Bloomberg Audio Studios, podcasts, radio news. I'll start with the broad question that I think is on everyone's mind today, and that is what the hell is happening?
Liquidation is happening.
John Authors is a columnist for Bloomberg who has written about markets for more than three decades. In other words, he's seen a lot like the dot com bubble bursting, the two thousand and eight financial crisis, and of course the pandemic sell off.
Even still, I could have told you there was a risk that something like this was going to happen. I have no clue that it was going to happen. Now nobody else did die.
That It's been read, read and more read across the board as stocks have plunged. The numbers were shocking, even to market veterans. This is Monday, and I have to say, folks, it is looking ugly out there. Yes, look, it's as Monica Monday as they get a college blood letting, panic mania. Just some of the wus that have been news to
describe the route. In Japanese as well as Asia equities, European shares also sank, and when the opening bell rang in New York, the Nasdaq plunged five percent in seconds, cryptocurrencies tumbled, and the VICKS known as the Fear Index, saw its biggest one day spike in data going back over thirty years.
We're at levels that we haven't seen all that often in the past three decades.
I'm David Gera, and this is the big take from Bloomberg News. On today's episode, John Authors walks us through the market meltdown, what triggered it, how long it could last, and went to panic. So, John, you've been warning about a selloff like this one for months. What did you see that worried to you, that made you think that something like this was going to happen.
Well, if you look at the Magnificent seven, the big text docs, Yes, the very big tech stocks, they had started to be treated almost as though they were US treasuries. That these are very very safe companies, and when you were worried about something, you bought even more in Nvidia, Microsoft, Apple, etc. I'm not saying they aren't really great, incredible companies, because they are for the longer term, but the fact that they are as monopolistic as they now are should be
a cause of some concern. It's highly unlikely they're going to be allowed to stay quite as powerful as they are. But that was plainly an overdone, overcrowded trade. Everybody could see this. Now is the time when it's started to come unpicked.
And the unpicking accelerated after Apple and Amazon, Meta and Microsoft reported second quarter earnings.
The key point was that they were priced for perfection beforehand, so it's not like the earnings were terrible. The critical point that people were looking for was is AI going to pay off?
Is it going to make money?
Well, it'd be amazing if you didn't make money eventually. Like the Internet eventually made a lot of money. People were expecting it. In two thousand. When the Internet bubble burst, people realized they had been expecting it to make money far earlier than it could possibly do. That is the analogy. It's whether AI is actually going to bear fruit straight
away that is in question. I would say from the earnings results we've had so far, I don't think we have proved that AI isn't going to make money for years and years. But these results we've seen would give cause to any CEO thinking in terms of really putting the boats out to invest in AI.
Now. Adding to those concerns was a report that Warren Buffett Theracle of Omaha, had sold almost half of Berkshire Hathaway's sizable steak in Apple, about seventy five billion dollars worth of stock. We have Warren Buffett selling Apple Sheries, and we had a Bloomberg storytelling traders, Okay, maybe it's really not some cost for panic, but of course we have some traders panicking and lot. But John said, there is really no reason to panic, at least not over this point.
He bought that steak mostly in twenty sixteen, which turns out to have been a fantastic time to buy it. Nobody ever took a loss by recognizing a profit. So I don't think it actually is terribly meaningful, any great reason to sell the stock. That Warren Buffett has done what you would expect him to do. But it obviously freaked people out. It's obviously a scary data point that happens to come out just when it did.
But John told me what is worth paying attention to is what happened at several major central banks last week. On Tuesday, the Bank of England its target interest rate. Policymakers say they're satisfied they've gotten inflation under control. Then on Wednesday, the Bank of Japan increased its target interest rate in an attempt to slow economic growth. A few
hours later, it was the federal reserves turn. The central Bank voted to keep its target interest rate unchanged, but FED Chair Jerome Powell did suggest the next meeting could be different. A reduction in our policy rate could be on the table as soon as the next meeting in September. I asked John about this seeming lack of coordination. Was this haphazard unwinding the cause or part of the cause of the market turmoil?
Uh? Yes, central banks have started talking in terms of mountains, whether we were going to have a matter Horn type rise in rates which is almost immediately followed by a slope down, or whether you were going to get more of a table mountain where rates go up and then they just stay at a plateau for a long time. And then what you definitely want to avoid is El Capitan or Seroh Torah, where things just suddenly go for tonks straight down very sharply because they have to because
there's an emergency. And then the other point about the mountaineering analogy is that far more mountaineers die on the way down than on the way up. You really need to be coordinated when you're clambering back down a mountain. And last week the Bank of Japan actually raised rates, the Bank of England cut, and the Fed did nothing. That's exactly the kind of lack of coordination that increases the risk of an accident.
And then, of course we had the US Jobs report released on Friday, which showed the unemployment rate rose more than Wall Street expected, to four point three percent, and the US economy added one hundred and fourteen thousand jobs last month, far fewer than four k. I wonder what your reaction was to that. Having just heard from Venturo J.
Powell on Wednesday, my reaction was that this probably means trouble. To be clear, it's there was still one hundred thousand extra jobs created, not too shabby, and there had been a hurricane and in Houston, which people were expecting to distort things, and the unemployment rate is still not much over four percent. This isn't a recession or anything like
it thus far. It did trigger what is known as the Psalm rule after Cloudy Assam, who does contribute pieces to Bloomberg Opinion, which comes at the notion that the way the jobs market tends to work is that unemployment will tick up very gently and will then get to a sort of Malcolm Gladwell style tipping point, after which it shoots up very sharply. And that tipping point, according
to the Psalm rule, was reached on Friday. Lots of people had been looking at this, noticing this, and so that really did contribute in a big way to market nerves.
