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Speaker 1: Bloomberg Audio Studios, podcasts, radio news. I'll start with the

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Speaker 1: broad question that I think is on everyone's mind today,

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Speaker 1: and that is what the hell is happening?

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Speaker 2: Liquidation is happening.

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Speaker 1: John Authors is a columnist for Bloomberg who has written

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Speaker 1: about markets for more than three decades. In other words,

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Speaker 1: he's seen a lot like the dot com bubble bursting,

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Speaker 1: the two thousand and eight financial crisis, and of course

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Speaker 1: the pandemic sell off.

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Speaker 2: Even still, I could have told you there was a

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Speaker 2: risk that something like this was going to happen. I

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Speaker 2: have no clue that it was going to happen. Now

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Speaker 2: nobody else did die.

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Speaker 1: That It's been read, read and more read across the

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Speaker 1: board as stocks have plunged. The numbers were shocking, even

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Speaker 1: to market veterans. This is Monday, and I have to say, folks,

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Speaker 1: it is looking ugly out there. Yes, look, it's as

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Speaker 1: Monica Monday as they get a college blood letting, panic mania.

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Speaker 1: Just some of the wus that have been news to

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Speaker 1: describe the route. In Japanese as well as Asia equities,

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Speaker 1: European shares also sank, and when the opening bell rang

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Speaker 1: in New York, the Nasdaq plunged five percent in seconds,

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Speaker 1: cryptocurrencies tumbled, and the VICKS known as the Fear Index,

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Speaker 1: saw its biggest one day spike in data going back

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Speaker 1: over thirty years.

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Speaker 2: We're at levels that we haven't seen all that often

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Speaker 2: in the past three decades.

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Speaker 1: I'm David Gera, and this is the big take from

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Speaker 1: Bloomberg News. On today's episode, John Authors walks us through

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Speaker 1: the market meltdown, what triggered it, how long it could last,

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Speaker 1: and went to panic. So, John, you've been warning about

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Speaker 1: a selloff like this one for months. What did you

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Speaker 1: see that worried to you, that made you think that

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Speaker 1: something like this was going to happen.

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Speaker 2: Well, if you look at the Magnificent seven, the big

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Speaker 2: text docs, Yes, the very big tech stocks, they had

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Speaker 2: started to be treated almost as though they were US treasuries.

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Speaker 2: That these are very very safe companies, and when you

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Speaker 2: were worried about something, you bought even more in Nvidia, Microsoft, Apple, etc.

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Speaker 2: I'm not saying they aren't really great, incredible companies, because

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Speaker 2: they are for the longer term, but the fact that

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Speaker 2: they are as monopolistic as they now are should be

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Speaker 2: a cause of some concern. It's highly unlikely they're going

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Speaker 2: to be allowed to stay quite as powerful as they are.

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Speaker 2: But that was plainly an overdone, overcrowded trade. Everybody could

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Speaker 2: see this. Now is the time when it's started to

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Speaker 2: come unpicked.

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Speaker 1: And the unpicking accelerated after Apple and Amazon, Meta and

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Speaker 1: Microsoft reported second quarter earnings.

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Speaker 2: The key point was that they were priced for perfection beforehand,

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Speaker 2: so it's not like the earnings were terrible. The critical

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Speaker 2: point that people were looking for was is AI going

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Speaker 2: to pay off?

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Speaker 1: Is it going to make money?

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Speaker 2: Well, it'd be amazing if you didn't make money eventually.

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Speaker 2: Like the Internet eventually made a lot of money. People

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Speaker 2: were expecting it. In two thousand. When the Internet bubble burst,

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Speaker 2: people realized they had been expecting it to make money

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Speaker 2: far earlier than it could possibly do. That is the analogy.

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Speaker 2: It's whether AI is actually going to bear fruit straight

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Speaker 2: away that is in question. I would say from the

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Speaker 2: earnings results we've had so far, I don't think we

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Speaker 2: have proved that AI isn't going to make money for

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Speaker 2: years and years. But these results we've seen would give

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Speaker 2: cause to any CEO thinking in terms of really putting

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Speaker 2: the boats out to invest in AI.

