Hello, viewers! Welcome to “Qin Peng’s Observation.”
Today’s focus: Is the 1987 stock market crash repeating itself? Black Monday, global stock market plunges, four major reasons behind it; Buffett sells Apple stocks, what signal is he sending?
Is it an economic recession or just excessive panic? Buffett’s famous saying: “If you’re worried about it, you shouldn’t own stocks.” Recent rise of the prophet Biggs predicting an economic collapse, when will it happen?
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On August 5th, it was a day of panic and darkness for global stock markets. The Nikkei index plummeted by 4451 points, surpassing the 3836 point drop on October 20, 1987 (“Black Monday” aftermath), setting a historic new high with a full-day decline of 12.4%, slightly lower than the 14.9% in 1987.
Major trading companies like Mitsubishi, Mitsui, Sumitomo, and Marubeni all experienced crashes of over 14%. SoftBank Group’s stock price plunged by 19%, causing founder Masayoshi Son’s net worth to shrink by $4.6 billion in a single day.
The crisis quickly spread globally. On Monday, the three major US stock indexes all fell by more than 2%, with the Nasdaq dropping by 3.8%. Tech giants like Nvidia, Tesla, and Apple all witnessed declines of at least 4% on the same day.
Amidst the panic, online trading for millions of stock users in the US experienced interruptions. Brokerages like Schwab, Fidelity, Vanguard, as well as popular trading platforms E-Trade and Robinhood, all faced issues.
The reasons behind the stock market crash are believed to be mainly triggered by last week’s US job data, along with the recent easing of artificial intelligence hype and the Bank of Japan’s rate hike. Buffett’s recent sale of half of his Apple stocks and increase in cash reserves further exacerbated the turmoil.
On Friday, the US announced an unemployment rate of 4.3%, shaking the markets. More concerning was the continuous rise in unemployment rate over the past three months, up by 0.5% compared to the previous 12-month average. This surge might have already triggered the indicator for an economic recession – the Sahm Rule, proposed by Claudia Sahm, an economist at the Fed, in 2019. The rule has been consistent with recessionary periods since 1970.
The US manufacturing index is also clouded with negativity. Additionally, recent financial reports from large US tech companies like Tesla and Google’s parent company disappointed the market. Intel’s stock price plummeted by 26% in a single day due to underwhelming performance, causing a stir.
In the past two years, more and more people have begun to question to what extent AI can improve company performance. The continuous 3-week decline of the Nasdaq index reflects the market’s negative sentiments towards tech stocks.
On August 3rd, Buffett’s company reported in the Q2 financial statement that he sold about half of his Apple shares, significantly reducing his stake from $174.3 billion at the end of the first quarter.
Additionally, as of the end of June, Berkshire Hathaway’s cash reserves reached $276.9 billion, a record high, representing a 31.74% increase from the end of the first quarter’s $189 billion reserves. Industry experts suggest that this indicates a potential temporary peak in Apple’s stock price or the overall US stock market. Some speculate that Buffett holding a large amount of cash might be waiting for a market crash.
The first crash occurred in Japan due to the decision of the Bank of Japan on July 31 to raise rates again, lifting the previously 0% – 0.1% policy rate (unsecured overnight call rate) to 0.25%, effective from August 1.
Prior to this, with near-zero interest rates in Japan, most global capital was engaged in carry trades: borrowing yen, exchanging it for dollars or other currencies, and investing in high-yield countries’ assets. As I previously mentioned Buffett’s investment in Japan, betting on the Japanese stock market through issuing bonds led to significant profits. Now, with the sudden rate hike and balance sheet tightening by the Bank of Japan, disrupting global capital’s carry trades, the yen surged, prompting global capital to deleverage, liquidate stocks, and repay yen. This triggered a massive stock market crash in Japan, spreading panic selling worldwide.
I believe there is another significant reason, the stock market has risen too rapidly this year, leading investors to secure massive profits during this period of volatility. In the words of a Zen Buddhist koan, “It is not the wind that moves, it is not the flag that moves, it is your mind that moves.” Wine does not get people drunk, people get themselves drunk.
However, looking at the international situation, threats from Iran and its allies towards Israel have escalated tensions in the Middle East, further contributing to market volatility.
So, one might ask, does this indicate a major problem for the US economy in the short term? Is the turmoil a short-term occurrence or a long-term change? Interestingly, the term “Rising East, Falling West” has appeared multiple times in Chinese securities reports recently – suggesting that global assets may receive more attention due to the recent global stock market declines and shifts in the risk-off and “buy the dip” modes. Let’s analyze:
First, about “Rising East, Falling West.” By the close of Monday morning, A shares briefly showed a hint of green amidst the sea of red, indicating that the concept of “Rising East, Falling West” might be unfolding. However, the Chinese stock market indices also fluctuated and ended with losses, with the Shanghai Composite Index dipping to 2863 points again, even lower than the previous Tuesday’s low. The challenge came quickly.
Secondly, the rapid decline in the Japanese market suggests a potential swift rebound. The norm in the investment world is that sudden market sell-offs are less dangerous compared to gradual selloffs over time. This is because investors who rationally price bad economic data often act more slowly. Moreover, with many global stock markets now automated, quantitative trading will exacerbate market fluctuations.
