Tag: Financial market (page 1 of 4)

Credit Crashes, VIX Tops 14 As Stocks Open Lower For 7th Straight Day

Something changed…

Futures were weaker overnight but dumped at the cash open…


As the collapse in HY credit accelerated… worst day for HYG in 3 months


HYG is now negative year-to-date…


With spreads crashing back abopve 400bps…


USDJPY was unable to save stocks and VIX is now topping 14…


VIX is starting to catch up to credit…


Equity markets are down at the open for the 7th straight day… Trannies (blue) and Small Caps (dark red) are the worst performers but Nasdaq (green) is plunging today…


It seems like the Saudi debacle broke something…


Or is this why?

Did the buyer of first and last resort just disappear?


China 10Y Bond Yield Breaks Above 4% “Mental Line Of Defense”

Following last night's dismal economic data, China's 10Y bond yield pushed above 4.00% for the first time since October 2014…

As China's intentional credit slowdown strikes.,,


Additionally, China's yield curve has been inverted for a record 22 days and analysts are warning it is likely to get worse – at least until Chinese authorities are forced to step back in.


Bloomberg provides a breakdown of analysts' comments:

David Qu, market economist at Australia & New Zealand Banking Group Ltd. in Shanghai

  • “The breaking of 4 percent will have significant negative impact on sentiment. There’s a chance that we will see an extensive and quick slump in bonds in the near term.”
  • The selloff will spread to corporate bonds if sentiment worsens.
  • Worse-than-expected monetary and real economic data didn’t help bonds, which shows the market is losing confidence.
  • Investors should expect tougher financial regulations and tighter monetary policy next year, so bond yields will keep climbing.

Li Qilin, chief macroeconomic researcher at Lianxun Securities Co.

  • The breach of 4 percent may trigger a new round of stop-loss trades and drive the 10-year yield up, though it’s hard to predict how high.
  • The peak depends on whether authorities announce some supportive policies to calm the market and whether banks start buying bonds.
  • Banks don’t currently have money to allocate to sovereign bonds because they are under pressure to buy local government debt and deposit growth has been slow due to the popularity of investment alternatives such as Yue Bao.

Chris Leung, senior economist at DBS Bank Hong Kong Ltd.

  • “If deleveraging continues as Xi stated in the party congress, then bond yields will climb further.”
  • “With financial firms’ liabilities shrinking, and outstanding WMPs (wealth-management products) falling, the allocation or the demand to allocate to government bonds will shrink, weighing on prices.”

Liu Dongliang, senior analyst at China Merchants Bank Co. in Shenzhen.

  • China bonds will remain weak but there may not be an acceleration of declines after the break of 4 percent, as a “mental line of defense” was broken when the yield hit 3.9 percent.
  • Investors were expecting it to rise to 4 percent.
  • “The market is still worried about tougher financial regulation and tighter year-end liquidity.”

Zhang Guoyu, analyst at Tebon Securities Co. in Shanghai

  • The 10-year yield should be capped at 4.1%.
  • Authorities aren’t likely to let the rate climb fast as that would increase corporate funding costs and put pressure on the real economy, which is against the aim for stable growth.
  • If there’s another round of panic selling, the central bank will likely add liquidity to the market to stabilize it and prevent a rapid pickup in yields.

Not exactly positive, but it seems everyone is banking on Chinese authorities losing the market's game of chicken.


One Trader Urges “Extreme Caution”

Something has changed. While stocks are exhibiting their usual BTFD patterns still, other asset classes are not playing along – most notably the junk bond market and the sovereign yield curve. Furthermore, while a few megacaps continue to rise ubiquitously, small caps have suffered and breadth is terrible. As former fund manager Richard Breslow warns, "sometimes markets look really bad and it’s prudent to exhibit extreme caution."

Via Bloomberg,

Use 2008 as a good example. Other times, they look horrendous and it’s only a phase. Unfortunate series of events happening at the same time that overload investors’ circuit breakers and we have a rough, perhaps scary, patch that turns out to be just another buying opportunity. February 2016 would be a poster child for that scenario.

Obviously, getting that distinction right is the key to everything. But whatever is the case, it’s a mistake to think that one vital piece of the market mosaic can experience a profound change without it rippling through all markets. Whatever the duration.


Totally aside from all of the systemic and structural blunders we allowed ourselves to stumble into preceding the financial crisis, we, and the central banks, have learned two vital lessons.


In times of trouble correlation matrices become a series of ones, another way of saying there’s nowhere to hide, and it’s all about keeping the funding mechanism going and liquidity flowing.


This week’s market setback has been minuscule in the scheme of things and I’m not going to tell you what will happen next. Then I’d have little to write about next week. But it has been interesting to listen to how people are thinking about those two investing truths. Traders are trying to unlearn and argue away the former and leaning very heavily on the latter. Both approaches are wrong.


The problem with citing the equity rally post the Bear Stearns hedge fund debacle is we understood far less about modern market structure then than now.


No one had any concept about the fragility of the interbank funding market nor what it actually meant to be so insanely leveraged.


Go back and reread all the analysis you received back then and you will remember that we were being told these were exotic funds in an esoteric market that got too far out over their skis. Avoid esoterica for the time being and stick to safe plain vanilla. So everyone ran to stocks. After all, what’s simpler than the S&P 500? Contagion was just a medical term. Even the Fed thought that was good advice. Talk about popular delusions and the madness of crowds. It’s not that you had plenty of time to get out, everyone was loading up at the worst time.


Correlations require some nuance to understand when they bend, but in times of fear they don’t make fine distinctions. If someone says the words asset-class rotation when things are going pear-shaped run very far away from them.


As to the central bank put, it’s true–in the big picture of things. They are paying close attention to price action, but their reaction function to step in isn’t as hair trigger. How many times do they have to signal that change.


Without the funding mechanism seizing-up they probably could live with a little investing circumspection to assert itself. Analysts panic over tiny corrections. In the scheme of things they are healthy. We’ve forgotten that fact because we’ve been trained to — that’s the price of trickle-down monetary policy. But the economy and time have softened that requirement and it’s important not to be irresponsibly blase unless you have very deep pockets.

Finally, Breslow has some advice for those on edge curently – For my two cents, keep it simple and watch the 21-day moving averages, so far they’ve been very helpful. Most especially in equities.


The Year Was 1989…

By Chris at www.CapitalistExploits.at

These folks were probably worth more than Justin Bieber.

And this guy was still alive… and even though dressed like a peacock, amazingly popular.

1989 was also the year the Japanese stock market topped out.


Most economic crises are the result of an economic boom which leads to investors getting all giddy, bidding up assets to the point where they become completely disconnected with reality.

Japan in the 70’s and 80’s was no different. People are people, everywhere and always. Even if they do eat oodles of raw fish and seaweed.

In the 70’s, after they’d nicked a lot of German ideas, Japan managed to produce the world’s second-largest gross national product (GNP) after the US. And, get this: By the late 1980s, Japan ranked first in GNP per capita worldwide.

