Why Is The Stock Market Crashing?

Such an annoying question to ask, isn’t it? The correct answer is because people desire to hold stocks less and prefer to hold cash more than they did prior to the crash. The reasons for this are ultimately unknown but we can speculate.

The value of a stock to an investor is the present value of all future expected cash flows, discounted by the risk free rate. If you wanted to be 100% accurate you’d need to use the expected rate from now through the day of each individual cash flow, respectively, but I like to use the 20 year t-bond rate for simplicity’s sake.

Based on this there are two major reasons for stocks to crash: a drop in future expected earnings and/or a previously unexpected increase in the risk free rate.

Market action from Feb 1-8 has basically been marked by the following factors:

  • crashing stocks
  • slightly falling gold prices
  • falling/stable short term Treasury rates, rising long term Treasury rates, with a shift occurring around the 3-5 year duration (see graphic below)

Falling/stable gold prices indicate that investor expectations of future inflation haven’t fundamentally changed in recent days.

There’s no evidence that I’m aware of that indicates that corporate profit expectations are collapsing, in fact, the recent earnings season was upbeat, with positive news & expectations all over the place. But it’s also important to point that after the recent tax reform which is expected to expand deficits (a net positive on corporate profits, as I’ve explained before) one big factor towards rising corporate profits is now 100% priced in, whereas before it wasn’t.

Furthermore, there’s currently no evidence that the Fed is planning on accelerating the expected schedule of 3 rate hikes this year. In fact, at this very moment CME Fedwatch probabilities even slightly lean towards only 2 vs the widely expected 3 rate hikes!

In my opinion, this kind of action more than anything hints at a sudden change in investor expectations in the schedule of Federal Reserve interest rate increases over the coming years.

The one significant factor that I’ve been able to pinpoint is the seemingly subtle change in language in the most recent FOMC statement from January 1 2017. Minor shifts early on in the future schedule of expected rate hikes can have a huge impact on long term rates, since long term rates are basically just a bet on the average rate of short term rates inbetween.

If you do a text compare with previous FOMC statements, the following changes in verbiage stand out:

  • While most previous Fed statements said that “Market-based measures of inflation compensation remain low”, the most recent one states that “Market-based measures of inflation compensation have increased in recent months but remain low”.
  • Furthermore, most previous statements said that “Inflation on a 12‑month basis is expected to remain somewhat below 2 percent in the near term”, while the most recent one states that “Inflation on a 12‑month basis is expected to move up this year and to stabilize around the Committee’s 2 percent objective over the medium term”.
  • And finally, another subtle difference is that statements recently always said “The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate”, while the most recent one stated that “The Committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate”.

These changes could indicate that the Fed is beginning to prepare markets for an acceleration in the pace of raising interest rates, not immediately this year, but in the coming years.

This could explain why there hasn’t been a big shift in the rates on 3-5 year bonds, but after that the rates have increased substantially, with the 20 and 30 year Treasury rate (the one I like to use to discount future expected profits) rising by 13 basis points over just a few days. Such an adjustment in the medium to long term schedule of expected rate hikes, without corresponding changes in future profit expectations, can absolutely lead to significant adjustments in current stock market valuations, after which things should continue at the usual pace. For simplicity’a sake you could run a simplified model of present value at constant growth using different discount rates to get an idea of the possible magnitude of such adjustments.

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Declassified FISA Abuse Memo Confirms DNC, Obama Administration & Criminal FBI Elements Engaged in Grafting, Perjury, Obstruction of Justice, Fraud, Lying to the Government, Illegal Spying & Treason

We now have final confirmation for what we knew all along:

– Trump’s campaign was spied on illegally by criminals in the FBI under Obama.

– Mueller’s criminal witch hunt was initiated based on COMPLETELY fraudulent information.

– This is Watergate x 1000

Here’s somem gems from the document:

“Neither the initial application in October 2016, nor any of the renewals, disclose or reference the role of the DNC, Clinton campaign, or any party/campaign in funding Steele’s efforts, even though the political origins of the Steele dossier were then known to senior and FBI officials.”

“The Carter Page FISA application also cited extensively a September 23, 2016, Yahoo News article by Michael Isikoff, which focuses on Page’s July 2016 trip to Moscow. This article does not corroborate the Steele dossier because it is derived from information leaked by Steele himself to Yahoo News. The Page FISA application incorrectly assesses that Steele did not directly provide information to Yahoo News. Steele has admitted in British court flings that he met with Yahoo News and several other outlets in
September 2016 at the direction of Fusion GPS. Perkins Coie was aware of Steele’s initial media contacts because they hosted at least one meeting in Washington DC in 2016 with Steele and Fusion GPS where this matter was discussed.”

“in September 2016, Steele admitted to Ohr his feelings against then-
candidate Trump when Steele said he was desperate that Donald Trump not get elected and was passionate about him not, being president. This clear evidence of Steele bias was recorded by Ohr at the time and subsequently in offcial FBI files but not reflected in any of the Page FISA applications.”

“The Ohrs’ relationship with Steele and Fusion GPS was inexplicably
concealed from the FISC.”

“Deputy Director McCabe testifed before the Committee in December 2017 that no surveillance warrant would have been sought from the FISC without the Steele dossier information.”

Read the document here:

FISA Abuse Memo

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Could a Government Job Guarantee Permanently Solve the Unemployment Problem?

The Federal Job Guarantee – What Heresy is This?

Dylan Moore of the Volitional Science Network and Nima Mahjour of EconomicsJunkie.com go over the basics of libertarian and Austrian thought on the role government plays in the economy.

A philosophical analysis of negative and positive rights tells us that any time the government gets involved in PROVIDING something, it must be inherently oppressive because someone need merely demand it to create an obligation on the government to provide it, and the government must provide it by taking it from someone else.

The Bill of Rights enshrined the concept of negative rights in the US Constitution.

However… there’s a weird one. The 6th Amendment. The government guarantees a right to a speedy trial. That sounds kind of like a positive right, doesn’t it?

(NOTE: I totally say 4th Amendment in the video. Doh.)

Libertarian philosophy argues: if the government causes the problem, then the government has to provide the solution. If the government arrests you (problem), it has to give you a means to deal with that arrest (speedy trial). Thus it doesn’t fit the category of a positive right.

…but what happens if government causes the problem of requiring citizens to pay taxes with money?

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#MMT For Conservatives Part 3 – Libertarian Warren Mosler Explains Why Government Deficits Facilitate Economic Growth & Why Most Taxes Should Be Abolished!

I had an absolutely EPIC conversation with my friend Dylan Moore and economic expert & MMT founder Warren Mosler. What an honor!

Warren talked about Modern Monetary Theory, the Gold Standard, the mechanics behind the Global Financial Crisis of 2008 & the banker bailouts, inflation, credit, and much more. Enjoy!

To read more from Warren have a look at his website Mosler Economics

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MMT For Conservatives Part 2 – What You’ve Never Been Told about the Economy

Dylan Moore of the Volitional Science Network and Nima Mahdjour of EconomicsJunkie go over the basics of MMT: what you’ve never been told about the economy.

-The concept of Credit Money and the Statist origins of money
-Sectoral Balances: how foreign trade can affect money supply and economic conditions
-Floating vs. Fixed Currency Systems: the arbitrariness of the gold standard
-Why do governments sell bonds? Do they actually fund spending? No. They are essentially risk-free assets for rich people.
-What do federal reserve interest rates do? Nothing.
-If interest rates do nothing, why does the Fed control them?
-What does Quantitative Easing do? Turns out it’s nothing to worry about.
-The basics of the private banking system

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