Frightening Data Points to Potential Market Panic & Fed Inaction

Yesterday, the Arms Index (TRIN) spiked dramatically to levels not seen since 2011 and nearly twice as high as last week’s “Black Monday.” The Arms Index is a way of measuring how balanced the stock market is, with higher values suggesting the market might head in a bearish direction sooner than later. As ZeroHedge describes it:

A sudden surge in the TRIN indicates a jump in trader lack of confidence, as everyone scrambles to either go long the 2-3 rising stocks, or to sell or short the biggest decliners, ignoring the bulk of the market.

 

Of course, the Arms Index is a purely technical indicator that stock speculators watch closely, but it coincides with a growing mountain of data pointing to frightening volatility in American stocks and major cracks in the rosy mainstream narrative of an economic recovery in the United States. International banks, investment firms, big-name fund managers, and everyday technical analysts have all been sharing insights into terrible data and trends the financial media has largely ignored.

The spike in the Arms Index is accompanied by a giant surge in the Chicago Board Options Exchange Volatility Index (VIX) last week, which shot up to levels not seen since the financial crisis. Just as its name suggests, the VIX measures dangerous volatility in equities, with very high numbers corresponding to periods of economic recessions. The VIX jumped into that zone last week.

Goldman Sachs acknowledged that this VIX level is alarming, but played it down, because the economy is not officially in a recession:

While extreme VIX levels periodically occur, our analysis shows that VIX levels in the high-twenties to low thirties for extended periods of time are rare outside of recessions.”

If all you read is the mainstream news, then you might be forgiven for sharing Goldman’s assumption that the US is not in a recession. After all, the ADP National Employment Report was released this morning, and what do you know – another 190,000 private jobs were added in August.

But monthly job growth is about the only positive indicator the media can point to, and even that is extremely unreliable, as Peter Schiff has explained in the past.

A more complete picture of the US economy must take into account core capital expenditures, retail sales, inventory-to-sales, and dozens of other important metrics that Peter Schiff has reviewed regularly in his weekly podcast. On Monday, Peter noted that the latest Dallas Fed Manufacturing Index report was absolutely terrible – negative 15.8:

Nobody had anything like this on their estimates of what they actually thought the manufacturing number would be in August from the Dallas Fed. Horrible, horrible number. You got to go back to the financial crisis, the Great Recession, to find a number this bad.”

Few major financial analysts have joined Peter Schiff in acknowledging the fundamental problems underlying the foundering US economy and equity volatility, though here and there wiser voices are rising. Deutsche Bank’s Managing Director Jim Reid underlined the core issue this week:

One of the biggest problems we face is that there is no historical template for current global market conditions so we’re all flying blind to a large degree. Never before have so many of the most important countries in the world printed so much money and left base rates at near zero for so long. Also never before has the largest economy in the world tried to start a slow process of reversing said extraordinary policy.”

As seen in the chart below, there’s never been a time in 5,000 years of human history when interest rates remained this low for this long.

Surely this must mean that the Federal Reserve will actually raise rates this year, right? Not so fast. The volatility and instability in the market discussed above could be the very excuse the Fed uses to further delay a rate hike. Peter Schiff has discussed this, and now renowned fund manager Bill Gross is saying the same thing.

Gross believes the Fed has missed its opportunity to raise rates. If it did so now, it risks “spooking markets further and creating self-inflicted ‘financial instability.’” Gross joins Peter and Ray Dalio in suggesting that the Fed may only deliver one tiny, symbolic rate hike. Gross writes in his September Investment Outlook:

They [the Fed] should [normalize rates], but their September meeting language must be so careful, that ‘one and done’ represents an increasing possibility – at least for the next six months. The Fed is beginning to recognize that 6 years of zero bound interest rates have negative influences on the real economy – it destroys historical business models essential to capitalism such as pension funds, insurance companies, and the willingness to save money itself. If savings wither then so too does its Siamese Twin – investment – and with it, long term productivity – the decline of which we have seen not just in the U.S. but worldwide.”

In a world of volatility and mixed signals from the financial media and investment gurus, there’s one important takeaway from investors: the Fed is just as clueless as anyone. In an article for the US News & World Report entitled “All the Fed’s a Stage”, Alex Pollock writes:

Macroeconomics is not a science and suffers from many unintended and unexpected consequences. The Fed cannot be sure of what the results of its current theories and its remarkable forays into uncharted territory will be. It cannot know what the right level of interest rates is. It cannot be sure of what the results of its own actions will be. No wonder it engages in the melodrama which continues to keep our financial journalists so busy.”

In times of uncertainty, gold and silver are an investor’s best safe haven. Just as interest rates have never remained this low for thousands of years, gold and silver have remained the hard asset of choice throughout history. Share this message with your friends and family, and learn more in our free special report, Why Buy Gold Now?

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