Stocks Plummet On Recession Fears… And Japanese Stocks Tumble 8/5/24

22:33So this thing could go at least a few more days. So I'm looking for color from trading desks. That would be probably the most timely thing to watch. And that's just going to be their color. It's not going to be scientific. But I think it'll give us a sense where we are in that journey. Are we at the beginning, the middle, at the end? Right now, it's hard to say, but I would guess we're still close to the beginning. Rebecca, thank you. Great to see you. Rebecca Patterson. All right. So we were talking about huge moves, continued deleveraging, et cetera. We can be calm about what the Fed might or might not do.

23:03But how about just blow ups on Wall Street? Because you see these sorts of moves and you think someone's getting blown up. There are many, many funds out there getting blown up as we speak with these massive, violent moves. And could that then prompt the Fed to come in or prompt? I mean, it's sort of like just a vicious cycle. Well, they say when policymakers start panicking, markets start rallying. I think if I think if I think if the Fed stepped in here, they would be panicking. And I think that would be really scary. You know, you speak about what might be going on on Wall Street. I'm glad Guy brought up credit because the credit guys are the smartest guys in the room.

23:36And that's the next leg of anything if we've got it. Right. And so that would be where I would be scared. But the move in the VIX and the kind of, you know, vol selling strategies out there when you have this kind of a spike and it led into a lot of bad pain before today tells me, yes, we're waiting for that. Yeah. It doesn't feel like there's anything remotely clear or close to what happened in 2008 at all because of the lack of leverage. And so to me, it's probably fundamental. It's what Lori said. There were some valuations and concentrated names here. I'll just mention this, and we talked about it a little bit.

24:07You know, last summer we had a July 18th top. It took two months or so, a little more than that, to go down 11%. Well, here we are. If we were to get down to that 5 ,000 level, that 200-day moving average, if it really is technical, well, there you go. It's like 11.5%, 12%. The S &P is still up on the year, you know, nearly 9 % or so. So that's why I don't think there's any cause for alarm. I think the speed in which it came down right now versus last year is probably the reason why you will get a pretty violent bounce back. But I don't think anyone thinks we're going to be making new highs anytime soon in the S &P 500.

24:38Yeah, I think this whole discussion about the emergency cuts, the Fed acting, you know, in my career, and we spent a lot of time looking through this data, the emergency cuts, the big chunky cuts, those are associated with major crises. And wherever you think we are in this unwind, wherever you think the economy is headed, we are just not there right now. And I think the Fed, at least the Fed speak we've seen so far, is giving a nod to that. And the other thing I would add, just to play off what Dan was saying, is I do think when we go back to the GFC, we learned a lot as a financial system, right?

25:06We have cleaned up a lot of things. We have de-risked a lot of things. We bemoan that, right, because it does limit returns. It limits the growth of financial institutions. And that's not to say we won't ever see a blowup. We do see them. But I do think that limits some of the systemic risk, which also, I think, limits the emergency interventions that we'll get until they're really necessary. All right. Let's get to a news alert now. San Francisco Fed President Mary Daly delivering remarks on the economy. CNBC's Steve Leisman has the developments here. Steve? Hey, Melissa. Yeah, Mary Daly, San Francisco Fed President, talking in Hawaii now, saying the Fed is prepared to do what the economy needs.

25:38When we are clear what that is, she says there's a lot of data between now and the next meeting. She does not sound like a person who thinks the economy requires an emergency rate cut. She does see upcoming policy adjustments as required. She says rates will need to be adjusted to balance the two objectives of the Federal Reserve of low unemployment and stable inflation. It's true to tell if the economy is slowing to a sustainable pace, but the Fed is prepared to do, as we said earlier, what needs to be done. And then just broadly on the economy, looking at what she says, let me just look at a couple other notes here.