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Speaker 1: Now. Adding to those concerns was a report that Warren

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Speaker 1: Buffett Theracle of Omaha, had sold almost half of Berkshire

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Speaker 1: Hathaway's sizable steak in Apple, about seventy five billion dollars

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Speaker 1: worth of stock. We have Warren Buffett selling Apple Sheries,

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Speaker 1: and we had a Bloomberg storytelling traders, Okay, maybe it's

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Speaker 1: really not some cost for panic, but of course we

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Speaker 1: have some traders panicking and lot. But John said, there

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Speaker 1: is really no reason to panic, at least not over

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Speaker 1: this point.

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Speaker 2: He bought that steak mostly in twenty sixteen, which turns

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Speaker 2: out to have been a fantastic time to buy it.

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Speaker 2: Nobody ever took a loss by recognizing a profit. So

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Speaker 2: I don't think it actually is terribly meaningful, any great

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Speaker 2: reason to sell the stock. That Warren Buffett has done

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Speaker 2: what you would expect him to do. But it obviously

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Speaker 2: freaked people out. It's obviously a scary data point that

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Speaker 2: happens to come out just when it did.

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Speaker 1: But John told me what is worth paying attention to

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Speaker 1: is what happened at several major central banks last week.

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Speaker 1: On Tuesday, the Bank of England its target interest rate.

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Speaker 1: Policymakers say they're satisfied they've gotten inflation under control. Then

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Speaker 1: on Wednesday, the Bank of Japan increased its target interest

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Speaker 1: rate in an attempt to slow economic growth. A few

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Speaker 1: hours later, it was the federal reserves turn. The central

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Speaker 1: Bank voted to keep its target interest rate unchanged, but

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Speaker 1: FED Chair Jerome Powell did suggest the next meeting could

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Speaker 1: be different. A reduction in our policy rate could be

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Speaker 1: on the table as soon as the next meeting in September.

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Speaker 1: I asked John about this seeming lack of coordination. Was

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Speaker 1: this haphazard unwinding the cause or part of the cause

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Speaker 1: of the market turmoil?

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Speaker 2: Uh? Yes, central banks have started talking in terms of mountains,

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Speaker 2: whether we were going to have a matter Horn type

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Speaker 2: rise in rates which is almost immediately followed by a

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Speaker 2: slope down, or whether you were going to get more

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Speaker 2: of a table mountain where rates go up and then

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Speaker 2: they just stay at a plateau for a long time.

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Speaker 2: And then what you definitely want to avoid is El

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Speaker 2: Capitan or Seroh Torah, where things just suddenly go for

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Speaker 2: tonks straight down very sharply because they have to because

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Speaker 2: there's an emergency. And then the other point about the

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Speaker 2: mountaineering analogy is that far more mountaineers die on the

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Speaker 2: way down than on the way up. You really need

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Speaker 2: to be coordinated when you're clambering back down a mountain.

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Speaker 2: And last week the Bank of Japan actually raised rates,

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Speaker 2: the Bank of England cut, and the Fed did nothing.

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Speaker 2: That's exactly the kind of lack of coordination that increases

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Speaker 2: the risk of an accident.

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Speaker 1: And then, of course we had the US Jobs report

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Speaker 1: released on Friday, which showed the unemployment rate rose more

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Speaker 1: than Wall Street expected, to four point three percent, and

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Speaker 1: the US economy added one hundred and fourteen thousand jobs

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Speaker 1: last month, far fewer than four k. I wonder what

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Speaker 1: your reaction was to that. Having just heard from Venturo J.

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Speaker 2: Powell on Wednesday, my reaction was that this probably means trouble.

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Speaker 2: To be clear, it's there was still one hundred thousand

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Speaker 2: extra jobs created, not too shabby, and there had been

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Speaker 2: a hurricane and in Houston, which people were expecting to

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Speaker 2: distort things, and the unemployment rate is still not much

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Speaker 2: over four percent. This isn't a recession or anything like

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Speaker 2: it thus far. It did trigger what is known as

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Speaker 2: the Psalm rule after Cloudy Assam, who does contribute pieces

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Speaker 2: to Bloomberg Opinion, which comes at the notion that the

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Speaker 2: way the jobs market tends to work is that unemployment

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Speaker 2: will tick up very gently and will then get to

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Speaker 2: a sort of Malcolm Gladwell style tipping point, after which

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Speaker 2: it shoots up very sharply. And that tipping point, according

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Speaker 2: to the Psalm rule, was reached on Friday. Lots of

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Speaker 2: people had been looking at this, noticing this, and so

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Speaker 2: that really did contribute in a big way to market nerves.