Jerome Power looks at these numbers, look at those job dead numbers, and does he think now it's too late to cut? Is a fifty basis point cut? What he should be thinking about or considering? How do you think through what the Fed's next steps might be or should be?
Okay, at the moment, the question is do we really look as though we're running scared if we cut between meetings, which is what people out there are thinking, you can risk looking panicked if you cut between meetings. It's too big and clear in admission of error. My best guess is that unless the sell off intensifies quite dramatically from here, not saying it won't, he won't cut until the next
scheduled meeting in September. One other key point to bear in mind, iss they've got to be very careful not to look as though they are trying to help the incumbent Democrats. I personally have never taken that argument terribly seriously. J. Powell is a registered Republican, first appointed to his job by a Republican president. I am not inclined to take that terribly seriously. If there has been any reticence to cut, I think the market is now giving very strong cover for them to make a cut.
Coming up after the break, John tells us the number one thing that would indicate there is more trouble ahead central banks that are uncoordinated, earnings that would only please if they were near perfect, and a disappointing jobs report. These are just a few of the reasons markets are undergoing what Bloomberg colonists John Arthur's calls a liquidation event. And when investor has become fearful, they usually go to the one place they feel is safe. That's US government. Barns.
We've talked a lot about stocks and what we've seen in the stock market. Let's move to Barns and what you're seeing there and what that could tell us about where this has headed and how long this dip might last. Well.
The bond market is the getting into very technical territory. The yield curve has very briefly uninverted. Today as we're recording this, it's back inverted. But generally what that means is usually ten year yields a much higher than two year yields because there's more risk attached to investing in the longer term. And for over two years, tenure yields have been below two years. That's generally a sign that
you think there's a recession coming. When you reach the point of disinversion, that generally means rate cuts are right about to happen and a recession is just about to break out. So you know this is not good. In general, the bond market at this point seems to be more concerned about the possibility of an imminent recession than it has seemed about the possibility of irresponsible fiscal policy.
John talk about international contagion. I imagine this ruined your Sunday. But you saw what happened in Japan. We're sell off since nineteen eighty seven. What does that tell us about the sell off that we're seeing.
I think the sell off in Japan was more about this was made in America. This was I mean in my column was that this was a butterfly flapping its wings in Wall Street caused the tsunami in Tokyo, not the other way around. For a change, Basically, if you look very many Japanese people, the strategy that has worked beautifully for a long time if your Japanese is to buy stocks from elsewhere and then as the yen weekens,
you do even better. What you saw was a reaction to central banks moving in such way that the yen went up, meaning that you had a correction for them, so you get a classic cascade Tokyo is a very clear sign that something is wrong that must give.
Another thing adding to the brutal day in Tokyo was the unwinding of the yen carry trade. It's complicated, but basically a carry trade is when an investor borrows money in a low interest rate currency, in this case, the Japanese yen, and then invest the money in a higher yielding foreign currency. This had been very popular, John said until the Bank of Japan raised interest rates last week.
The trade of borrowing in the end selling the en and parking in a currency where you get much higher rates particularly the Mexican peso has been fantastic. One of my favorite factoids is that for the century so far, you would have made more money in the yen peso carry trade than you would have done in the S and P five hundred the US stock market. That is bonkers. It was obviously ridiculous that there was so much money
to be made that way. Now the Bank of Japan has tried to shake things, and the result has been an absolutely massive bust in yen carry trades.
For an investor who's panicking, I imagine your counsel would be stand pad, don't do anything. Don't do anything immediately.
Panic is seldom a good idea. The reason Warren Buffett has whatever it is, two hundred and fifty billion dollars worth in cash is because he thinks he's going to have a good opportunity to use it soon. Bear that in mind, if you were already heavily in tech stocks, that's probably not a great place to have been. Sorry about that. This is just unremittingly boring, but good family
investing EA is dolocaust. Investing into equal weighted funds which aren't overweighting tech is probably as good an idea as it was last week. It just appears more so now.
John, could you put this sell off in context given the gains that we've seen in the last year or so.
At the point that we're recording this in video, is down twenty six and a half percent from the top, and it was up exactly one hundred percent for the year to date. And we're still only in the first week of August. So you can look at that as well, we're still doing pretty well. You can also look at it as boy, is there a long lot of room below As it stands at the moment, this is, you know, obviously a significant market incident. I wouldn't yet say it
was definitely a bear market. It's not a crisis and it's not a crash yet.
So what would make it a crash or a crisis? John said, to pay it attention to one thing.
I think the key to whether it really becomes serious. This is going back to the major crisis is you need some major financial institution to get into trouble, whether it's long term capital management or Lehman Brothers or last year a bunch of medium sized regional banks. That's what happens if somebody has got into so much trouble that they're forced selling or that they're going under that that would make things much worse. That would take us to the next level.
This is the Big Take from Bloomberg News. I'm David Gura. You can subscribe to John Arthur's daily newsletter Points of Return at Bloomberg dot com, where you'll also find all our markets coverage. And we put a link in our show notes to the latest episode of The Odd Lad's podcast on the hidden forces driving the market sell Off if you want even more more information on what's going on. This episode was produced by David Fox and Alex Sigura, who also mixed it. It was fact checked by Adriana
Tapia and edited by Caitlin Kenny and Sid Verma. Our senior producers are Kim Gittleson and Naomi Shaven. Our senior editor is Elizabeth Ponso. Nicole Beemster Bor is our executive producer. Sage Bauman is Bloomberg's head of podcasts. Thanks so much for listening. Please follow and review The Big Take wherever you get your podcasts. It helps new listeners find the show. We'll be back tomorrow