The Economic “Red Wedding” Begins

I love being right…Does that make me a bad person?

I have been warning for months that the market is overvalued, that the global economy is sick, and that stocks are headed for a fall. While CNBC and the rest of the clueless bulls break out the arm-bands, readers at Money Morning – who have been paying attention – should not have been surprised by what happened last week.

The collapse in commodity prices that began a year ago was a raging canary in the coal mine, screaming that something was wrong in the global economy. And that was the faltering of Chinese growth, which all along had been built on a fragile foundation of debt.

Just as I forecast two weeks ago, U.S. stocks saw their biggest weekly losses in four years. The Dow Jones Industrial Average plunged -5.8% or more than 1000 points to close at 16,459.75 and is now officially in correction territory, down more than 10% from its recent sugar high. The S&P 500 was not far behind, falling -5.77% to 1970.89. The S&P 500 is now down 4% on the year and has generated a negative return over the last 12 months. The high-flying Nasdaq Composite Index lost even more last week, collapsing by -6.78% to 4706.04. The small cap Russell 2000 fell -4.6% to 1156.79.
But these numbers don’t convey the hard, cold reality of the losses. Let’s put some meat on the bones. The U.S. stock market lost $1.4 trillion in value last week according to Wilshire Associates, with more than half the loss coming in Friday’s rout.

The world’s favorite company and investors’ favorite stock, Apple (Nasdaq: AAPL), has lost $72 billion in market cap from its recent high while Facebook, (Nasdaq: FB), Amazon.com (Nasdaq: AMZN), Netflix (Nasdaq: NFLX) and Google (Nasdaq: GOOG) lost a combined $100 billion.

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What Credit Markets Are Telling Us About Stocks Now

Rather than trust markets to heal themselves, the world’s central banks have polluted markets with flawed economic theories and trillions of dollars of debt. Rather than ignite economic growth as they had hoped, however, they have suffocated the global economy.

It began with the U.S. Federal Reserve’s move to lower interest rates to zero seven years ago, followed by several bouts of quantitative easing.

This was followed by Mario Draghi’s August 2012 declaration to do “whatever it takes” to defend the euro.

And then there were the Bank of Japan’s kamikaze moves last Halloween to buy not only every Japanese Government Bond being sold, but even stocks and ETFs.

China is late to this central banking party, but it still managed to rock global markets last week when it devalued the yuan.

Central banks have launched a massive assault on markets that has sucked out their liquidity and distorted normal pricing mechanisms beyond recognition. What we’ve seen so far is only a taste of what central banks will do in their desperation to prop up over-indebted economies…

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