Is Argentina the Economic Canary in the Coal Mine?
Responding to the crushing primary defeat for Argentina’s US-supported neoliberal Macri regime, signaling the likely end of his tenure and a decisive shift to the left in the October presidential election, the nation’s stock market plunged 48% in dollar terms on Monday.
It was the second greatest equity market rout in 70 years, Sri Lanka’s 61.7% crash in 1989 alone exceeding it during this period.
The early stage of the US 1929 market crash was far less severe, plunging 13% on October 28 Black Monday and another 12% the following day — ending the “roaring 20s,” ushering in the 1930s Great Depression.
In September 1929, noted economist Irving Fisher notoriously said: “Stock prices have reached what looks like a permanently high plateau.”
At the market’s trough in July 1932, stocks lost 89% of their September 3, 1929 peak value. Recovery to that level didn’t happen until November 1954.
Argentina’s Merval equity index crash also saw the country’s peso plunge over 30% to the dollar, recovering some ground by the market’s close.
Will Argentina’s meltdown spread. As the saying goes, “(o)ne swallow does not a summer make.”
Wednesday’s 800 point drop in the US Dow average may or may not signal economic decline and recession ahead. On August 5, the Dow dropped 767 points before recovering losses.
Financial explosions up or down can happen without warning. According to market analysts, there was a minuscule chance of an Argentinian market rout, but it happened.
After a prolonged global bull market, created by money printing madness by the Fed and other major central banks, elevating equities to bubble levels, an eventual day of reckoning is to be expected — only when, by what trigger, how severe, and over what duration unknown.
Does sharp volatility on Wall Street and other major markets, rising gold prices and flight to fixed income investments signal downturn? Only the fullness of time will tell, hindsight the best foresight.
In Argentina, its Merval stock index soared 42% this year through August 9 — lost in a single trading day as the index turned negative, signaling likely more losses ahead.
When fear and uncertainty grip markets, sharp selloffs can follow, at times panic like on Wall Street in October 1929. At the same time, what happened nearly 90 years ago doesn’t indicate what lies ahead now.
Yet for the first time ever, the 30-year US Treasury’s yield fell below 2%, dropping to 1.9689%, a historic low, investors fearing recession.
The fall inverted the entire yield curve, a bearish sign. The two-year/10-year US Treasury inverted for the first time since 2007, the onset of the great 2008-early 2009 great recession.
History shows recessions most always are preceded by yield curve inversions. With short US interest rates at around 2%, the ($22.5 trillion) national debt exceeding GDP, and the Fed’s bloated $4 trillion balance sheet, there’s little monetary and fiscal ammunition to stimulate recovery during the next downturn.
Over-valued equity valuations are exacerbated by Trump’s trade war with China and what looks like a US color revolution attempt in Hong Kong, trying to destabilize the country.
China’s economy is weakening, industrial production growth at its lowest level since 2002, retail sales also down from an earlier in the year high.
Wednesday’s Dow plunge in numerical terms was the fourth largest single day one on record — nowhere near the largest percentage drop.
On October 19, 1987, the Dow plunged a record 22.6%. Recovery, not recession, followed. Wednesday’s Dow percentage drop was a mere 2.9%.
It may or may not signal global recession ahead, and if coming, it can take months to unfold.
According to Phoenix Capital’s Graham Summers, market breadth is a key indicator. When it “underperforms the S&P 500,” stocks usually go down.
“With that in mind, breadth has broken a bearish rising wedge formation. This is an EXTREMELY bearish development for stocks. This is telling us stocks are going DOWN, possibly quite a lot.”
According to the Economic Collapse blog, “ ‘too big to fail’ banks were on the cutting edge of (Wednesday’s) decline, and some of the biggest names in banking got absolutely monkeyhammered.”
“The S&P 500 Financials Sector dipped into correction territory on an intraday basis…(B)ank stocks also led the way down in 2008.”
It remains to be seen if history repeats in some form, the answer not likely to be known for some time, though anything ahead is possible.
In August 2018, the US bull market became the longest in the country’s history — made possible by money printing madness, benefitting Wall Street and high-net worth investors, not main street.
What can’t go on forever, won’t. What goes up exponentially can come down harder and faster when the music stops.
The (Wall Street owned and controlled) Fed’s mandate is to stabilize the economy, smooth out the business cycle, manage healthy, sustainable growth, and maintain stable prices.
Its policies created economic and financial instability, periods of high inflation, high unemployment and growing poverty, numerous recessions, the 1929 Wall Street crash, the Great Depression, and unprecedented excesses since 2008 — serving investors over the general welfare.
My newest book as editor and contributor is titled “Flashpoint in Ukraine: How the US Drive for Hegemony Risks WW III.”