26:12She noted that the unemployment rate is still low by historical standards and that there's more room for confidence underneath the labor report that we're seeing a slowing and not a falling off a cliff. She says what we're hearing is the economy is downshifting with inflation still above target. Our contacts tell our firms are not laying off workers. They're slowing the pace of hiring. So I think this kind of dovetails, Melissa, with Goolsbee this morning who says, yeah, we need to cut. But there isn't the sort of sense, at least not yet, of the hair being on fire the way the market is trading and otherwise priced for the Fed to reduce rates.

26:53Do you get a sense or did you get a sense from Mary Daly's remarks that she was a little bit more, I don't know, like trying to dampen the volatility out there by addressing directly the market concerns versus Goolsby, who you pointed out earlier today, seemed to leave open the idea to anything, that anything is possible. I thought he was very sober, but still leaving the possibility open that there could be additional rate cuts. Yeah, you know, Mary Daly said more than once that inflation is still above target. And so that has to be a consideration. It certainly was one for her and other members on the Fed that there isn't like this blank check to cut rates because inflation is at target.

27:34I think they're going to feel a little bit more constrained. And I think that may be reflected in what Daly is saying here. She's talking about an adjustment. Look, I don't think she wants to get out ahead of her colleagues or even out ahead of the economy. I mean, I think maybe it sounds trite, Melissa, but the most important thing she might have pointed out is there's a lot of data between now and the next meeting. And that is simply true. And I think one of the things she's trying to do, and I think Gulsby tried to do this morning as well, is to remind markets that, A, the slowdown is what the Fed sort of wanted here and what the markets were hoping for.

28:09And, B, that it's only one jobs report so far. And that jobs report, when you look underneath the hood, was maybe not as bad as markets have priced in. Yep. Steve, thank you. Pleasure. Steve Leisman. And I go back to Powell's line. They will be data dependent, not data point dependent. And yet the markets want to be data point dependent at this point. Right. I mean, you know, listen, I'm sure I've never met. I'm sure Jeremy Siegel's a lovely guy. But he's emergency 75 point basis. What's the emergency? The stock market was. Seriously, I'm not even trying to be. Right. I mean, Friday on the back of the jobs, everybody said, oh, this is an emergency.

28:44There's no emergency. The stock market can go down, too. So rate cuts are not some magic salve for the market. Be careful what you wish for again. And by the way, a rate cut actually makes this yen carry trade worse, counterintuitive. If the Fed had a set, they'd actually start to think about hiking rates if they want to get in front of us. Well, they do have a set. They have a dual mandate, Guy. Yes, they do. They have a set of mandates. Two of them. Dual mandates. Two of them. 75 basis points would just set the market on fire. I mean, in terms of it being incorporated so badly. The second day of January in 2001, the Fed had a surprise rate cut, and it was the sharpest rally that I can remember.

29:23It was vicious, and we hear that all the time. I mean, the sharpest rallies take place in bear markets or so. So I actually think, to Guy's point, there's a lot of knock-on effects that we're just not pricing in right now, but you would have, I think, a pretty sharp rally. That would be the thing that shorts would cover. It's usually a signal that the top is in the market. It's usually six months, 12 months later that you actually peak in the market and everything collapses on itself now. So to Guy's point, be careful what you wish for. It usually is a signal the top is in. But they are trying to stay ahead of the weakness and that long and variable lag.

29:55We know monetary policy is restrictive here. So what's the big deal? In other words, whether they go 25 or 50 right now and then do another one and start, the next meeting or the meeting after that, Look, I don't think this changes the trajectory of what the economy is doing here. It changes the trajectory of what the market wants. And I think we're kind of all here. Let's not forget, the S &P has had a 62 % move from the CPI low of 22 to the high we had a couple weeks ago. I mean, that's a 62 % move in a year and a half. But think about this. That's crazy. Main Street doesn't care about yen carry trades or if the Fed's going to go 25 or surprise at 50 and stuff like that.

