Facebook Share Price drops over 8% – is this only the beginning?

Facebook’s [NASDAQ:FB] shares dropped 6.8% on Monday after a data privacy scandal…and another 2.5% on Tuesday.

It looks like a political consultancy firm that worked with US President Donald Trump’s campaign — Cambridge Analytica — accessed the data of 50 million Facebook users.

Facebook’s fall wiped out of all their 2018 gains.

But don’t fret, Facebook’s stock is still up almost 20% since this time last year. And a whopping 340% since it started trading in 2012.

Facebook’s plunge took down tech stocks and the NASDAQ by almost 2%.

The ‘fear index’ VIX, spiked up over 6 points to 21.77.

But it’s not just Facebook’s scandal that is shaking markets. The truth is, there is a lot the markets have to fear this week.

For one, there is the continuing talk of trade war.

For another, the US Federal Reserve is deciding on monetary policy. It is very likely that in his first interest rate decision, the newly appointed chairman Jerome Powell will be hiking rates.

As you may remember, last February the stock market dropped after the US released they had stronger than expected wage growth. The fear of increasing inflation shook US markets and spread around the world.

Does the market still have further to drop?

Since then, things have been relatively calm.

In fact, investors have jumped back in to ‘buy the dip’.

This is from CNBC:

With the market correction barely a month in the rear-view mirror, investors have jumped back into stocks in record numbers.

Stock-focused funds took in $43.3 billion in fresh cash over the past week, a new peak that reverses much of the angst over the past several weeks, according to Bank of America Merrill Lynch…

Investors had pulled $9.4 billion from stock funds the previous week.

The new money for stock funds amounted to nearly 0.6 percent of total assets, the best since September 2013.

In other words, investors think this market still has more to go.

They expect things will stay the same. But as we’ve told you before, things can change…in a second.

The fact is, risks have been building up since the financial crisis in 2008.

Since then, the three main central banks — the US Fed, the European Central Bank (ECB) and the Bank of Japan (BOJ) — started a quantitative easing (QE) program to kick-start the economy.

With QE, central banks basically buy treasury bonds and other assets from investors to increase the amount of money in the economy.

Check out the Fed’s balance sheet below. In five years they have almost accumulated US$4 trillion. Yet they haven’t succeeded in creating much growth.

Federal Reserve Bank Total Assets 21-03-2018

Source: St Louis Federal Reserve
[Click to enlarge]

Households have taken on too much debt

QE also keeps interest rates low. Which has caused asset prices to soar.

And much like 2008, households have taken on too much debt.

Only this time, it is not only mortgage debt.

The debt is things like auto loans and student loans. These have ballooned from US$2.71 trillion back in 2008 to US$3.82 trillion today, according to the New York Fed. That is a 41% increase.

Household bills are increasing, but there is no wage growth. As a result, households are saving less.

Now the Fed is looking to reduce their balance sheet with Quantitative Tightening (QT). They are looking to do this by shedding $US6 billion in treasury bonds and $US4 billion in mortgage backed securities a month. They want to increase that amount to US$50 billion a month, by December 2018.

Take another look at the US Fed’s balance sheet chart above. You can see the slight decline at the end of the curve.

The Fed is only just starting with QT, and markets are already jittery.

And they’re doing this at a time when the US government is spending more and increasing debt. That is, the government will be adding more bonds into the market.

But they are not only unwinding their balance sheet, they are also making debt more expensive by increasing interest rates.

This will make already high household debt more expensive.

You see the danger?

Kind regards,

Selva Freigedo,
Editor, Markets & Money

PS: Editor Vern Gowdie sure sees the danger ahead. In fact, he thinks there is a ‘big one’ coming. That is why he has created a step-by step guide to help you protect your wealth against a crash. For more details click here.

Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the ravaging effects of hyperinflation, high unemployment, deposit freezes and debt default. Selva now writes from her vantage point here in Australia. She is lead Editor at the daily e-letter Markets & Money. And every week, she goes through each report and research note produced by our global network of trusted advisors to find the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.

Leave a Reply

Your email address will not be published. Required fields are marked *

Markets & Money