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Speaker 1: Jerome Power looks at these numbers, look at those job

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Speaker 1: dead numbers, and does he think now it's too late

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Speaker 1: to cut? Is a fifty basis point cut? What he

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Speaker 1: should be thinking about or considering? How do you think

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Speaker 1: through what the Fed's next steps might be or should be?

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Speaker 2: Okay, at the moment, the question is do we really

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Speaker 2: look as though we're running scared if we cut between meetings,

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Speaker 2: which is what people out there are thinking, you can

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Speaker 2: risk looking panicked if you cut between meetings. It's too

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Speaker 2: big and clear in admission of error. My best guess

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Speaker 2: is that unless the sell off intensifies quite dramatically from here,

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Speaker 2: not saying it won't, he won't cut until the next

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Speaker 2: scheduled meeting in September. One other key point to bear

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Speaker 2: in mind, iss they've got to be very careful not

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Speaker 2: to look as though they are trying to help the

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Speaker 2: incumbent Democrats. I personally have never taken that argument terribly seriously. J.

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Speaker 2: Powell is a registered Republican, first appointed to his job

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Speaker 2: by a Republican president. I am not inclined to take

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Speaker 2: that terribly seriously. If there has been any reticence to cut,

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Speaker 2: I think the market is now giving very strong cover

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Speaker 2: for them to make a cut.

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Speaker 1: Coming up after the break, John tells us the number

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Speaker 1: one thing that would indicate there is more trouble ahead

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Speaker 1: central banks that are uncoordinated, earnings that would only please

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Speaker 1: if they were near perfect, and a disappointing jobs report.

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Speaker 1: These are just a few of the reasons markets are

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Speaker 1: undergoing what Bloomberg colonists John Arthur's calls a liquidation event.

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Speaker 1: And when investor has become fearful, they usually go to

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Speaker 1: the one place they feel is safe. That's US government. Barns.

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Speaker 1: We've talked a lot about stocks and what we've seen

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Speaker 1: in the stock market. Let's move to Barns and what

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Speaker 1: you're seeing there and what that could tell us about

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Speaker 1: where this has headed and how long this dip might last. Well.

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Speaker 2: The bond market is the getting into very technical territory.

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Speaker 2: The yield curve has very briefly uninverted. Today as we're

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Speaker 2: recording this, it's back inverted. But generally what that means

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Speaker 2: is usually ten year yields a much higher than two

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Speaker 2: year yields because there's more risk attached to investing in

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Speaker 2: the longer term. And for over two years, tenure yields

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Speaker 2: have been below two years. That's generally a sign that

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Speaker 2: you think there's a recession coming. When you reach the

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Speaker 2: point of disinversion, that generally means rate cuts are right

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Speaker 2: about to happen and a recession is just about to

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Speaker 2: break out. So you know this is not good. In general,

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Speaker 2: the bond market at this point seems to be more

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Speaker 2: concerned about the possibility of an imminent recession than it

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Speaker 2: has seemed about the possibility of irresponsible fiscal policy.

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Speaker 1: John talk about international contagion. I imagine this ruined your Sunday.

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Speaker 1: But you saw what happened in Japan. We're sell off

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Speaker 1: since nineteen eighty seven. What does that tell us about

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Speaker 1: the sell off that we're seeing.

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Speaker 2: I think the sell off in Japan was more about

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Speaker 2: this was made in America. This was I mean in

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Speaker 2: my column was that this was a butterfly flapping its

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Speaker 2: wings in Wall Street caused the tsunami in Tokyo, not

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Speaker 2: the other way around. For a change, Basically, if you

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Speaker 2: look very many Japanese people, the strategy that has worked

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Speaker 2: beautifully for a long time if your Japanese is to

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Speaker 2: buy stocks from elsewhere and then as the yen weekens,

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Speaker 2: you do even better. What you saw was a reaction

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Speaker 2: to central banks moving in such way that the yen

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Speaker 2: went up, meaning that you had a correction for them,

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Speaker 2: so you get a classic cascade Tokyo is a very

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Speaker 2: clear sign that something is wrong that must give.