30:33They're looking at the stock market, and they say it's still up 9%, and they know that it's rallying. Do you think they're looking at it saying up 9 % or are they taking a look and saying it was down 6 % today at the lows? Listen, they don't know what the intraday action is unless they're watching Fast Money right now. But I had Main Street calling me today talking to me about Japan, which I thought was fascinating. And I'll just define Main Street as a couple buddies of mine. Hey, Main Street, what's happening? Drinking buddies. No, but truly, Japan was on the ears of Main Street in terms of people that follow the market that are not professionals.

31:02Yeah, I will say one of my analysts told me his mom called him today and asked if she should sell everything. Main Street. So Main Street did know did know a little bit more. But look, I do think that at this point in time, I loved your comment on the data data point dependent. This was a messy jobs report. Right. There's a debate going on in the economics community about whether or not there was weather in there. And I know they said there wasn't. But I've talked to a number of people who said they think there was some sort of weather impact. So, again, are you going to do an emergency sort of shift on a fluky data point?

31:31I'm not so sure. All right. Berkshire Hathaway's cash pile now at a record$277 billion. Warren Buffett's firm adding to its reserves by slashing its Apple holdings by half and selling almost$3.8 billion of its Bank of America shares over the last few weeks. Apple still remains its largest holding, but with Berkshire shoring up its cash pile, should you be as well? A lot of focus was on the Apple sale, which was disclosed over the weekend. But when you put into context selling Bank of America plus Apple, you get sort of a bigger picture of perhaps somebody who is worried about where valuations were, worried about where the markets were going, you know, worried enough to bulk up the cash.

32:10Timing mechanisms are tough. And that Buffett indicator we've talked about, I mean, that was flashing red at the beginning of this year. And the market didn't really care. It went up on its merry way. It sort of looked right past it. So that's the whole thing. Market doesn't care about valuation until it does. But you should absolutely listen. If you agree with him when he buys things and get elated that he bought one of your stocks, you should be equally whatever interested when he sells something. And Apple is obviously his biggest holder. But Bank of America, I mean, again, it's not to be mean anything.

32:40We talked about this when it was a$44 stock. We said there's zero reason this stock should not be trading at book value, which was$34. Look what the low was today. So that makes sense as well. I'll just say a guy says this all the time when passive goes active. So Berkshire went active. Okay. And the top three holders now are Vanguard, BlackRock, and State Street, all passive investors. They own 3 billion shares between the three of them. There's 15 billion shares outstanding. You can't get out of this. The fact that he got out of this, that's why the stock underperformed all spring while everything else was going crazy about generative AI.

33:17And the last point, this product stinks. You know, Buffett might have been a beta tester. He might have said, you know what I mean? Like, this is not good. And they're pushing out a lot of those offerings. So to me, I don't know. All right. Do not miss a CNBC special on today's major market sell-off. That is tonight, 7 p.m. Eastern time, right here on CNBC. Coming up, Japanese stocks plummeting, seeing their worst day since 1987. What it means for global markets and the unwinding of the yen carry trade. More on that next. Plus, a huge spike in the VIX touching its highest levels since the pandemic as recession fears grip Wall Street.

33:50How options traders are handling the volatility ahead. Fast Money is back in two.

34:03Welcome back to Fast Money. Stocks plummeting to start the week as recession fears sparked a global market sell-off. The Dow dropping more than 1 ,000 points. The S &P is sinking 3 % and the Nasdaq leading to the losses down nearly 3.5%. The Japanese yen rallying against the dollar today, hitting its highest level since January. It's a sharp move in the currency over the last month and comes as the Bank of Japan has taken a more hawkish tilt to its monetary policy and raised speculation of an unwinding of the carry trade between the U.S. and Japan. How much more deleveraging could there be? What could that mean for the market?