Record-low interest rates had fuelled a stock market and real estate speculative boom that sent valuations screaming throughout the 80’s. In fact, at one point a piddly little 3-square meter piece of dirt (enough to stick a portaloo on) near the Imperial Palace sold for $600,000. The Imperial Palace itself was worth more than the entire state of California.

If it sounds crazy, it’s because it was.

Upon realizing that the bubble was unsustainable and potentially destabilising for the economy, Japan’s Finance Ministry ratcheted up interest rates to try and curb the rampant speculation.

It was all far too late, and the move quickly led to a stock market implosion and debt crisis as borrowers failed to make payments on debts, many of which were backed by assets which themselves had been bid up in a speculative frenzy and now worth a whole lot less.

In the bloodbath that ensued, Japanese investors lost their shirts kimonos, and the Imperial Palace could no longer be sold to buy George Clooney’s Hollywood bathroom.

Fast forward to today and you’d be forgiven for thinking the place was about to be nuked by young Kim, who is more likely to have his shiny rocket wobble about in the sky for a bit before crashing… or not taking off properly at all.

The point is: If you were to run a poll today, you’d probably find that the the perception amongst money managers is that the only folks who’ve been buying Japanese equities, (which includes us) are ones who’ve taken a knock to the head or been dropped on their head at birth.

And that’s not all.

Bloomberg recently pointed out that less than 10% of Japanese households own any equities. That’s basically none. Zero. Zilch. Nada.

Marginal buyers

Which brings me neatly to another much loved thesis of mine. It was Mark Twain who said:

“Courage is not the absence of fear; it is acting in spite of it.”

Well, I say, risk is not the absence of consensus; it is the deafening roar of it.

So what’s the risk today? Well, risk is highest when your pool of marginal buyers are the smallest, and consequently the lowest when your pool of marginal buyers the greatest.

I always look for markets where marginal buyers are either exhausted (none left, everybody is already in) or they’re sitting there at the train station watching the rain, just waiting for a reason to board the next train.

Bad News… Pffff

Something else.

I’ve always looked at turning points in markets and one of the best signs of a stealth bull market I’ve ever seen is a market which continues to rally on bad news.

And there’s been a fair bit of that in the land of the rising sun.

Toshiba — Japan’s answer to Enron:

Mitsubishi, after admitting to falsifying fuel efficiency data. Naughty, naughty!

Kobe Steel with their own scandal. Very naughty!

These follow scandals at Nissan, Toyota, and Takata Corp.

And the market? Rallying.

Who Leads?

Another thing I look at is small caps. Why?

Because small caps are like Mahatma Gandhi — they’re natural leaders.

Here’s the small caps:

One word. En fuego! (Ok, I lied… 2 words).

Not only that. They actually make money and pay shareholders. How unique!

In fact, if like me you’re on the lookout for stuff like this you’ll realise that this market actually got cheaper over the last decade…while it’s gone up. How so?

Dividends grew faster (97.5%) than prices (29.2%), so on a price-to-dividend basis they’re even cheaper today… all the while we’ve been making money.

And for you technical geeks out there, here’s something to chew on.

The Nikkei 225 just broke a key 38.2 percent Fibonacci-retracement level. The next retracement of 50% stands at 22,981.49. Today, as I write this we trade at 22,539. Mmmm…

So marginal buyers are large. Bad news is being bought not sold. Technicals couldn’t be better. Companies actually make money. And today you could buy much of the Japanese banking industry if you were to liquidate Elon’s vanity project that incidentally incinerates cash and uses funky math.

Your choice…

– Chris

PS: We’ve been all over this like a fat kid on a cupcake for the last 12 months in Insider. You’re always welcome to join us.

“Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” – John Templeton


Liked this article? Then you’ll probably like my other missives on

this topic as well. Go here to access them (free, of course).



Healthcare Spending Now Accounts For Almost One-Fifth Of The Entire US Economy

Authored by Michael Snyder via The American Dream blog,

Everybody agrees that healthcare costs are way too high.  Back in 1960, healthcare spending accounted for approximately 5 percent of GDP, and by 2020 it is being projected that healthcare spending will account for 20 percent of GDP.  And when you break those numbers down into actual dollars, they become even more staggering.  Back in 1960, an average of $146 was spent on healthcare per person for the entire year, but today that number has skyrocketed to $9,990.  On a per capita basis, we spend far more than anyone else in the world on healthcare.

  In fact, we spend almost twice as much as most other industrialized nations on a per capita basis.  Something has gone terribly wrong, and we desperately need to get this fixed.

Just between the years of 1996 and 2013, our spending on healthcare rose by a whopping 900 billion dollars, and it is estimated that healthcare spending now accounts for nearly one-fifth of the entire U.S. economy.  The following comes from the Daily Mail

US healthcare spending rocketed $900 billion between 1996 and 2013, staggering new data reveal.


Americans spend more money on healthcare than any other population, and increasingly so.


By 2013, total healthcare spending hit $2.1 trillion, according to the study published today in the Journal of the American Medical Association. The researchers say that figure has now likely soared to more than $3.2 trillion, which equates to 18 percent of the country’s economy.

So why is healthcare spending going up so much?

Well, the truth is that our population is aging, obesity is certainly on the rise, and medical care has become much more expensive.  In addition, we should acknowledge there are a couple of other major factors that we should acknowledge as well

First, the United States relies on company-sponsored private health insurance. The government created programs like Medicare and Medicaid to help those without insurance. These programs spurred demand for health care services. That gave providers the ability to raise prices. Other efforts to reform health care and cut costs raised them instead.


Second, chronic illnesses, such as diabetes and heart disease, have increased. They are responsible for 85 percent of health care costs. Almost half of all Americans have at least one of them. They are expensive and difficult to treat.


As a result, the sickest 5 percent of the population consume 50 percent of total health care costs. The healthiest 50 percent only consume 3 percent of the nation’s health care costs.

Healthcare costs are only expected to rise even more in the years ahead, and so we desperately need to reform our system.

Because as it is, health insurance premiums are becoming completely unaffordable.  According to CNBC, health insurance premiums for plans purchased through an employer will be higher than ever next year…

Next year, employers expect to spend $8,527 per enrolled employee, according to data form the National Business Group on Health. Meanwhile, workers themselves will contribute an average of $2,752 toward their premiums.

And for those that have to purchase their own health insurance, things are even worse.  In fact, it is being projected that the average rate increase for Obamacare plans will be 37 percent in 2018.

When I get elected to Congress, I am going to make repealing Obamacare and fixing our broken healthcare system one of my highest priorities.

We need a system that is focused on the relationship between doctors and patients.  Compared to the rest of the world, we spend way too much on administrative costs, and we desperately need legal reform.  I would like to see Congress legalize the kind of association buying groups that Rand Paul has been proposing, and I would like to see exciting new models such as direct primary care used much more extensively.

There is no way that we should be spending nearly twice as much on healthcare as everyone else in the industrialized world on a per capita basis.  We must streamline the system, and we need to start using some common sense.

Unfortunately, common sense is in short supply in Washington D.C. these days, but hopefully we can start to change that.

