Stock Market Chaos Engulfs the Mightiest

It was a big ugly one for the stock market. Stocks cratered, and, for once, it wasn’t because the Fed suddenly sounded like it wasn’t going to provide the high-sugar candy of lowered interest to juice up the market. This time it was due to economic fundamentals—the kind of fundamentals you see during a recession—terrible earnings that came in below expectations.

Even that comment requires further explanation to sense the significance. For years now, companies have tried to lower expectations for earnings as they neared reporting season in order to make it easy to clear the bar of expectations. During the late Biden years, I think expectations have been lowered more than in most previous years. And, yet, several companies reporting failed to clear an expectations bar that is practically sitting on the ground.

In a matter of hours, the entire Tesla corporation was worth 12% less in the kind of nosedive that has mostly been happening to top-performer Nvidia recently as the hot air is released from the market. This was Tesla’s worst plunge in four years. It was like they had a clearance sale on Tesla stock:

Tesla on Tuesday said auto revenue declined 7% from a year earlier to $19.9 billion while margins also fell…. The company has been forced to slash prices globally and offer discounts and incentives as it faces slowing sales and rising competition, especially in China….

Tesla’s adjusted operating margin shrank to the lowest in three years, dropping to 14.4% from 18.7% a year earlier. It’s the fourth straight quarter of shrinkage.

Not much more than a month ago, the hot air that circulates among market makers was claiming companies like Nvidia could never fall like we saw in 2000 during the dot-com bust because they are the companies that will be running the world for years to come. People said that as if they were oblivious somehow to the very fact that what they were saying was the exact same argument used to support nosebleed valuations of high-tech stocks during the run-up to the dot-com bust. It pays to be old enough to remember those times that have been forgotten.

Now, if Tesla were the only one having troubles, it might be just a Tesla thing and hardly bear mentioning. However, Google/Alphabet joined the fray with a plunge of its own. Other stocks joined in, as well, taking the S&P and Nasdaq by end of day into their worst plunge since the crash of 2022 when Fed-addicted markets tanked because the Fed removed the market’s stimulants and started tightening interest rates. Google rode downhill 5% because YouTube advertising revenues are getting crushed … as tends to happen during recessions.

Now, listen to the blithering mainstream press:

Wednesday’s sell-off was caused by a perfect storm of an overbought market, high bar for earnings and a seasonally weak period for equities.

There was no high bar for earnings. All they had to do was beat widely lowered corporate projections that were used earlier to lower expectations. This they failed to do because the economy sucks. The only “high bar” was, “You better darn well beat these lowered expectations, or there will be hell to pay.” So, there was hell to pay because they couldn’t even do that, but what do you expect from fundamentals when the economy is in a stealth recession? You expect things to behave exactly as they did.

Drinking recession with a cup of inflation

The U.S. PMI flash manufacturing output index fell to 49.5 in July, unexpectedly slipping into contraction territory as new orders, production and inventories declined. Economists had forecast a reading of 51.5, according to Dow Jones….

A Wednesday report also showed new home sales came in lighter than economists had expected for the month of June.

Orders drop during times of recession. So do home sales. In short, stocks dropped because the economy is falling into recession.

Almost a month after our warning that this earnings season will be ugly … analysts are poring over this week’s raft of earnings for signs that the tech-driven rally of the first half of the year has longer to run.. and so far they aren't finding them….

“What we’re seeing during this earnings season is the growing gap between the rather optimistic profit consensus from analysts and slowing economic growth,” said Benoit Peloille, chief investment officer at Natixis Wealth Management.

No surprises here. It’s what happens during recessions.

But, hey, at least oil prices, after taking a short rest, are back to rising again, promising Powell an encore round in his fight with inflation, which will make it hard in the future to stimulate us back out of recession with lower interest rates. That means the recession could be a hanger-onner. And electricity prices are surging under heavy demand. And another kind of liquid black gold—your already overpriced cup of coffee—is about to get even more expensive.