34:34Let's bring a FedWatch advisor's chief investment officer and founder, Ben Emmons. Ben, great to have you with us. We've talked about the carry trade in the past. It looks like the unwind is upon us. And I'm wondering, how can investors tell, how can you tell if we're near the end of that process? Yeah, the one hand is difficult, Mel, because, you know, you're looking at that CFTC data too and that's just a part of the market right we have the foreign exchange market that is so large with its FX forwards you know there's some data on the IMF side on that and that actually shows more like a four trillion dollar type of estimated position and that's barely changed so from the last time that we spoke about it but also just the last sort of weeks and the futures data indicates that too if you look at the last few days the open interest in these contracts for yen futures is barely shifting.

35:21So it looks like that as much as we get movement in the Japanese yen, it may not be really, you know, a major short covering just yet or just not to the extent that you get real calamity. Nonetheless, you know, a VIX today at 65 is clearly a financial distress moment caused probably mostly by the yen. I think that's the interlinkage. So my sense is there's more to go here, but it may need another catalyst, let's say data catalyst or BOJ catalyst before we more of this. What would that catalyst be from your standpoint? Would it be a U.S. data point or would it be a BOJ catalyst? I think it's more the Bank of Japan in this case because, you know, they actually got their intervention, right?

36:00You know, we were trading 161 on the yen and there was a lot of flutter in the market, a lot of speculation. When will they come in and do something about that? Now they got their intervention. And so the Bank of Japan, And surprising with that hike last Wednesday, I think was obviously a trigger for people covering shorts. And you can tell from asset manager data, taking futures, that that was clearly happening. On the other hand, it's also about the Bank of Japan now having to hike rates because inflation continues to be high. But the currency has already strengthened a lot. So I think the next Bank of Japan meeting will be the key meeting.

36:35It's not too far off from Jackson Hole. You know what that could be. I think if they signal that they're going to be on hold, then I think the calm comes back to the Japanese yen. Hey, Ben, Tim, maybe a comment and your view on my comment and then and then a question. But but ultimately, should we be surprised that the Bank of Japan has stepped in here? I mean, if you're in the carry trade, you're a sophisticated investor. You're borrowing in one currency. You're going long. You're probably levering up dramatically to pick up a couple of basis points. And this was the smartest guys in the room at long term capital back in the day.

37:04I'm just kind of curious, you know, why should a sophisticated hedge fund or professional investor be caught off sides by this move by the Bank of Japan? And then finally, where do you see credit? Yeah, you know, the Bank of Japan is always sort of like very nuanced in its language. And it was difficult to parse the language, I think, going into that meeting. You know, we missed maybe Sarah, you know, probing the governor on Sintra, right, that she did last year. Then we got more signals out of him, and that wasn't happening before this meeting. So they just simply did surprise. And it is in the history of the Bank of Japan.

37:41Kuroda has done this a few times, too. So, you know, I think that that's the reason why these funds, particularly CTAs and lever funds, got caught off guard. But I also denote, though, that I think it's also about people getting worried in general about the environment. So the yen is a flight to safety, you know, instrument, flight to safety generally. So I think that played a role here, too, because we did have this geopolitical sort of environment, sort of context of Iran playing in the background as well. And lastly, if you take that to credit, so credit spreads have widened a bit. It's still very marginal.

38:14If you think about it, if you're pricing that many, quote, quote, emergency rate cuts, I think credit can only widen more if the yield curve particularly starts to steepen very aggressively. That seems for now a bit moderate. We're just flat on the two, 10-year spread. So, Ben, everyone's focused on this direction right now. What's the knock-on effect? What's the next domino, if you will, that will fall? Is it the FX desks on a lot of these banks? What is the next thing? If this gets worse, what should we all look for? Yeah, that's a tough one, Steve, because, you know, it's not necessarily the FX desks itself because they pair positions there.

38:52I think not the ones in the risk zone. It would be those funds that have borrowed yen and bought, say, AI stocks or other riskier assets. You know, we don't know the extent of that position, but there's some data out on it that it's in the trillions of dollars. And so that is, I think, ultimately the catalyst that that data watching is about, if you see more pairing back, you know, people start to pile on one another. I think that's also what happened overnight, because the move in the Nikkei really, I think, prompted a lot of people to cover the yen short positions while there's no liquidity.