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Speaker 1: Another thing adding to the brutal day in Tokyo was

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Speaker 1: the unwinding of the yen carry trade. It's complicated, but

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Speaker 1: basically a carry trade is when an investor borrows money

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Speaker 1: in a low interest rate currency, in this case, the

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Speaker 1: Japanese yen, and then invest the money in a higher

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Speaker 1: yielding foreign currency. This had been very popular, John said

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Speaker 1: until the Bank of Japan raised interest rates last week.

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Speaker 2: The trade of borrowing in the end selling the en

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Speaker 2: and parking in a currency where you get much higher

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Speaker 2: rates particularly the Mexican peso has been fantastic. One of

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Speaker 2: my favorite factoids is that for the century so far,

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Speaker 2: you would have made more money in the yen peso

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Speaker 2: carry trade than you would have done in the S

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Speaker 2: and P five hundred the US stock market. That is bonkers.

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Speaker 2: It was obviously ridiculous that there was so much money

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Speaker 2: to be made that way. Now the Bank of Japan

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Speaker 2: has tried to shake things, and the result has been

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Speaker 2: an absolutely massive bust in yen carry trades.

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Speaker 1: For an investor who's panicking, I imagine your counsel would

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Speaker 1: be stand pad, don't do anything. Don't do anything immediately.

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Speaker 2: Panic is seldom a good idea. The reason Warren Buffett

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Speaker 2: has whatever it is, two hundred and fifty billion dollars

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Speaker 2: worth in cash is because he thinks he's going to

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Speaker 2: have a good opportunity to use it soon. Bear that

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Speaker 2: in mind, if you were already heavily in tech stocks,

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Speaker 2: that's probably not a great place to have been. Sorry

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Speaker 2: about that. This is just unremittingly boring, but good family

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Speaker 2: investing EA is dolocaust. Investing into equal weighted funds which

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Speaker 2: aren't overweighting tech is probably as good an idea as

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Speaker 2: it was last week. It just appears more so now.

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Speaker 1: John, could you put this sell off in context given

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Speaker 1: the gains that we've seen in the last year or so.

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Speaker 2: At the point that we're recording this in video, is

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Speaker 2: down twenty six and a half percent from the top,

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Speaker 2: and it was up exactly one hundred percent for the

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Speaker 2: year to date. And we're still only in the first

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Speaker 2: week of August. So you can look at that as well,

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Speaker 2: we're still doing pretty well. You can also look at

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Speaker 2: it as boy, is there a long lot of room

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Speaker 2: below As it stands at the moment, this is, you know,

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Speaker 2: obviously a significant market incident. I wouldn't yet say it

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Speaker 2: was definitely a bear market. It's not a crisis and

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Speaker 2: it's not a crash yet.

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Speaker 1: So what would make it a crash or a crisis?

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Speaker 1: John said, to pay it attention to one thing.

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Speaker 2: I think the key to whether it really becomes serious.

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Speaker 2: This is going back to the major crisis is you

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Speaker 2: need some major financial institution to get into trouble, whether

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Speaker 2: it's long term capital management or Lehman Brothers or last

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Speaker 2: year a bunch of medium sized regional banks. That's what

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Speaker 2: happens if somebody has got into so much trouble that

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Speaker 2: they're forced selling or that they're going under that that

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Speaker 2: would make things much worse. That would take us to

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Speaker 2: the next level.

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Speaker 1: This is the Big Take from Bloomberg News. I'm David Gura.

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Speaker 1: You can subscribe to John Arthur's daily newsletter Points of

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Speaker 1: Return at Bloomberg dot com, where you'll also find all

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Speaker 1: our markets coverage. And we put a link in our

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Speaker 1: show notes to the latest episode of The Odd Lad's

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Speaker 1: podcast on the hidden forces driving the market sell Off

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Speaker 1: if you want even more more information on what's going on.

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Speaker 1: This episode was produced by David Fox and Alex Sigura,

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Speaker 1: who also mixed it. It was fact checked by Adriana

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Speaker 1: Tapia and edited by Caitlin Kenny and Sid Verma. Our

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Speaker 1: senior producers are Kim Gittleson and Naomi Shaven. Our senior

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Speaker 1: editor is Elizabeth Ponso. Nicole Beemster Bor is our executive producer.

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Speaker 1: Sage Bauman is Bloomberg's head of podcasts. Thanks so much

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Speaker 1: for listening. Please follow and review The Big Take wherever

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Speaker 1: you get your podcasts. It helps new listeners find the show.

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Speaker 1: We'll be back tomorrow