*  *  *

Michael Snyder is a Republican candidate for Congress in Idaho’s First Congressional District, and you can learn how you can get involved in the campaign on his official website. His new book entitled “Living A Life That Really Matters” is available in paperback and for the Kindle on Amazon.com.


Investors Now Value A $20 Billion Company Based On Its “Energy & Spirituality”

Authored by Simon Black via SovereignMan.com,

About twelve years ago, at the height of the real estate boom in the United States, banks began issuing what became known as NINJA loans.

You’ve probably heard the term before– NINJA stood for No Income, Job, or Assets.

These were the famed ‘no money down’ loans at low, teaser interest rates given to borrowers with pitiful credit and little hope of being able to make the payments.

One of the best examples of this absurdity was the case of Johnny Moon, a bankrupt, homeless man in Florida with no job history who was able to borrow hundreds of thousands of dollars to buy real estate.

Unsurprisingly, the market eventually crashed, dragging down the entire financial system with it.

Looking back it’s so obvious. I mean… duh… who would possibly think it was a good idea to give no money down loans to homeless, jobless, assetless borrowers?

Or the infamous ‘stated income’ loans, where the lender doesn’t bother to verify anything the borrower says (so the borrower can just make up their income and asset levels).

But back then, even some of the most conservative banks were doing it.

And hard core, seasoned financial professionals packaged all these toxic loans together into enormous, AAA-rated financial securities that were incredibly popular among institutional investors.

It’s not like these were stupid people. Bankers, brokers, investors, real estate professionals… many of them were incredibly astute.

But everyone was making so much money that they didn’t want to see the obvious truth. And the entire financial system paid the price for it.

Candidly, there are a number of similar signs today.

Snapchat is a great example.

The sexting social media app that’s so popular with pedophiles young people released rather disappointing quarterly results yesterday.

User growth is falling. Revenue growth is falling. And the company is hemorrhaging cash.

Snapchat has negative free cash flow. It has negative operating cash flow.

It has lost a total of $4.3 billion of its shareholders’ money since the company was founded in 2011– and more than $3 billion (nearly 70%) of that total loss is from this year alone.

In other words, the rate at which Snapchat is losing money… is INCREASING. Quickly.

Meanwhile the company continues to shower its employees with generous stock options despite its prodigious losses, ultimately forcing investors to suffer the consequences.

Snapchat’s shares took a big tumble yesterday after releasing its underwhelming quarterly report, and the share price is down more than 50% since it’s IPO.

Gee, what a surprise– a massively loss-making company that treats its investors like doormats has turned out to be a bad investment! How could anyone have possibly anticipated this?!?!

And Snapchat isn’t alone.

Another high-flying company that fits this mold is WeWork. If you’re not familiar, WeWork basically subleases short-term office space to other businesses at terms as short as one month.

So if you’re a new startup needing some short-term, non-committal office space…

… or flexible access to a conference room to meet clients…

… or even just a professional address to receive mail.

… that’s essentially what WeWork provides.

It’s important to note that WeWork doesn’t actually own any real estate.

It signs long-term leases, and then sub-leases the space through short-term contracts, which creates a LOT of risk for the company (and its investors).

You might be thinking– that sounds familiar, aren’t there a number of companies already doing that? It seems a lot like Regus’s business model (another company that provides flexible-lease office space).

Yes. It’s like… exactly… what Regus’s business model is.

The big difference is that WeWork is one of the most expensive private companies in the world, with a valuation of $20 billion.

By comparison, the parent company of Regus (IWG) is worth $2 billion (90% LESS than WeWork) despite having 3x as much revenue and 5x as much office space.

It also goes without saying that WeWork has negative cashflow… while Regus is profitable. But that’s apparently an irrelevant detail given that WeWork is worth TEN TIMES as much as Regus.

How can WeWork possibly justify such an enormous valuation?

The CEO/co-founder’s rationale is simple:Our valuation and size today are much more based on our energy and spirituality than it is on a multiple of revenue.”

Yes I’m serious: that is a direct quote.

We are living in a world where serious financial professionals are investing in loser companies based on “energy and spirituality,” not profit, plan, or cashflow.

(As an aside, WeWork’s CEO is so energetic and spiritual that he’s personally sold $100 million worth of his own shares to buy a number of luxury homes.)

It’s not exactly the same as giving FIVE no-money down loans to a homeless guy. But it’s pretty close.

And this is precisely the sort of nonsense you always see at the top of a market.

Granted, it could keep going like this for YEARS. And it could become even more ridiculous.

No one knows precisely what will happen next, or when. And I acknowledge that I’m always early.

But I do believe that for anyone willing to do a little bit of homework and look beyond what’s sexy and sensational, there are plenty of better options out there.

As an example, we have a number of subscribers earning 5%+ on loan investments they’ve made which are fully backed at a 2:1 margin by gold and silver.

Others are making 12% to 13.5% on other asset-backed loans. We discuss some of these investments here.

They’re not sexy or sensational. There’s no hyped-up CEO promising to change the world, or major headlines on CNBC.

They’re just steady, safe investments… pretty boring by comparison.

But I’ll take safe and boring over a risky loser any day of the week.

Do you have a Plan B?


Stock and Awe, Bears in Bondage

The following article by David Haggith was published on The Great Recession Blog:

Is the US stock market going to crash in 2017? [By Philip Timms [Public domain], via Wikimedia Commons]

The Trump Rally pushed ahead relentlessly through a summer full of high omens and great disasters, all which it swatted off like flies. Even so, all was not perfect in the market as nerves began to jitter midsummer beneath the surface even among the most longtime bulls. Wall Street’s fear gauge (the CBOE Volatility Index) lifted its needle off its lower post to a nine-month high after President Trump’s comments about “fire and fury” if North Korea didn’t toe the line. (Mind you, the high wasn’t very far off the post because of how placid the previous nine months had been.)

As volatility stirred languidly over the threat of nuclear war, stock prices took a little spill with all major stock indices seeing their biggest one-day drop since May. The SPX fall amounted to a 1.4% drop in a day — nothing damaging. The Dow dropped about 1% in a day. But beneath the surface, the market is looking different and shakier.

For example, trading narrowed to fewer players as more stocks in the Nasdaq 100 finally moved below their fifty-two week lows than moved above them. Likewise in the S&P. This phenomenon is known as the “Hindenburg omen,” and tends to precede major crashes.



