Over the past several months we have been witnessing one of the most gloriously irrational stock market rallies in U.S. history. Even CNN is admitting that this is “the worst economic crisis of our lifetimes”, but stock prices have just kept going higher and higher until this week. Several months ago the Federal Reserve decided to do whatever it took to rescue the financial markets, and their exceedingly reckless behavior fueled a speculative boom that is unlike anything that we have ever seen before. But now it appears that the boom may be ending. The Dow Jones Industrial Average was down 807 points on Thursday, and it appears that Friday could be another very challenging day for Wall Street. It is well documented that many of the greatest stock market crashes in history have happened in the fall, and many investors may be trying to bail out before this latest bubble bursts in spectacular fashion.
Tech stocks have led the way up during this latest rally, and now they could potentially start leading the market back in the other direction. On Thursday, the biggest names in the tech world got hit particularly hard…
Apple shares fell 8% for their biggest one-day decline since March 16. Amazon and Netflix were both down more than 4% and Facebook slid 3.8%. Microsoft slipped 6.2%. Alphabet pulled back by 5.1%.
And Tesla has been absolutely monkey-hammered over the past several days. If you can believe it, the stock is now 18 percent lower than it was on Monday…
Tesla shares slid 9% on Thursday, building on the stock’s recent losses after the company’s largest outside shareholder reduced its position, and after the automaker said it would raise up to $5 billion in a new share offering.
With Thursday’s decline, the stock is more than 18% below Monday’s close, a day when the name surged following its stock split.
But I wouldn’t be crying too much for those holding Tesla stock just yet. The stock is still way, way up so far in 2020, and it is still massively overvalued.
In fact, if Tesla’s stock price fell 90 percent I would still think that it was overvalued.
Needless to say, the entire market is tremendously overvalued at this point. It is absolutely absurd that the Dow is sitting above 28,000 at the moment. Investors decided to divorce economic reality long ago, and even with the losses that we have seen this week they are still sitting really pretty.
But could that soon change?
According to one expert that was just interviewed by CNBC, the market could be heading into a “Minsky moment”…
Asset prices could be on the cusp of a sharp collapse known as a “Minsky moment,” and may retest lows last seen in March, according to Ron William, market strategist and founder of RW Advisory.
So exactly what is a “Minsky moment”?
The following is how CNBC defines it…
A “Minsky moment,” named after economist Hyman Minsky, refers to a sudden market collapse following an unsustainable bull run, which in this case could be fueled by the “easy credit” environment created as a result of unprecedented fiscal and monetary stimulus measures.
I think that may be a perfect description of what we are facing. Since the second half of March, the Dow, the S&P 500 and the Nasdaq are all up more than 50 percent even though the U.S. economy as a whole has been falling apart all around us.
If we were ever due for a “Minsky moment”, it is now.
And it is interesting to note that the stock market also peaked in early September in 1929. The following quote from Sven Henrich was just posted by Zero Hedge…
“September 3rd marked the top in 1929 following a furious rally fueled by wild optimism, excessive retail speculative behavior and markets disconnecting far above the fundamentals of the economy.”
It has been said that history doesn’t always repeat, but it often rhymes.
Meanwhile, we just learned that a huge number of Americans filed for unemployment benefits once again last week.
As I discussed a week ago, the Labor Department decided to change the way that it calculates seasonal adjustments for initial unemployment claims, and this week was going to be the first week when that change was going to show up. So it wasn’t a surprise that the “official number” was lower than last week, but when you look at the unadjusted numbers the story is completely different.
In fact, those figures tell us that the number of Americans filing new claims for unemployment benefits was about 7,000 higher than the week before.
That is very troubling, because if we were going to have any sort of an “economic recovery” before the next wave of economic pain, it should be happening now.
And according to Wolf Richter, the number of continuing unemployment claims under all state and federal programs was way up over the previous week…
Powered by a nasty jump in continued unemployment claims under the federal Pandemic Unemployment Assistance (PUA) program for contract workers, established under the CARES Act, total continued claims under all state and federal programs jumped by 2.2 million, “not seasonally adjusted,” to 29.2 million people on unemployment rolls, the highest since August 1, according to the Department of Labor this morning.
In our entire history, we have never seen a spike in unemployment claims like we have in 2020.
But up until now, investors on Wall Street have been able to ignore what has been going on in the rest of the country.
In some ways it is easy to be in awe of their single-minded focus on speculative greed, and the mainstream media has been proudly touting how much richer some of the wealthiest investors have been getting.
Of course the truth is that you only make money in the stock market if you get out in time. Nothing goes up forever, and this ridiculously absurd bubble will end the same way that so many others have.
Meanwhile, the real economy will continue to deteriorate as we plunge even deeper into the “perfect storm” that we are now dealing with.
In addition to everything else, a hotly contested presidential election is looming, and the fact that we are not likely to have a winner until some time well after November 3rd is just going to make matters even worse.
We truly live in historic times, and I have a feeling that they are about to get a whole lot more “interesting”.