One of the classic ‘chase’ sequence in the Looney Tunes cartoon series of the Road Runner and the Coyote, is where the villain Wile E. Coyote pursues the protagonist the Road Runner at the edge of the cliff.
But the Coyote runs over the cliff, thinking that he still has been running on the ground. The Coyote temporarily defies gravity, until he discovers that there is NO ground underneath. And that’s where he plunges to the ground.
I’ve been saying that outrageously overvalued and grossly mispriced stocks, from central bank puts, are equivalent to the Wile E. Coyote running off the cliff.
They can run run & run way until….
…the delusions wear off. (Wile E Coyote portrait from the BobcatinBeijing)
Following two days of rebound, outlandishly priced technology stocks suffered another bout of drubbing, but this time with more forcefulness.
From Bloomberg:
U.S. stocks fell, with the Nasdaq Composite Index sinking the most since 2011, as technology shares resumed a selloff on concern valuations are too high as earnings season begins. Treasury rates sank to a three-week low on speculation interest-rate increases won’t be accelerated.The Nasdaq Composite Index sank 3.1 percent at 4 p.m. in New York to a two-month low that erased its gain this year. The Standard & Poor’s 500 Index lost 2.1 percent to the lowest since Feb. 19. The 10-year Treasury note fell five basis points to 2.64 percent.
I know it may be premature to call for an inflection point or the Wile E. Coyote moment. But there are increasing signs of these.
One is the developing pronounced volatility in both directions, but now with a downside bias. Such is a sign of a topping process. This can be seen developing in the high flyer indices as the Nasdaq (-6.9%) and the Russell 2000 (-6.7%).
Two deterioration in market breadth as I called out a few days back. The Nasdaq Biotech is just about 1% away from the bear market.
Three, the periphery to core dynamic or the unwinding phase of the bubble bust cycle has become very evident or has been running in full throttle.
First to be affected has been commodities, then emerging markets. This has now spread to the developed economies. The initial impact in developed economies has been in the fringes: overpriced technology stocks. Now even the blue chips are affected.
Falling yields of the 10 year notes reinforces the sign of pressures on risk asset deflation.
Emerging markets have been buoyed lately by foreign money whom have been recklessly chasing yields. However when the decline in the stocks markets of developed economies worsen, the statistical growth numbers backing these will be exposed as a charade.
Remember, the global real economy has hardly been growing due to the invisible transfers from negative real rates (financial repression) via zero bound rates and QE. So whatever statistical growth we are seeing have mostly been carved out from the artificial spiking of the asset markets bolstered by credit.
Such sustained risk off scenario will ricochet back to emerging markets where both the stock markets and the economies of developed-emerging market in tandem will substantially sputter. Then the Global financial-economic Black Swan manifested by the Wile E. Coyote moment appears.
The Cyprus model of 'deposit haircuts' will likely be a standard response by global governments, thus cash in the banking system may also be at risk.
A global risk asset meltdown will hardly bring about a safehaven or that there will be no place to hide—except perhaps in gold and gold related assets.
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