It’s a serious signal that highlights times of decoupling within an index or an exchange. The S&P hasn’t suffered five signals so tightly clustered since 2007 and 2000…. This year the pattern has been popping up more often in all four indexes … 74 omens so far in 2017, second only to 78 recorded in November 2007…. That they are manifesting in several indexes and forming so frequently are good reasons to brace for weakness. (MarketWatch)


Long credit cycles like the current one always end with a crash. But first they deteriorate. The headline numbers remain positive while under the surface a growing list of sectors start to falter. It’s only when the latter reach a critical mass that market psychology turns dark. How far along is this process today? Pretty far, it seems, as some high-profile industries roll over: ‘Deep’ Subprime Car Loans Hit Crisis-Era Milestone…. Used Car Prices Crash To Lowest Level Since 2009 Amid Glut Of Off-Lease Supply…. Junk Bonds Slump…. The worst is yet to come for retail stocks, says former department store executive Jan Kniffen…. U.S. Stock Buybacks Are Plunging…. “Perhaps over-leveraged U.S. companies have finally reached a limit on being able to borrow simply to support their own shares.” (–John Rubino, The Daily Coin)


The fact is that the market is breaking down beneath the shrinking number of Big Cap stocks and levitating averages. This has all set-up a severe downside shock within the coming weeks. As to the market’s weakening internals, consider that there are 2,800 stocks on the New York Stock Exchange (NYSE). Back in early 2013 when the bull market was still being super-charged with massive QE purchases by the Federal Reserve, 85% or 2,380 of them were above their 200-DMA. By contrast, currently only 1,050 of them (37.5%) are above that level, meaning that the bull is getting very tired. (–David Stockman, The Daily Reckoning)



Trading shifted this summer from the major players (often called the “smart money”) buying to smaller buyers trying to jump in, which is also the typical final scenario before a crash where the smart money escapes by finding chumps who fear missing some of the big rush that has been happening. And buybacks seem to be slumping as corporations hope for a new source of cash from Trump’s corporate tax breaks.

In spite of those underlying signs of stress, the market easily relaxed back into its former stupor, with the fear gauge quickly recalibrating, from that point on, to absorb threats and disasters with scarcely a blip as the new norm. The market now yawns at nuclear war, hurricanes and wildfires, having established a whole new threshold of incredulity or apathy, so the fear gauge stirs no more.

With the New York Stock Exchange eclipsed by the larger number of shares that now exchange hands inside “dark pools” — private stock markets housed inside some of Wall Street’s biggest casinos (banks) where the biggest players trade large blocks of stocks in secret during overnight hours —  the average guy won’t see the next crash when it begins to happen. He’ll just awaken to find out it has happened … just like much of the nation woke one Monday to find out that northern California had gone up in flames over the weekend.


Bulls starting to sound bearish


While concern over these national catastrophes never came close to letting the bears out of their cages, it did change the dialogue at the top as if something was beginning to smell … well … a little dead under the covers. Perhaps these slight and temporary tremors in the market are all the warning we can expect in a market that is now almost entirely run by robots and inflated by central bank largesse.

While the bearish voices quoted above can be counted on to sound bearish, many of the big and normally bullish investors and advisors became more bearish in tone as summer rolled into fall. For the first time in years, Pimco expressed worries about top-heavy asset valuations, particularly in stocks and junk bonds, advising its clients in August to trim risk from their portfolios. Pimco argued that that the new central bank move toward reversing QE could leave equities high and dry as the long high tide of liquidity slowly ebbs. Pimco’s former CEO said much the same:


Bill Gross … perhaps the preimminent bond market analysts/ trader/ investor of the age… has gone on record as stating only just recently that the risks of equity ownership are as high as they were in ’08, and that at this point when buying weakness “instead of buying low and selling high, you’re buying high and crossing your fingers.” (Zero Hedge)


Goldman Sachs even took the rare position that the stock market had a 99% chance that it would not continue to rise in the near future, and places the likelihood of a bear market by year’ send at 67%, prompting them to ask “”should we be worried now?” The last two times Goldman’s bear market indicator was this high were right before the dot-com crash and right before the Great Recession. In fact, there has only been one time since 1960 when it has been this high without a bear market following within 2-3 months. Of course, everything is different under central-bank rigging, but some central banks are promising to start pulling the rug out from under the market in synchronous fashion, starting last month. (Though, as of the Fed’s own latest balance sheet shows, they have failed to deliver on their promise, cutting only half as much by the close of October as they said they would.)

Morgan Stanley’s former chief economist said at the start of fall that the combination of high valuations and rising interest rates is about to reck havoc in the market. He claimed the Fed’s commitment to normalization should have come much earlier, as the market now looks as frothy as it did just before the Great Recession.

Citi now calculates the odds of a major market correction before the end of the year at 45% likelihood. Even Well’s Fargo now predicts a market drop of up to 8% by year’s end.

Speaking of big banks, their stocks look particularly risky. Two years ago, Dick Bove was advising investors to buy major banks stocks aggressively. Now, he’s taken a strikingly bearish tone on the banks:


A highly-respected banking stock guru warns that financial storm clouds loom for Wall Street’s bull rally. The Vertical Group’s Richard Bove “warns that the overall market is just as dangerous as the late 1990s, and he cites momentum — not fundamentals — as what’s driving bank stocks to all-time highs,” CNBC.com explains. “If we don’t get some event in the economy or in politics or in somewhere that is going to create more loan volume and better margins for the banks, then yes, they would come crashing down,” Bove told CNBC. “I think that the risk in these stocks is very high at the present time,” he said. (NewsMax)


It’s a taxing wait for the market


These are all major institutions and people who are normally quite bullish. Some of the tonal change is because of concern about the Fed’s Great Unwind of QE, while much is because enthusiasm over Trump’s promised tax cuts has become muted among investors deciding to wait and see, having been burned by a long and futile battle on Obamacare. In fact, the market showed more interest in Fed Chair Yellen’s suggestion of a December interest-rate hike than in Trump’s release of a tax plan.

Retiring Republican Senator Bob Corker predicts the fighting over tax reform will make the attempt to rescind Obamacare look like a cakewalk, and he intends to lead the fight as one of the swing voters to make sure it is not a cakewalk now that he and Trump are political enemies.

The Dow took a 1% drop in the summer when Bannon was terminated so that anti-establishment resellers felt they were losing the battle and when the Republican government seemed deadlocked on all tax-related issues, which it still may be.

On the bright side, with Mitch McConnel’s Luther Strange losing his senate race and Bob Corker quitting, anti-establishment forces appear to be gaining a little power. That’s, at least, something. On the other hand, Trump has just chosen an establishment man to run the Fed, and Trump, who once ridiculed Janet Yellen for propping up Obama’s economy with low interest rates, said a few days ago,


I also met with Janet Yellen, who I like a lot. I really like her a lot.


President Trump’s new Federal Reserve chair, Jerome “Jay” Powell, “a low interest-rate kind of guy,” was obviously picked because he is Janet Yellen minus testicles, the grayest of gray go-along Fed go-fers, going about his life-long errand-boy duties in the thickets of financial lawyerdom like a bustling little rodent girdling the trunks of every living shrub on behalf of the asset-stripping business that is private equity…. Powell’s contribution to the discourse of finance was his famous utterance that the lack of inflation is “kind of a mystery….” Unless you consider that all the “money” pumped out of the Fed and the world’s other central banks flows through a hose to only two destinations: the bond and stock markets, where this hot-air-like “money” inflates zeppelin-sized bubbles that have no relation to on-the-ground economies where real people have to make things and trade things…. The “narrative” is firmest before it its falseness is proved by the turn of events, and there are an awful lot of events out there waiting to present, like debutantes dressing for a winter ball. The debt ceiling… North Korea… Mueller… Hillarygate….the state pension funds….That so many agree the USA has entered a permanent plateau of exquisite prosperity is a sure sign of its imminent implosion. What could go wrong? (–James Howard Kunstler)


Powell doesn’t sound like a man who sees a need for change in the current Fed programming, but he is the very best Trump could think of for carrying out his desire to make America great again.