39:26So I think that is the data watching, the positioning data. Ben, great to see you. Thanks. Thank you. Ben Emmons of FedWatch. So what do you make of this pullback in the Nikkei, Tim? Excuse me. I think it's interesting in that it was happening well before the last couple of days. So if you look at at least intraday high from where they were to the intraday lows, I think it was a 26 % move in the Nikkei over three weeks. And this is something that's been a function of where you've seen some slowing, not necessarily in the economy. I'm someone that's been talking about Japan and talking about the fundamentals around the companies themselves, governance, payout levels, and where I thought at least a handful of the Japanese companies were big winners here.

40:08I actually think that gets kind of interesting here. But look, this trade has been bigger than all of us. All we said for the last month, excuse me, year and a half, is that the yen has to give ground. So this was supersized on top of supersized. And I think the next level of watch is 138, and it's probably going to test that. Coming up, the VIX soaring to its highest level since the depths of the pandemic today. We'll make sense of today's wild move and take a closer look at how options traders are playing it next. And after a day like this, what if anything is worth a buy? We'll go around the horn and find out where opportunity may lie right after this.

40:49Welcome back to Fast Money. Today's market sell-off got us wondering, are there any names now worth buying from precious metals to big pharma? There are a few areas catching our traders' attention. So what would you buy tomorrow? Guy Dami. I know gold sold off. If everybody's getting out of everything, margin calls, everything gets sold off. However, gold wins to this. Tim says it all the time. There's going to be a day for gold. And we're talking about, again, you want to say currency price, say what you want. There's obviously things going on. Gold wins. PHYS is so much better than GLD. Sprott physical gold ETF.

41:21Tim? Yeah, and longsprot as well. I think it's the kind of value or at least the beaten up mega cap pharma. So that's Bristol Myers. That's Pfizer. That's J &J. I mean, these are companies that have had their own issues. These are companies that certainly valuation are defensible. You know what their business is. It isn't a function necessarily even of the broader economy. So I feel very comfortable there. Steve, I added to three positions, my BTC, my ETH, which are both the Grayscale Minis. And I added to my Nvidia, which I mentioned in the A block. Those are the three names. Think about it. If we're getting closer to cutting, then we're devaluing the dollar, which in theory should make more sense for Bitcoin to rally.

42:05ethereum is the uh is the groundwork or the structure that all of the cryptos trade off of that's why i like the two of them do we need to see a risk uh on yeah i think you see you need to see it recover because the trade it's correlated with the overall market as we've seen risk off comes on the table so does bitcoin so yes we do need to see a little bit of a bounce lori so i'd go with financials um we've been overweight the sector but we've been a little annoyed that they haven't looked particularly cheap lately and i think we've probably gotten and our buying opportunity in here. And I do think the tech big mega cap growth unwind has further to go.

42:39And ultimately, I think this side has got to benefit from that as the kind of big chunk of value. Dan. Yeah, if we're going to have this period of volatility, I think we could all agree that there's going to be fits and starts. We're going to have really mad rallies and we're going to have retests of other lows. I look at a Robinhood here. I think they get just under 20 percent of their sales from options. Options had one of the biggest, I think it did have its largest all-time volume day on Friday. I'm sure it was huge, too. They also, crypto is going to remain pretty volatile. And I think that is a large chunk of their sales, probably just also under 20 percent or so.

43:14That stock was down 25 percent at one point today. Got back a lot of those losses, but still closed down a lot. So that looks interesting to me. All right. Coming up, the VIX surging to its highest level since the pandemic. We'll check in on the wild move and see how options traders are playing it. Fast Money is back in two.

