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A Palpable Sense Of Panic

November 13, 2018

Based the last few days’ headlines you’d never know the world is in year 10 of a pretty good expansion. Check this out:

Not terrified of a recession? These stocks hint you should be

Cyclical commodities continue to weaken, gold moves in relation

Italian banks on verge of new crisis on €400 million hole at Banca Carige

China rate-cut chatter becomes louder as growth risks gather

“iPhone story is showing cracks”: Apple slides under $200 after supplier forecast cut

Japan PM Abe calls for public works spending plan to help economy

What plunging oil prices tell us about stocks and the economy

Why Chinese authorities are freaking out

Note the strong words: “freaking out,” “plunging,” “slides,” “on verge of new crisis,” “terrified.” These headlines — which aren’t cherry-picked; they’re representative of what’s out there — display a palpable sense of panic.

What’s happening? The short answer is “time.” Nothing – long-distance runner, living organism or economic trend – continues in one direction forever because the longer the journey the more imbalances accumulate. In a runner these manifest as muscle cramps and shortness of breath. In an economy you get soaring debt, rising inflation, labor shortages and overpriced assets.

These make it harder to keep going, and increasing difficulty spooks traders and politicians, which in turn spooks the headline writers.

What happens next? People who were obliviously riding the growth wave try to make sense of this new pattern and discover that things aren’t as good as they thought. Maybe they find this chart (from Real Investment Advice) illustrating how pretty much all the “growth” the US has generated in the past few decades has been due to rising debt.

Then they wonder what this means for their mutual funds, and find this chart from the same source showing that, contrary to recent experience, stocks don’t always go up.

Our hypothetical person’s blithe optimism evaporates and they begin to act accordingly, dumping their stocks and telling friends to sell their houses, annoying most but converting a few who spread the word further, and so on, until the economy’s general mood turns dark. “Buy the dip” becomes “sell the rip,” cash becomes king, growth stocks are judged on their P/E ratios rather than subscriber trends. And everything is revalued with risk rather than reward in mind.

Is this that kind of phase change, or just a blip in a continuing expansion/bull market? We won’t know until after the fact, alas. Especially because there’s still at least one big potential player out there with the power to keep the game going: Corporations have been buying back their shares since 2009 and are projected to buy another trillion or so dollars’ worth in the coming year.

If they follow through, it’s possible that all that new cash will push the “illusion of prosperity” even further past its due date. But it’s also possible that regardless of how much cash they have on hand, corporate executives, as pattern-seeking humans, will notice market psychology shifting and decide that instead of being a good time to buy, this is a great opportunity to capture some dumb money by selling shares at record high prices. Note on the above chart what buybacks did in the two years after their 2007 peak. They went negative, meaning more sales than purchases, which turbocharged an already brutal bear market. They could do that again. It just depends on their mood.


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