Bulls still climbing to dizzying heights


While some of the leading bulls have started sounding like bears of late, the bulls still lead the bears by more than 4:1, and investors remain in love with technology almost as much as they were before the dot-com crash. ”Still, as Sir John Templeton famously said,


Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.


We are clearly in the euphoric stage where the market just cannot stop itself from rising. It’s been a year-long euphoria now as the Trump Rally, which stalled for some time midyear, found a second wind. It is now on track to soon become the greatest rally in 85 years. You have to go back to FDR and the recovery from the Great Depression to find anything greater. No euphoria there, given that is all based on tax cuts that have as much likelihood of failing as the Obamacare repeal had.

What is peculiarly interesting at present is the euphoria over volatility itself. Look at the following two graphs: (The first indicates what is happening in terms of market volatility. The second shows where people are betting volatility will go from here.)




The CBOE Volatility Index dove 8% last Friday to close the week just a hair’s breadth above its lowest volatility record ever! So, at a time when volatility in the stock market is essentially as low as it has ever gone, bets that volatility will go lower have risen astronomically. Yeah, that makes sense.

Essentially, hoards of investors are so certain that volatility is down for the count that they are betting it will practically cease to exist months from now. As Mauldin Economics has argued, we are now, among all our other bubbles, in a volatility bubble.

Such low volatility when the market is priced to its peak means market investors see no risk even at such a high top and even in an environment that has been literally plagued for months by external risks from hurricanes to wildfires to endless threats of nuclear annihilation by a lunatic. That’s because all investors know the market will stay up for as long as the Federal Reserve chooses to keep propping it up. Investors must not be taking the Fed’s threat of subtracting that support seriously, or they are choosing to stay in to the last crest of the last wave and then all hoping to be the first ones out before the wave crashes. Is that rational or irrational euphoria?

This market is not just notable for how long its low-volatility euphoria has gone on but also for how low the volume of trades have been. We are almost at a point of no volatility and no volume. That means nobody is selling stocks if they don’t get a higher price, but there aren’t many buying either. The few companies whose stocks are pushing the market up are trading less and less. That trend holds in both the US and Europe. European trading volume is its lowest in five years; and in the US, it is 22% below last year and still falling. That things are so calm in the middle of global nuclear threats, devastating hurricanes and wildfires and constant political chaos on the American scene and with such a do-nothing congress strikes me as surreal.

The Wall Street Journal concludes,


The collapse in trading volumes is closely tied to the recent fall in volatility, where measures of daily stock price movements have plumbed multiyear lows. When markets aren’t moving, there are typically fewer people scrambling to protect their portfolios against further losses or seizing an opportunity to buy things that look cheap.” (The Wall Street Journal)


What does it mean; where do we go from here?


Even the WSJ says it isn’t sure what this low-volatility/low-volume stasis means. I have to wonder if the market will reach such a lull in volatility that everyone just sits there, looking at each other, wondering who will be the first to move again. Is that finally the moment panic breaks in? Even the Journal wonders if the eery calm means investors have simply become so bullish they refuse to sell. Or is it that everyone is already in the market who wants in at current prices now that the Fed has stopped QE and is now even reversing it. Is the lull extreme narrowing happening because there is no longer excess new money in the market to invest but no one scared enough to drop their price and sell? Is there no money that wants in at current prices and under the current knowledge that money supply will now be deflating for the first time in years?

Is this the way the unwind of QE starts to suck money back out of the market … by reducing the number of interested traders to a thin trickle while the fewer number of interested players who do have money to invest keep bidding up prices? If you’re already in this hyper-inflated market, where earnings only look good on a per-share basis because companies keep spending a fortune buying back shares, then you may see no reason to sell; but, if you’ve been sitting on the side with a pocketful of cash, it may look awfully late in the game to jump in.

(Consider also that growth in earnings throughout the first half of 2017 was easy to show because it compared to the first half of 2016, where earnings were terrible. Now the climb in earnings has to steepen in order to show growth year on year.)

So what if the tax reform that everything seems to be depending on flops? Charles Gaparino warns,


If tax reform bellyflops the way ObamaCare repeal did, many smart analysts are coming to the conclusion that the market will turn sour. Without tax cuts, one Wall Street executive told me, “the markets will drop like a rock….” This is a significant change in investor attitudes…. As much as stock values represent economic and corporate fundamentals, they also represent raw emotion known as the “herd mentality.” And that mentality, according to the investors I speak to, has begun to shift in recent weeks…. The market mentality that once said anything is better for the markets than Hillary is now saying to the president and Congress: Deliver on those promised tax cuts or face the consequences. And they won’t be pretty.(The New York Post)


Evidence of how reactive the market will be if tax cuts are less than expected came a couple of weeks ago when the Russel 2000 fell the most it has since August on news that the Republicans’ proposed corporate cuts would be phased in over a period of years. That demonstrated that the Trump Rally is mostly about the tax cuts; they are fully priced in; so, if the tax cuts fail or even get dragged out over years, the market fails.

With savings way down, personal debt extremely high, corporate debt quite high, and central banks threatening to reduce liquidity, consumption will have no means of support if asset prices also fall; so, the whole broader consumer-based economy goes back down if the stock market fails. Of course, central banks will revert to more QE if that happens; but each round of QE has been less effective dollar-for-dollar.

And where have we arrived under complete Republican leadership in the midst of all this? As the Committee for a Responsible Federal Budget stated,


Republicans in Congress laid out two visions in two budgets for our fiscal future, and today, they choose the path of gimmicks, debt, and absolutely zero fiscal restraint over the one of responsibility and balance. While the original House budget balanced on paper and offered some real savings, the Senate’s version accepted today by the House fails to reach balance, enacts a pathetic $1 billion in spending cuts out of a possible $47 trillion, and allows for $1.5 trillion to be added to the national debt…. The GOP is now on-the-record as supporting trillions in new debt for the sake of tax cuts over tax reform…. “Tax cuts do not pay for themselves; they can create growth, but in the amount of tenths of percentage points, not whole percentage points. And they certainly cannot fill in trillions in lost revenue. Relying on growth projections that no independent forecaster says will happen isn’t the way to do tax reform. (TalkMarkets)


This is progress? The Republicans are proving month after wearying month they are incapable of doing everything they have sworn for years they would do if they were in power. They could complain as an obstructionist body about the other sides, but they have no solutions they can agree on. The Republican answer in the budget and tax plan that have just come out guarantees mountains of additional debt as far as the eye can see … with the perennial promise that cuts will eventually be made in some distant future by a congress that will not in any way be beholden to the wishes and slated demands of the present congress. (Always tax cuts now, spending cuts promised to be made by other people far down the road.)