As part of our prep for possible shortages during the supply-line shutdowns, my wife and I laid in extra supplies of the all-important morning beans whenever they were on sale and froze them. At the time, I said, “Even if no coffee shortages become big enough to leave us needing backup supplies, we can count on higher prices for some time, so this will be a nice hedge against inflation. Well, now we’re slowly consuming the hedge to take advantage of that prep … and because they only freeze for so long before they lose quality. (Of course, if shortages get worse, we may wish we hadn’t.)

What all of this means is that, “Yes, Virginia. We’re having a staglfationary recession” like I’ve said was coming for the last couple of years due to the Fed’s raucous monetary party that ran from 2020 to 2021 … after all their other raucous parties.

Real estate crush it

Well … crushing banks and financial institutions. We also saw the housing market take a big hit (or saw the hit it has been taking get reported to be more accurate). Buyers have held out long enough that we’re starting to shift from a sellers market to something like a shift toward a buyers market. It is far from being there, but that was the direction of the recent shift. Mortgage demand has dropped as buyers sit and wait for the Fed to lower rates enough to affect mortgages. I suspect that will be a long wait … at least until it affects mortgage rates enough to matter. So, I’m not sure the ice dam in housing is going to thaw all that quickly, but there is a shift happening.

On the commercial real-estate front where the worst collapse in values has happened, Blackstone slashed dividends by 24% in the face of piling distress from bad CRE loans. On the same day, the infamous Deutsche Bank took a soaking in the stock market because it has taken a soaking in the CRE market. Deutsche Bank’s dismal results kicked dents into the stocks of banks across Europe.

One has to wonder how much longer it will be before Santander, BNP Paribas, and Deutsche Bank—the big three barnacles under Europe’s banking foot—start to draw blood. These giants have wavered for a long time but never gone fully down.

Chaos is in style

You may remember, if you read my Deeper Dives, that I warned the world’s largest internet crash due to a mere glitch by CrowdStrike was a prime example of the massive risk taken by nations that switch to central-bank digital currencies. Now the mainstream press in the UK is getting on board with my thinking (not that they know about my thinking in order to know that they’ve moved on board with it).

Last week’s global IT outage appears to have shaken some British media outlets’ confidence in the idea of a fully cashless society. When a content update by the cyber-security giant CrowdStrike caused millions of Microsoft systems around the world to crash on Friday morning, bringing the operating systems of banks, payment card firms, airlines, hospitals, NHS clinics, retailers and hospitality businesses to a standstill, businesses were faced with a stark choice: go cash-only, or close until the systems came back online.

That option will disappear when CBDCs replace cash. And your gold won’t do much good as direct money either because grocery stores won’t accept it, and you won’t be able to convert it into cash because there won’t be any cash anywhere. You will, of course, be able to barter with it, but you won’t be able to turn it into “money” for as long as the computer world is shut down by a bug or as long as you want nothing to do with CBDCs. I’m not saying gold is not a good move; but it’s not a panacea, and its actual deployment will be harder to orchestrate, not easier. (Right now, most people when they are going to deploy their gold, convert some of their stores into cash then trade in cash. You’ll have to convert it into CBDCs or barter with the limited few willing to barter in gold, though that may become a growing number.)

This quickly caused chaos in Australia, whose government has explicitly encouraged businesses to go cashless. Pictures posted on social media showed card-only self-checkout registers at the grocery chain Coles displaying Blue Screens of Death (BSODs). Queues for human-run registers at Australian groceries stretched to the back of the store, according to local media. Some Australian marts simply locked their doors…

Starbucks—whose then-CEO said in 2020 was shifting “toward more cashless experiences”—appeared to have been particularly hard hit. One Kansas-based Starbucks worker posted a TikTok showing that the mobile order system was “completely down.”

Regardless, that is the world that is coming, and I’m here to keep warning you about it with each piece of passing news in that direction.

As for that “Year of Chaos” I predicted, others are writing about this year’s chaos, too, now, comparing it to the chaos of some of our nation’s worst years. And that is what this year is shaping up to look like—like the most tumultuous years in history in order to find any that match.