Asset Price Deflation: The Bubble Is Bursting
Wealth Destruction Is Brutal And Ugly
Last week, I pondered the question: Has the “everything bubble” finally popped?
This week, the world’s financial markets have answered that question: “Yes”. With the Dow Jones Industrial Average leading the way, the financial havok being wrought on the world’s major bourses has only continued.
The Dow Jones Industrial Average posted its biggest loss since 2020 on Wednesday after another major retailer warned of rising cost pressures, confirming investors’ worst fears over rising inflation and rekindling the brutal 2022 sell-off.
The Dow shed 1,164.52 points, or 3.57%, to 31,490.07, the average’s biggest decline since June 2020. It was the lowest close for the Dow since March 2021.
Nor were the declines confined to the Dow. The S&P 500, the NASDAQ, and the Russell 2000 index all also have been posting sharp declines.
Not Just The US Markets
Yet these indices only show the decline in asset prices for the US. Looking at the rest of the world, the major markets are joining the US in mass sell-off.
Europe is down about half as much as the US:
China, which has been leading the downward trend for most of the year, is still drifting lower.
Japan stocks are likewise declining.
India stocks tried to find a floor price and failed.
Only Russia is showing price increases—paradoxically largely in dollar-denominated stocks (The RTS index on the Moscow Exchange is dollar-denominated, the MOEX is ruble denominated).
Stocks are down quite literally everywhere.
Gold And Crypto Are Joining The Downward Spiral
Intriguingly, the global carnage in stocks has not seen assets like gold and crypto currencies being bid up in price—the behavior one would expect to see from a “flight to safety” market reaction.
Gold has declined against the dollar for the month:
Likewise, gold is down against the yuan and the euro.
Crypto currencies, meanwhile, continue to be in freefall, with Bitcoin and Ethereum down over 30% literally everywhere.
Money and wealth are not flowing from one market to another—rather, they are simply vanishing. Asset price deflation is taking hold in the world’s markets and wealth destruction is following close on its heels.
Holding Down The Price Of Oil?
Evaporating money may partially explain the largely lateral price movement in global benchmark oil prices during the past month. Only OPEC oil is showing any sustained price rises over the month.
Even with global geopolitical pressures and supply chain dislocations distorting oil prices relative to other goods, thus far, benchmark price of West Texas Intermediate may have found a price ceiling (for now) at around $114/barrel.
Economic Apocalypse? Or Merely Calamity?
I have been noting for quite some time that financial and economic conditions in the US were heading into the abyss.
Arguably, the latest stock market bloodbath could be seen as confirmation of that dire prediction. Disturbingly, that may yet prove to be the case.
Yet we must also remember that a consequence of the monetary policies after the 2008 Great Financial Crisis was a near complete decoupling of monetary policy with consumer prices. Money has become the chips for the Wall Street casino more so than the means to go grocery shopping. Even with Wall Street in a downard death spiral, as of yet the impacts to ordinary consumers are muted. Inflation is still a growing concern for Main Street, despite deflation taking hold on Wall Street.
When financial markets are roiled globally, global finance is undeniably impacted. In the modern, globalized, highly interconnected world economy, it is difficult to envision how those impacts can be at all good, even on Main Street. The destruction of wealth to the tune of billions of dollars and trillions of yuan does not work to the benefit even of the poorest and meanest among us.
Wealth is being destroyed right before our eyes. That wealth destruction is continuing, and will continue to be both brutal and ugly.
The future economic outlook is bad. The only question now in play is “how bad?”.
Oh it's bad, and that is only the tip of the iceberg, as they say.
Check my Newsletter #2 for how much worse, "$10.00 GAS?"