If the program passes, however, it will shore up the stock market which has been banking entirely on that possibility; but at the cost of deeper economic structural problems to be solved (as always) by others later on. If it doesn’t pass, you do the math as to what that likely means for all the underlying weaknesses presented above when huge tax breaks are already baked into stock prices.

If you want to see whether or not tax cuts have EVER created sustained economic growth, read the last article linked above, but here is a chart from that article for a quick representation of the truth:



What Could Go Wrong?

Authored by James Howard Kunstler via Kunstler.com,

Everybody and his uncle, and his uncle’s mother’s uncle, believes that the stock markets will be zooming to new record highs this week…

And probably so, because it is the time of year to fatten up, just as the Thanksgiving turkeys are happily fattening up – prior to their mass slaughter.

President Trump’s new Federal Reserve chair, Jerome “Jay” Powell, “a low interest-rate kind of guy,” was obviously picked because he is Janet Yellen minus testicles, the grayest of gray go-along Fed go-fers, going about his life-long errand-boy duties in the thickets of financial lawyerdom like a bustling little rodent girdling the trunks of every living shrub on behalf of the asset-stripping business that is private equity (eight years with the Deep State-ish Carlyle Group) while subsisting on the rich insect life in the leaf litter below his busy little paws.

Powell’s contribution to the discourse of finance was his famous utterance that the lack of inflation is “kind of a mystery.” Oh, yes, indeed, a riddle wrapped in an enigma inside a mystery dropped in a doggie bag with half a pastrami sandwich. Unless you consider that all the “money” pumped out of the Fed and the world’s other central banks flows through a hose to only two destinations: the bond and stock markets, where this hot-air-like “money” inflates zeppelin-sized bubbles that have no relation to on-the-ground economies where real people have to make things and trade things.

Powell might have gone a bit further and declared contemporary finance itself “a mystery,” because it has been engineered deliberately so by the equivalent of stage magicians devising ever more astounding ruses, deceptions, and mis-directions as they enjoy sure-thing revenue streams their magic tricks generate. This is vulgarly known as “the rich getting richer.” The catch is, they’re getting richer on revenue streams of pure air, and there is a lot of perilous distance between the air they’re suspended in and the hard ground below.

Powell noted that the economy is growing robustly and unemployment is supernaturally low. Like his colleagues and auditors in the investment banking community, he’s just making this shit up. As the late Joseph Goebbels used to say describing his misinformation technique, if you’re going to lie, make sure it’s a whopper.

The economy isn’t growing and can’t grow.

The economy is a revenant of something that used to exist, an industrial economy that has rolled over and died and come back as a moldy ghoul feeding on the ghostly memories of itself. Stocks go up because the unprecedented low interest rates established by the Fed allow company CEOs to “lever-up” issuing bonds (i.e. borrow “money” from, cough cough, “investors”) and then use the borrowed “money” to buy back their own stock to raise the share value, so they can justify their companies’ boards-of-directors jacking up their salaries and bonuses – based on the ghost of the idea that higher stock prices represent the creation of more actual things of value (front-end-loaders, pepperoni sticks, oil drilling rigs).

The economy is actually contracting because we can’t afford the energy it takes to run the things we do – mostly just driving around – and unemployment is not historically low, it’s simply mis-represented by not including the tens of millions of people who have dropped out of the work force. And an epic wickedness combined with cowardice drives the old legacy news business to look the other way and concoct its good times “narrative.” If any of the reporters at The New York Times and The Wall Street Journal really understand the legerdemain at work in these “mysteries” of finance, they’re afraid to say. The companies they work for are dying, like so many other enterprises in the non-financial realm of the used-to-be economy, and they don’t want to be out of paycheck until the lights finally go out.

The “narrative” is firmest before it its falseness is proved by the turn of events, and there are an awful lot of events out there waiting to present, like debutantes dressing for a winter ball. The debt ceiling… North Korea… Mueller… Hillarygate….the state pension funds….That so many agree the USA has entered a permanent plateau of exquisite prosperity is a sure sign of its imminent implosion. What could go wrong?


The Deflating Rally

Authored by Sven Henrich via NorthmanTrader.com,

Record prices continue to be printed on US indices as the global multiple expansion on the heels of still ongoing record central bank intervention has yet to slow down in a significant way.

All central banks were in essence dovish in recent days and weeks, whether the FOMC, the ECB, the BOE and of course the ever active BOJ as well as the SNB as it showed a new record $88B in direct holdings of US stocks.

Yet, despite the record prices on indices, the rally appears to be deflating from within.

In the past several weeks I’ve pointed out a very specific pattern of positive internals on market opens and then a very distinct pattern of internals weakening throughout most days:

This trend has impacted the cumulative advance/decline picture and shows that recent highs have come on a negative cumulative advance/decline:

Since this rally began with massive global central bank intervention in February 2016 the cumulative advance/decline picture has often been cited as a sign of underlying core strength in markets. This picture has changed:

Recent highs came on negative divergences in relative strength despite index prices continuing to advance in a seemingly steady trend.

Yet the internal picture is practically collapsing.

Take the recent highs in the Nasdaq.

Ever since the beginning of October all new highs in the $NDX have come on fewer new highs versus new lows. Indeed Friday’s $NDX highs came on the lowest expansion yet:

On $NDX itself we can observe a complete collapse in the amount of stocks above the 50MA as $NDX printed new highs. Only 56% of components are still above the 50MA:

A similar picture can be observed on the $SPX:

And of particular note: All recent highs have come on a negative $NYMO:

The message: Somebody is selling this market. Every day. And it’s very cleverly done as to not disturb the seeming tranquility in markets.

Note that despite all the selling volatility compression continues at a record pace as during each Friday, no matter what happens in the world, the $VIX is ensured a close below 10 by week’s end:

You’d think we’d have more volatility with such an internal breakdown in stocks. But the concentration of market cap in only a handful of stocks continues to mask the selling underneath.

On an equal weight basis we’ve noted the divergence in markets for quite some time. This indicator has now fallen off the cliff as the correlation has completely broken down:

As has the yield curve which hasn’t believed in this rally in months:

2017 has seen more central bank intervention on a global basis than ever. But this party is slowly coming to an end. And while central banks will still intervene in 2018 it will be at a reduced pace. The last time we’ve seen central banks intervene at a reduced pace? 2015. And it produced sizable selling in the summer of 2015 and at the beginning of 2016 forcing record intervention since then.

All global markets have proven is that they can perform splendidly with record intervention:

2018 will then be a test case how well markets can fare with less than record intervention, a new reality. Another new reality: Soon US markets will also have their answer in regards to tax cuts. All will be priced in one way or the other.

And, from the looks of it, someone has begun selling ahead of both of these emerging realities. And once the rest of the market takes notice we suspect Friday $VIX closes below 10 may suddenly become a thing of the past.


“It’s A Vicious Cycle”: Goldman Abandons Equity Options Market-Making As Vol Collapses

October is historically the most volatile month of the year, but in 2017 – the average volatility of US equity markets dropped to an all-time record low…


… And you know something's wrong when, just like in early 2007 when the crash in vol killed the swaptions industry – just before all hell broke loose – Goldman Sachs is pulling back from U.S. options market-making on exchanges.