43:38Welcome back to Fast Money. Volatility exploding amidst today's Monday's massive sell-off. The CBOE volatility index soaring nearly 200 % at its overnight highs, touching the mid-60s for the first time since April 2020. Baycrest Managing Director David Bull joins us on the Fast Line for a closer look at the volatility explosion and how options traders are squaring up. David, are we going to see even higher levels in terms of volatility, or do we see the spike that will mark a bottom? Hey, Melissa, thanks for having me. So it was, as you said, an explosion of volatility this morning with VIX hitting 65.

44:12A couple tidbits to remember, VIX is just a calculation based on S &P 500 options. And so this 65 print, while astronomical, was pre-market while things were very illiquid. It was kind of a perfect storm for volatility. coming out of the weekend, a summer weekend, where you had fundamental dynamics, you had positioning, you had de-risking from the yen and what the Nikkei was doing, essentially setting all global carry trades on notice. And so VIX did settle in in the mid-30s, which essentially implies about, this is not a perfect proxy, but about a 2 % move per day, which is pretty wild, given about a week and a half ago we were on a streak of about 350 days where we hadn't seen a down 2 % move.

44:56And now we're expecting for the next one, two, three, four weeks, essentially a 2 percent move every day. That sounds like we're going to get whiplash here. David, in terms of the backwardation that we're seeing in the VIX curve, should we make much of it? Because we are going to the election, so one would think that volatility would be higher closer to. Correct. It is pretty normal on a big risk off day to see a massive backwardation in the VIX term structure specifically. This is usually the VIX term structures in the contango where there's more uncertainty the further you go out in time. But with Apple opening up down 10 percent, NVIDIA opening up down 15 percent, there was massive uncertainty within the next five or 10 minutes.

45:39There were people putting circuit breaker numbers in chats this morning. So that uncertainty was in the short term. So the whole level of the VIX curve did rise today. So it is uncertain going out in time. But I think the market generally thinks that we will stabilize somewhere, even if it's down a large amount from here. But massive volatility in the front part of the curve. But still expecting a lot of volatility as we go into the election cycle in the fall, which is generally more volatile in general. All right, David, thanks for phoning in. Appreciate it. David Buhl of Baycrest. Were you surprised at 65 this morning?

46:18If I was said no, I'd be lying. Yeah, absolutely. I haven't seen a number like that since the financial crisis, right? Maybe COVID. We saw a couple of days. You know, we had Vinnie and Porter on the show a week and a half or so ago. And one of their mantras for the remainder of the year was make volatility great again. And they couldn't have been more spot on. I think the VIX was 14. And by the way, Katie Stockton was on this show about a month and a half, two months ago. And she suggested that her work thought the VIX could have a spike. But I don't think anybody saw the levels we were to get to today.

46:49Are we too late to hedge positions, Dan? Probably. I mean, vol's blown out, right? And so you had the opportunity to kind of buy cheap protection. Now you have the opportunity to probably sell upside calls against positions that you own. Yeah, I mean, when I saw the 65 print this morning, I called my desk to see if my screen was right. I mean, we had been expecting, as Guy mentioned earlier, a pothole. But, you know, we did run some numbers. And luckily, we picked 35. But when you close above 35 on the VIX, it is typically a buy in the market 12 months out. Now, obviously, you want to know exactly where it peaks.

47:20But if you can really be a long-term investor in here, it's ultimately a buy signal. Up next, final trades.

47:41News alert on Southwest Airlines. Elliott Management has reported a 7 % stake in the company, and it's calling for both the CEO and chairman to be removed. The activist saying it believes LUV shares are undervalued. Time for the final trade. Let's go around the horn. Lori Calvacina. I'll buy energy. Ben reminded us about geopolitical risks. Tim. Value and defensive pharma. Bristol Myers. Steve. IoT was the only thing green on my screen today. Dan. Robinhood. Volatility. Is that a new jacket? It is a new jacket. Fantastic. Great color. Raytheon defense stocks are actually defensive and offensive.

48:18All right, Laurie, great to have you here on a night like tonight. Thanks for watching Fast Money. Mad Money with Jim Cramer starts right now.

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