of the Middle East, which is keeping a lid on prices.

19 Responses

  1. I’ll do what i always do in times like these: nothing. buy and hold.


  2. Lawrence H. Summers
    It is far from clear that the next Fed move will be a tightening

    wow… QE4, here we come!


  3. more cowbell!


  4. fascinating discussion with some younger cousins over the weekend. 2 recent grads, 1 still in college. one about to start her freshman year. all women. it’s sanders or not voting for them. what about Hillary and the historic first? they see it as inevitable and don’t care.


  5. What happens when the SJW left disagrees with your analysis… they call it hate speech..

    seriously… number crunching is not hate speech…

    Had dinner with a friend who was a dissident from the USSR in the 80s. The US is beginning to worry him..


  6. Brent and Scott, is this rough patch for the stock market entirely a panic response to Shanghai, or are there serious fundamental issues that I am not seeing?

    I realize that if the Chinese economy cratered that would be serious, but the bursting of a real estate bubble there is not the equivalent of a crater, right?


    • Mark:

      The huge moves today on the open (which have mostly been recovered…Dow now down “only” 140 after bottoming out at down over 1,000) were all a panic reaction to China.

      But I think I agree with El-Erian from this morning. The fundamental problem has been, and still is, a basic lack of economic growth, and the stock market has been inflated relative to that growth. I think we have a lot lower to go.

      But I am always a pessimist.


  7. Mark, I think this is normal market behavior…That said, I think China is going to go through a massive deflationary recession the way we did in the 30s and Japan did in the 90s.

    Countries that experience decades of super-normal growth seem to experience these sorts of pullbacks. Ultimately I think it means inflation is going to be hard to find, but I don’t see any sort of catastrophic effect on the US economy. Wouldn’t want to be a commodity-based economy like Australia, Canada, or the ME though…


    • Brent:

      That said, I think China is going to go through a massive deflationary recession the way we did in the 30s and Japan did in the 90s.

      I think it will be worse in China primarily because there is even more corruption and fictitious accounting going on.


  8. Turning back into a bloodbath.


    • McWing:

      Turning back into a bloodbath.

      Yup. Interesting that interest rates are not moving like they did this morning. 10yr still above 2%, while this morning during the open sell-off the yield dropped all the way to 1.94%.


  9. Should I worry if Swiss interest rates go more negative?

    Also, didn’t the market drop 750 the day that the (shitty) TARP bill failed?


    • McWing:

      Also, didn’t the market drop 750 the day that the (shitty) TARP bill failed?

      Biggest point drop ever was 777 on Sep 29, 2008. Not sure if that was the day TARP was voted down, but it could be.


  10. find it interesting the 10 year isn’t getting much risk off love…


  11. Not a Walker supporter but this is funny.

    Biden level of hyperbole, “they’re gonna put talk back in chains!”


  12. Worth a read, but I also believe that the story of a bubble in stocks and real estate in China has been one of the most predicted for years. The key, as always, is the timing. Nothing worse than losing lots of money by being right too early.

    “The Man Who Got China Right
    AUG. 25, 2015
    Joe Nocera”

    Nice to see Ken Rogoff back without the spreadsheet BS being beaten to death.

    “A Warning on China Seems Prescient
    AUG. 24, 2015
    Andrew Ross Sorkin”


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