The Wall Street Journal reports an extraordinary calm in markets has choked the trades that typically funnel through banks’ derivatives desks.

Waning stock volatility is pressuring the equity derivatives business, suppressing revenue and driving traders out of what was once a key Wall Street moneymaker.

Goldman Sachs pulled back from U.S. options market-making on exchanges, a spokeswoman for the firm said Thursday.

It’s the latest to withdraw from the business of continuously buying and selling contracts on venues using automated programs.

Revenue in an equity derivatives business that focuses on listed options shrank by 41% in the U.S. and by 28% globally during the first half of 2017 from the same period a year ago, according to data firm Coalition, which tracked 12 of the biggest banks in the world.

The number of employees in equity derivatives at banks has contracted by about 10% since 2012, Coalition data also show.

“With lower volatility this year, we’re seeing less of those trades come through,” said Coalition’s research director Amrit Shahani.


“It’s a vicious cycle.”

OptionMetrics LLC founder David Hait said investors tend to think of options as insurance for stock bets.

With U.S. equities in an eight-year bull market, people are asking, “What do I need an option for?” he said.

After 16 years of trading options during which he ascended to managing director at Bank of America and Deutsche Bank, Zahid Biviji left Wall Street this year, citing fewer opportunities in the space, partly caused by regulations imposed after the financial crisis.

“I had a good run making money,” Mr. Biviji said, noting that “a lot of the derivatives business is in survival mode right now.”

But as equity market volatility has collapsed to record lows, another asset class has sprung up with record-breaking-high volatility: cryptocurrencies.

“For the most part, you’re not going to get wealthy like you could in the late ‘90s or early 2000s” in equity derivatives, said Arthur Hayes, the Hong Kong-based co-founder and chief of Bitcoin Mercantile Exchange, who traded derivatives at Citigroup and Deutsche Bank.

“In cryptos, you actually get to do what you like to do: trade.”


Major Correction Coming in Financial Markets

By EconMatters

We discuss Herbalife stock (HLF) as basically being the poster child for the Stock Market, Bitcoin Market and a reflection of how Central Banks are all twiddling their thumbs while Rome is burning, they just are about as clueless and irresponsible custodians of financial markets` prudential regulation as one can get. Expect a major correction coming in financial markets, go to cash now, everything must be in cash!


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“Investors Can’t Stop Buying Every Dip”: The WSJ Explains Why Markets Soar To New Highs Every Day

International equity markets seem to effortlessly surge to brand new record highs with each passing day.  As we note fairly frequently, declines have grown shallower over the past two years and the S&P 500 has now gone 246 trading days without trading more than 3% below its record high, the longest streak ever for the index, according to LPL Financial. Meanwhile, the S&P hasn’t had a decline of 10% or more from a recent peak since February 2016.

So, in light of surging valuations, which are at, or near, all time highs depending on your metric of choice, international tensions which could seemingly spark a brand new global conflict at any point and non-stop allegations of treason on both sides of the aisle in Washington D.C., the Wall Street Journal recently set out to discover why markets seem so immune to bad news.

Alas, as it turns out, the answer is quite simple with Allianz chief economic advisor Mohamed El-Erian confirming that it all comes down to a simple strategy: Buy The Fucking Dip (BTFD).

The steady buying in the U.S. has lately spread to Europe, Japan and even developing markets, investors say. On Friday, the Dow Jones Industrial Average rose 0.1% to 23434.19, near its record from Tuesday, its 54th of the year. Japan’s Nikkei gained 2.6% this past week to its highest level since 1996, and share indexes in the U.K. and Germany have hit records this month.


The gains reflect both economic optimism and recognition of the strong returns reaped by those who have stayed invested in riskier assets during the rebound from the epic market decline in 2008-09.


“The investor base has been conditioned to buy the dip,” said Mohamed El-Erian, chief economic adviser at Allianz SE. “And the reason why they have been conditioned is because it has been an extremely profitable trade.”

Meanwhile, being the savvy investors that they are, the WSJ notes that Americans have become so immune to equity risk that dips are getting filled faster and faster…

In the stock market, investors are buying the dip more quickly than they used to. The S&P 500 recouped the bulk of its 5.3% two-day post-Brexit decline, in June 2016, in only three trading days. It took just three days for the S&P 500 to recover from a 1.8% drop in May—its largest one-day decline of the year—following reports that President Donald Trump asked then-FBI Director James Comey to drop an investigation into former National Security Adviser Michael Flynn.


That is a faster recovery than when the S&P 500 fell 11% over a six-day stretch in August 2015 and then took until November of that year to get back to its pre-selloff level.


Some observers worry that the buy-the-dip mentality, like the persistent decline over the past year in daily stock-price swings known as volatility, could point to an underlying complacency that will end with a big selloff.

Take the case of General Electric, for example, whose stock crashed over 6% in early trading last week after missing earnings and slashing guidance but quickly recovered and finished the day in the green.

In the case of General Electric Co., shares tumbled 6.3% in early trading on Oct. 20 after the conglomerate missed analyst earnings expectations and slashed its forecasts. But buyers quickly stepped in on GE’s heaviest trading volume session in nearly two years, and the stock ended 1.1% higher.


An analysis of the type of the size of trades made that day indicate that most dip buyers were smaller investors or high-frequency professionals that trade in quick bursts, rather than large institutions that tend to transact in larger chunks.

Of course, it’s not just U.S. markets that have been taken over by the BTFD crowd as all risk has suddenly disappeared from emerging markets as well.

The Brazilian real plunged against the dollar, while Brazilian shares tumbled 8.8% on May 18, after the country’s Supreme Court approved an investigation of President Michel Temer amid bribery accusations. Three months later, the Bovespa Index was back at records and the volatility failed to weigh on other emerging-market stocks.


The buy-the-dip trade is surfacing in niche markets, too. Rob Lutts, president of Cabot Wealth Management in Salem, Mass., recently bought the Global X Lithium & Battery Tech exchange-traded fund.


“This is a type of market where bad news is met with unbelievable resilience,” Mr. Lutts said. “I think it tells you there’s still a lot of money on the sidelines.”

Of course, as Marilyn Cohen of Envision Capital Management points out, with this level of complacency having taken over international markets, when the tide turns the resulting decline will be precipitous and “psychologically painful.”

“People have just gotten so immune to any pain and anguish in any of these markets that when it happens it is going be very psychologically painful.”

Finally, just because it seems appropriate, here is a flashback to the original introduction to the BTFD trade…


The Stimulus Party Is Ending

By EconMatters

We cover the Financial Markets reaction to both the ECB and BOC Central Bank rate decisions and monetary policy adjustments in this subscription video, contact us to get on our subscription video mailing list.

The Central Bank Era is coming to an end as the ECB begins the tapering process in earnest in 2018, and just like a juiced up bodybuilder or MMA fighter on the juice or the Steroid Era in baseball the Asset Bubbles in Financial Markets are going to start deflating and popping all over the place.

