(Bloomberg) -- Listen and follow The Big Take on Apple Podcasts, Spotify or wherever you get your podcasts.
On Wall Street, the S&P 500 had its worst day in nearly two years and the Dow Jones Industrial Average shed over 1,000 points. Shares on Japan’s Nikkei Index fell by over 12% — their worst showing since Black Monday in 1987. Cryptocurrencies dropped, bond yields rose and the VIX, known as the fear index, saw its biggest one-day spike in more than 30 years. Is the Fed to blame? AI over-exuberance? Warren Buffett?
On today’s episode, Bloomberg columnist John Authers walks host David Gura through the global market meltdown: what triggered it, how long it could last, and when to panic.
Further listening: Why the Market’s Big Tailwinds Are Coming to an End
Here is a lightly edited transcript of the conversation:
David Gura: I’ll start with the broad question that I think is on everyone’s mind today, and that is: what the hell is happening?
John Authers: A liquidation is happening.
Gura: John Authers is a columnist for Bloomberg, who’s written about markets for more than three decades. In other words, he’s seen a lot — like the dot com bubble bursting, the 2008 financial crisis, and of course, the pandemic selloff. Even still…
Authers: I could have told you there was a risk that something like this was going to happen. I had no clue that it was going to happen now. Nobody else did either.
Gura: It’s been red, red, and more red across the board, as stocks have plunged. The numbers were shocking even to market veterans.
Archival Guy Johnson: This is Monday. And I have to say, folks, it is looking ugly out there.
Archival Peter Kinsella: Yeah, look, it's as manic a Monday as they get.
Archival Avril Hong: Ah, carnage, bloodletting, panic, mania, just some of the words that have been used to describe the rout in Japanese as well as Asian equities.
Archival Kriti Gupta: The sell off is one of, historic proportions. The topics down 12%. The Nikkei also down another 12%, but it's not just Japan.
Gura: It certainly wasn’t just Japan. European shares also sank — and when the opening bell rang in New York, the Nasdaq plunged 5% in seconds. Cryptocurrencies tumbled — and the VIX, known as the fear index, saw its biggest one day spike in data going back over 30 years.
Archival Katie Greifeld: We’re at levels that we haven’t seen all that often in the past three decades.
Gura: I’m David Gura, and this is “The Big Take” from Bloomberg News. On today’s episode, John Authers walks us through the market meltdown: what triggered it, how long it could last, and when to panic.
Gura: So, John, you’ve been warning about a selloff like this one for months. What’d you see that concerned you? That made you think something like this was going to happen?
Authers: Well, if you, if you look at the Magnificent Seven—
Gura: —the big tech stocks—
Authers: —yes, the very big tech stocks, they had started to be treated almost as though they were US treasuries. These are very, very safe companies. And when you were worried about something, you bought even more Nvidia, Microsoft, Apple, etcetera. I'm not saying they aren't really great, incredible companies because they are. For the longer term, 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.
Gura: And the unpicking accelerated after Apple and Amazon, Meta and Microsoft reported second quarter earnings.
Authers: 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?
Gura: Is it real? Or is it going to make money?
Authers: Well, it'd be amazing didn't money eventually.
Gura: Yes, true.
Authers: Like the internet eventually made a lot of money. People were expecting it — in 2000 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 sea to invest in AI now.
Gura: Adding to those concerns was a report that Warren Buffett, the “Oracle of Omaha,” had sold almost half of Berkshire Hathaway’s sizable stake in Apple — about $75 billion worth of stock.
Archival Isabelle Lee: We have Warren Buffett selling Apple shares, and we had a Bloomberg story telling traders. Okay, maybe it's really not some cause for panic. But of course, we have some traders panicking.
Gura: But John said there’s really no reason to panic, at least not over this point.
Authers: He bought that stake mostly in 2016, 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 or any great reason to sell the stock — that Warren Buffett has done what you would expect him to do. But it obviously freaks people out. It's obviously a scary data point that happens to come out just when it did.
Gura: 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 cut its target interest rate. Policymakers say they are 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 Reserve’s turn. The central bank voted to keep its target rate unchanged. But Fed chair Jerome Powell did suggest the next meeting could be different.
Archival Jerome Powell: A reduction in our policy rate could be on the table as soon as the next meeting in September.
Gura: I asked John about this seeming lack of coordination. Was this haphazard unwinding the cause — or part of the cause — of the market turmoil?
Authers: Uh, yes. Central banks have started talking in terms of mountains, you know, whether we were going to have a Matterhorn 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 Cerro Torre, where things just suddenly go 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.
Gura: 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 4.3%, and the US economy added 114,000 jobs last month — far fewer than forecast.
Gura: I wonder what your reaction was to that, having just heard from Fed Chair Jay Powell on Wednesday?
Authers: My reaction was that this probably means trouble. To be clear, you know, there were still a hundred thousand extra jobs created.
Gura: Not too shabby.
Authers: And there had been a hurricane in Houston, which people were expecting to distort things and the unemployment rate is still not much over 4%. This isn't, this isn't a recession or anything like it thus far. It did trigger what is known as the Sahm rule after Claudia Sahm, 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 we'll 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 Sahm 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.
Gura: Jerome Powell looks at these numbers, looks at those job data numbers, and does he think now it's too late to cut? Is a 50 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?
Authers: 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 an admission of error. My best guess is that unless the selloff intensifies quite dramatically from here, not saying it won't, he won't cut until the next meeting in September. One other key point to bear in mind is politics. 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. Jay 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.
Gura: Coming up after the break: John tells us the number one thing that would indicate there’s more trouble ahead.
Gura: 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 columnist John Authers calls a “liquidation event.” And when investors become fearful, they usually go to one place they feel is safe: US government bonds.
Gura: We've talked a lot about stocks and what we've seen in the stock market. Let's move to bonds and what you're seeing there and what that could tell us about where this is headed and how long this dip might last.
Authers: Well, the bond market is — 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 10-year yields are much higher than two-year yields because there's more risk attached to investing in the longer term. And for over two years, 10-year yields have been below two-year yields. 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.
Gura: John, talk about international contagion. I imagine this ruined your Sunday into Monday morning, but you saw what happened in Japan: worst selloff since 1987. What does that tell us about the selloff that we're seeing?
Authers: I think the selloff in Japan was more about, this was made in America. This was— you know my column was 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 you're Japanese, is to buy stocks from elsewhere. Then as the yen weakens, you do even better. What you saw was a reaction to central banks moving in such a way that the yen went up, meaning that you had a correction for them. So you get a classic cascade. Tokyo was a very clear sign that something is wrong that must give.Gura: 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 invests 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.
Authers: The trade of borrowing in the yen, selling the yen 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&P 500, 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.
Gura: For an investor who's panicking, I imagine your counsel would be, stand pat. Don't do anything. Don't do anything immediately as a result of this.
Authers: Panic is seldom a good idea. The reason Warren Buffett has whatever it is, $250 billion-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 is — dollar-cost investing into equal weighted funds, which aren't overweight in tech, is probably as good an idea as it was last week. It just appears more so now.
Gura: John, could you put this selloff in context, given the gains we’ve seen in the last year or so?
Authers: At the point we're recording this, NVIDIA was down 26.5% from the top, and it was up exactly 100% 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 could also look at it as, boy is there a 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.
Gura: So what would make it a crash or a crisis? John said to pay attention to one thing.
Authers: I think the key to whether it really becomes serious, this is going back to the major crises is — you need some major financial institution to get into trouble. 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 would make things much worse. That would take us to the next level.
©2024 Bloomberg L.P.