Furthermore, concerns among American investors seem somewhat exaggerated. Greg Daco, Chief Economist at EY, believes market panic is “disproportionate.” In a report to clients, he wrote, “It seems like an overreaction, particularly given the limited economic data this week and Fed’s communicated expectations.” He referenced several healthy economic indicators of the US.
Most earnings reports from US companies in Q2 brought positive news, with 78% of publicly traded S&P 500 companies exceeding profit expectations, compared to the 10-year average of 74%. Both AI-related companies and other businesses reported higher net profits than predicted one month ago. Overall, the US economy appears robust: the rise in the unemployment rate is due to an expanding workforce.
In conclusion, some have likened this stock market turmoil to the 1987 crash or the 2008 financial crisis. However, a viewpoint in the Wall Street Journal suggests it may resemble 1987 more: markets rise, then fall, with minimal casualties.
On October 19, 1987, Black Monday, the US stock market experienced the largest single-day drop in history, with the S&P 500 plunging over 20%. However, the Fed injected liquidity into banks and brokers did not default, allowing the US stock market to recover all losses within two years because the economy was already strong at that time.
Several similarities are identified this time around: in 1987, the S&P 500 rose by 36% within eight months before peaking, similar to the 33% increase in eight months this year. Like in 1987, although monetary policy tightened, and long-term government bond yields were high, this year’s returns were still realized. Conflicting with tight monetary policy and high government bond yields, investor nerves were heightened in 1987, preparing to sell stocks to lock in unexpected profits.
What’s truly scary would be a repeat of the 2008 financial crisis, however, that seems less likely. Indeed, some large US banks collapsed last year due to poor bets on government bonds. But presently, the overall leverage ratio of US banks is much lower than before 2008, and the system faces less risk of a liquidity crisis, as private lending institutions now bear most of the banks’ past risks. Significant losses may occur, and hedge funds might encounter issues, but that would take time and not cause a systemic crisis like in 2008.
This brings to mind an infamous quote from Buffett: focus on long-term rewards.
“If you are worried about a price adjustment, you should not hold stocks.” In a 2015 interview with the Wall Street Journal, Buffett stated, “The stock market is going to fluctuate. If you are going to make money in stocks, then you have to learn not to get scared.”
As of now, the US service sector is booming, accounting for 80% of GDP, while the manufacturing sector comprises only 11%.
However, there are still some areas of concern. In addition to the Sahm Rule mentioned earlier, three more issues have arisen:
Firstly, last week, the two-year US Treasury bond yield rose to 3.746%, exceeding the 10-year yield of 3.678%. The inverted yield curve, where short-term yields are higher than long-term yields, is a widely watched indicator of an impending economic downturn.
On August 5th, amid the wails of the stock market, the two-year US bond yield dropped by 23 basis points, reaching 3.65%, while the ten-year yield was at 3.68%. Portfolio manager Ari from Marlborough Investment Management stated that an inverted yield curve indicates the US economy has entered a recession. “Historical experience shows that when the curve normalizes, the economy is already in decline. This signal is even more worrying.”
Secondly, the pain of rate cuts and the ripple effect. A capital market expert focusing on Buffett’s investment logic told mainland China’s Caixin reporter, “The Fed’s high interest rates, followed by each rate cut, usually triggers a big wave. Buffett selling stocks, hoarding cash, and investing in US Treasury bonds and equivalents, we will see in the next two years if his investment decisions are correct.”
This individual believes that if the Fed adopts rate cuts, stock market bubbles may burst, and rate cuts signal an economic recession. “Looking at the recent massive crash in the Japanese stock market, the crisis might be triggered by the Fed,” he said.
Lastly, the continued and spreading collective panic. If collective panic spreads to the real economy like a snowball, it could also trigger an economic downturn. Even in a seemingly healthy labor market in 2019, this is a worrying issue – as the concern persisted until 2022 following the Fed’s rapid increase in rates.
This morning, a friend shared a video with me about the American pastor Biggs, who accurately predicted Trump’s assassination on March 14, saying that he saw a vision of someone attempting to murder Trump. “I saw Trump stand up, and then I saw someone try to assassinate him. The bullet went past his ear, too close to his head, even rupturing his eardrum.” Biggs pointed to Trump’s right ear, and Trump knelt down immediately praying to God for salvation after being injured.
Biggs also predicted a more severe “economic collapse” than the Great Depression occurring.
I understand my friend’s concerns about an impending economic crisis. However, here’s my take:
Firstly, Biggs said that after Trump’s return to the White House, a “great economic plan” will lead to a more severe economic crisis in the US than the Great Depression. But he mentioned that this economic disaster isn’t the end-times judgment but rather a “correction” to awaken people.
Secondly, purely from an economic standpoint, I don’t foresee a severe economic crisis happening this year. The US does have issues such as a staggering $35 trillion national debt, a massive influx of illegal immigrants, and substantial government deficits that could eventually lead to a collapse, but it won’t happen immediately. Instead, to address the crisis, Trump plans to levy tariffs on foreign countries, particularly China, attract manufacturing back, and reduce taxes for American businesses and individuals, which will release the long-term risks in the US, sparking a short-term crisis.
In conclusion, the recent global stock market volatility suggests that investor reactions may have been somewhat exaggerated, indicating a significant market correction is ahead. The US is not heading towards a crisis like that of 2008, but long-term risks still persist and need to be addressed.
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– Qin Peng’s Observation Production Team