It is great that Central Banks created all these unsustainable asset bubbles all over the globe because make no mistake free, cheap Central Bank money is used internationally by all the large institutional players. They may even have created a wealth effect for those fortunate enough to benefit from Central Bank Extremism on the way up, but these same people and more will experience a Poverty Effect on the way down when the collateral damage takes down the larger global economy.

I love that Central Banks cannot seem to find any inflation when dogshit stocks like Intel are $41 a share, a stock that normally during a good run trade around $25 a share, or Microsoft that couldn`t get above $30 forever all the sudden is trading at $80 a share. These are not the only QE Inflated stocks with flat to declining revenue over the last three years which by the way is pretty hard to do when you factor in inflation effects. Just look at Caterpillar`s annual revenue the last two years versus its stock price.

The hilarity in all this is watching professional fund managers and money managers talking their book or giving their thoughtful analysis of the present state of financial markets and stock market valuations. As in the definition of a bubble isn`t whether it is unsustainable and overvalued by historically based valuation metrics, but whether it is going down tomorrow, next week or a month from now. When you get to this extreme levels of valuation, when it isn`t even a close call, where Central Banks around the globe all juiced up and bought Financial Assets for a decade, and now they are turning off the buying spigots, when the QE Monetary Experiment is over, and some financial market professional is still debating whether stock markets are a bubble right now you can come to a couple of conclusions.

First is that if they actually believe that stock markets aren`t in a bubble right now, then they are completely incompetent as financial professionals and should resign immediately. The second is that if they know that financial markets are a bubble and still taking speculative risk to the upside, then it proves that nothing was learned from the 2007 financial crisis. Thirdly, Central Banks are culpable for promoting this type of behavior in Financial Markets with their laissez-faire approach to financial markets and Monetary Policy in general without paying any heed to the unintended consequences of such abnormal Monetary Policy Measures.

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Is This China’s Minsky Moment?

Authord by Kevin Muir via The Macro Tourist blog,

Sometimes you have to love the naivety of the markets. At this week’s Communist Party Congress meeting in Beijing, the governor of the PBoC (People’s Bank of China) said the following;

“If we are too optimistic when things go smoothly, tensions build up, which could lead to a sharp correction, what we call a ‘Minsky moment’. That’s what we should particularly defend against.”

Yet instead of focusing on this dire warning, markets are busy trying to discount the chance of a Powell Fed or a Republican tax cut.

Although both of these developments would be important, China is the tail that wags the dog. Full stop. Figure out China, and all the other financial market forecasts become that much easier.

Aren’t Central Bank warnings cheap?

Some might argue this “Minsky moment” warning is nothing more than a Central Bank whistling in the wind. Didn’t Greenspan caution about a similar concern with his “irrational exuberance” speech? And didn’t that end up being a complete non-event?

Yet I would argue that China is not the same as other countries.

Although there are market elements to their economy, to a large degree, China is still a command economy. If Chinese leadership wants a particular outcome, they can just demand it, and it will happen.

So when the head of the PBoC warns about a “Minsky moment”, it’s probably not a good idea to load up on financial assets.

For the longest time, China exported goods and imported developed nation debt and other financial assets. They had already started down the road of re-balancing their economy away from this export driven model, but this recent development confirms that the old playbook should be thrown out the window. The global financial system is changing, and China is leading the way. Their moves will reverberate for years in the future. The Chinese authorities have just put up the warning flag, and you would be foolish to not believe it.

Chinese short term market support is ending

This long term warning coincides with my belief that over the short term, the risks are all to the downside. I have been banging the drum on the fact that the Chinese government have done everything in their power to keep markets stabilized through their Communist Party Congress.

They haven’t even hidden this fact. From the big sign above the Shenzhen Securities Exchange building that read “Use every effort to protect the stability of stock market for 20 days,” to the recent release that the Chinese government has asked firms to delay bad result during Congress, the message is clear.

Every effort has been made to keep financial markets bid until after the Communist Party Congress. And guess what? It ended this morning. Yup – that’s it. All done. Pink tickets are once again allowed.

It adds up to a great short entry

So let’s review. Longer term, the Chinese are telling you to be wary about a “Minsky moment.” Shorter term, they have been actively engaged in keeping the markets propped up, but that support is ending.

Meanwhile, according to the terrific Nordea analyst Martin Enlund, hedge funds are falling all over themselves bullish:

It’s tough because it has been a one way bet for so long, but from a trading perspective, this offers a great risk reward for a dark side stab.

Don’t say no one warned you, the PBoC Chairman laid it out for us in black and white.


“I’m Out Of The Game” – Traders Abandon China As ‘National Team’ Kills Equity Market

While all eyes have been focused on the collapse in US equity market volatility and its unending upward ramp in the face of 'event risk' large and small, the complacency has crossed the Pacific and crushed China's stock markets to a shadow of their former selves.

While we noted yesterday the seasonal tendency towards lower volatility around this time of year…

As The Wall Street Journal reports, the past 30 trading days, coinciding in part with the 19th National Congress of the Communist Party, have been the least volatile of any 30-day period since the Shanghai exchange reopened in the early 1990s, according to an analysis of FactSet data.

Many investors and traders say Beijing has taken on a more muscular role in markets, following a spectacular market boom and bust in 2015. Securities regulators have called many brokerages and funds over the past year, urging them to say publicly they were bullish about stocks and to refrain from selling shares, market participants say. Some traders cite the price-supporting effect of the “national team” of state investment funds, which they say steps in to buy shares when prices fall.

Since 2015, traders say Beijing has also used the “national team” – large state-backed companies including China Securities Finance Corp. and Central Huijin Asset Management – to help steady markets by buying shares when the market falls sharply and selling when it rises.

These state funds’ shareholdings hit a record high of 4.12 trillion yuan ($622 billion) in June, according to the most recent research by Sinolink Securities , or 7.2% of the total market cap of listed Chinese shares.

The developments have left China’s armies of retail investors – nicknamed “jiu cai,” after the leaves of Chinese chives that quickly regenerate – increasingly disillusioned.

While lower volatility can serve the government’s goal of projecting an image of stability, it can sharply reduce the opportunities for quick profits that many traders depend on.

Which has collapsed China's equity trading volumes…

As The Wall Street Journal continues…

“I’m out of the game,” said Gu Yuan, 34, an information-technology worker in Shanghai who sold almost 70% of a portfolio worth 600,000 yuan ($87,336) after the 2015 market slump and pared down some more this year. “It is more difficult to identify strong tech companies or convincing investment themes since the crash.”

This year’s subdued volatility doesn’t mean China’s markets have truly modernized,  said Michael Pettis, a finance professor at Peking University. He said that the quality of financial information still needs to improve.

“Real value investing requires corporate transparency, high quality of data and predictable government behavior,” said Mr. Pettis. “In China, none of these is easily available yet.”

The country still has 128 million individual investors, according to China Securities Depository and Clearing Corp, a clearing house. Individual investors directly owning stocks fell to 42% in February, the most recent available data, from 55% at the height of China’s bull market in 2015.