After a rebound on Tuesday based on hopes of government fiscal stimulus, US stock markets plunged again Wednesday and officially moved into bear territory.
The Dow Jones shed 1,464.9 points, a 5.86% drop. The S&P500 fell 4.89%. And the NASDAQ dipped 4.7%. With yesterday’s losses, all three indexes are down more than 20% off their highs — bringing the longest bull market in history to an official end.
Some of the other indexes are in even worse shape. The Russell 2000, which typically reflects the domestic economy, is down 26% from its highs and the Dow Transports have fallen around 29%.
In his podcast, Peter Schiff said this is as fast as US stocks have ever gone from record highs to a full-fledged bear market.
“We’ve gone from all-time record highs to a bear market in a matter of weeks. That has never happened before.”
The financials are getting clobbered. The regional banking index has fallen 53% from its peak. Seven years of gains have been wiped out. Peter said it’s no surprise financials are leading the decline just like they did in 2008.
“This is a financial crisis. We’re actually just resuming the financial crisis that started in 2008. It’s going to be a while before it ends, but it is going to be a spectacular ending as far as the severity of the ultimate collapse.”
The pundits on the business networks insist this isn’t a repeat of 2008. They claim that the banks are sound so there’s nothing to worry about.
“Except these were the exact same anchors who in 2008 were saying that we didn’t have to worry about the banks — that the banks were in great shape. None of these guys were worried about the banks until a few of them went bankrupt. … The banks are in lousy shape. That’s why they are tanking because they’re holding all this bad paper.”
Debt is the elephant in the room most people seem to be missing. The economy is loaded up with debt. It can’t handle even a modest economic slowdown due to the coronavirus — and this is not looking like a modest slowdown. How will corporations keep up the payments on their loans in a slow economy? How will consumers pay their trillion-dollar-plus credit card bills?
“Everybody is loaded up with debt, as I’ve been saying. That is the problem. If we had a viable economy that wasn’t so levered up, we could weather the coronavirus. We could handle it. Businesses could handle it. Households could handle it. But the fact of the matter is they can’t. This is a debt crisis just like the one we had in 2008.”
In 2008, the pin that pricked the bubble was falling real estate prices. When property values started to fall, the defaults started. People who had taken out subprime loans with virtually nothing down had no incentive to pay the mortgage. As Peter put it, they sent in their keys instead of a check. At the time, the pundits all said there was no problem. They said it was contained to the housing market.
“They didn’t understand the debt dominoes and how knocking down one meant the rest of them were going to fall.”
This time the pin was the coronavirus.
In fact, the air was already seeping out of the bubble before coronavirus. The Fed managed to patch things up last year by ending interest rate “normalization” and balance sheet reduction. It did three rate cuts last year and resumed quantitative easing. These were crisis-like monetary measures even before the virus.
Now that the bubble has popped, it’s not about the pin. We are on the precipice of a credit crisis.
“Just like lenders were in trouble when homeowners couldn’t pay their bills, the lenders are in trouble now when the hotels can’t pay their bills, or airlines can’t pay their bills, or retailers can’t pay their bills. There are so many companies that have gotten so levered up because of years and years of artificially low interest rates.”
Bond prices also dropped yesterday and yields rose for the second straight day. For the significance of that, click here.
Meanwhile, gold has languished, leading many people to ask why we’re not seeing a big increase in the price of the yellow metal as stocks tank. Peter said you have to go back to 2008. Gold crashed along with stocks in ’08. It just didn’t go down as much. Gold is a liquid asset and traders often sell the yellow metal to raise cash as stocks fall in order to cover margin.
With this market crash, gold has actually gone up. Not as much as people might expect, but even with the volatility, we have seen an increase in the price overall.
“The fact that gold has gone up and not down shows you that there’s a big difference between what’s happening now when this financial crisis is starting and what happened in 2008 when that smaller financial crisis started.”
