Category Archives: Financial markets

Arms Race in Bubbles, by Doug Noland

Bubbles have become the foundation of economic policy around the globe. From Doug Noland at creditbubblebulletin.blogspot.com:

The week left me with an uneasy feeling. There were a number of articles noting the 30-year anniversary of the 1987 stock market crash. I spent “Black Monday” staring at a Telerate monitor as a treasury analyst at Toyota’s US headquarters in Southern California. If I wasn’t completely in love with the markets and macro analysis by that morning, there was no doubt about it by bedtime. Enthralling.

As writers noted this week, there were post-’87 crash economic depression worries. In hindsight, those fears were misplaced. Excesses had not progressed over years to the point of causing deep financial and economic structural maladjustment. Looking back today, 1987 was much more the beginning of a secular financial boom rather than the end. The crash offered a signal – a warning that went unheeded. Disregarding warnings has been in a stable trend now for three decades.

Alan Greenspan’s assurances of ample liquidity – and the Fed and global central bankers’ crisis-prevention efforts for some time following the crash – ensured fledgling financial excesses bounced right back and various Bubbles hardly missed a beat. Importantly, financial innovation and speculation accelerated momentously. Wall Street had been emboldened – and would be repeatedly.

The crash also marked the genesis of government intervention in the markets that would evolve into the previously unimaginable: negative short-term rates, manipulated bond yields, central bank support throughout the securities markets, Trillions upon Trillions of central bank monetization and the perception of open-ended securities market liquidity backstops around the globe. Greenspan was the forefather of the powerful trifecta: Team Bernanke, Kuroda and Draghi. Ask the bond market back in 1987 to contemplate massive government deficit spending concurrent with near zero global sovereign yields – the response would have been “inconceivable.”

Articles this week posed the question, “Could an ’87 Crash Happen Again.” There should be no doubt – that is unless the nature of markets has been thoroughly transformed. Yes, there are now circuit breakers and other mechanisms meant to arrest panic selling. At the same time, there are so many more sources of potential self-reinforcing selling these days compared to portfolio insurance back in 1987. Today’s derivatives markets – where various strains of writing market insurance (“flood insurance during a drought”) have become a consistent and popular money maker – make 1987’s look itsy bitsy.

To continue reading: Arms Race in Bubbles

 

 

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Xi’s road map to the Chinese Dream, by Pepe Escobar

China has a different way of asserting its claim to world leadership than the US. From Pepe Escobar at atimes.com:

It all starts with Hong Kong as a major BRI financing hub. Photo: iStock

It all starts with Hong Kong as a major BRI financing hub. Photo: iStock
China’s Belt and Road Initiative – the New Silk Road – will spark the country’s development and turn the dream into reality
Now that President Xi Jinping has been duly elevated to the Chinese Communist Party pantheon in the rarified company of Mao Zedong Thought and Deng Xiaoping Theory, the world will have plenty of time to digest the meaning of “Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era.”

Xi himself, in his 3½-hour speech at the start of the 19th Party Congress, pointed to a rather simplified “socialist democracy” – extolling its virtues as the only counter-model to Western liberal democracy. Economically, the debate remains open on whether this walks and talks more like “neoliberalism with Chinese characteristics”.

  • “Moderately prosperous society” by 2020.
  • Basically modernized nation by 2035.
  • Rich and powerful socialist nation by 2050.

Xi himself, since 2013, has encapsulated the process in one mantra; the “Chinese dream”. The dream must become reality in a little over three decades. The inexorable modernization drive unleashed by Deng’s reforms has lasted a little less than four decades. Recent history tell us there’s no reason to believe phase 2 of this seismic Sino-Renaissance won’t be fulfilled.

Xi emphasized, “the dreams of the Chinese people and those of other peoples around the world are closely linked. The realization of the Chinese dream will not be possible without a peaceful international environment and a stable international order.”

He mentioned only briefly the New Silk Roads, a.k.a. Belt and Road Initiative (BRI) as having “created a favorable environment for the country’s overall development”. He didn’t dwell on BRI’s ambition and extraordinary scope, as he does in every major international summit as well as in Davos earlier this year.

To continue reading: Xi’s road map to the Chinese Dream

Into the Cold and Dark, by James Howard Kunstler

The fake reality so much of Washington and the media is caught up in can’t obscure actual reality: we’re on track for a prodigious fiscal train wreck. From James Howard Kunstler at kunstler.com:

It amuses me that the nation is so caught up in the sexual mischief of a single Hollywood producer when the nation as a whole is getting fucked sideways and upside down by its own political caretakers.

Behind all the smoke, mirrors, Trump bluster, Schumer fog, and media mystification about the vaudeville act known as The Budget and The Tax Cut, both political parties are fighting for their lives and the Deep State knows that it is being thrown overboard to drown in red ink. There’s really no way out of the financial conundrum that dogs the republic and something’s got to give.

Many of us have been waiting for these tensions to express themselves by blowing up the artificially levitated stock markets. For about a year, absolutely nothing has thwarted their supernatural ascent, including the threat of World War Three, leading some observers to believe that they have been rigged to perfection. Well, the algo-bots might be pretty fine-tuned, and the central bank inputs of fresh “liquidity” pretty much assured, but for all that, these markets are still human artifacts and Murphy’s Law still lurks out there in the gloaming with its cohorts, the diminishing returns of technology (a.k.a. “Blowback”), and the demon of unintended consequences.

Many, including yours truly, have expected the distortions and perversions on the money side of life to express themselves in money itself: the dollar. So far, it has only wobbled down about ten percent. This is due perhaps to the calibrated disinformation known as “forward guidance” issued by this country’s central bank, the Federal Reserve, which has been threatening — pretty idly so far — to raise interest rates and shrink down its vault of hoarded securities — a lot of it janky paper left over from the misadventures of 2007-2009.

I guess the lesson is that when you have a pervasively false and corrupt financial system, it is always subject to a little additional accounting fraud — until it’s not. And the next thing you know, you’re sitting in the rubble of what used to be your civilization.

To continue reading: Into the Cold and Dark

Tales from a Late Stage Bull Market, by MN Gordon

“Late Stage” implies the bull market will be over soon, which is SLL’s prognostication as well. From MN Gordon at economicprism.com:

An endearing quality of a late stage bull market is that it expands the universe of what’s possible.  Somehow, rising stock prices make the impossible, possible.  They also push the limits of the normal into the paranormal.

Last week, for instance, there was a Bigfoot sighting near Avocado Lake in Fresno County, California.  But it wasn’t just one Bigfoot.  According to a local farmer, there was a family of five or six Bigfoot running across his ranch in the middle of the night.  Paranormal expert Jeffery Gonzalez offered the following Bigfoot sighting anecdote:

“One of them, which was extremely tall, had a pig over its shoulder.  And the five scattered and the one with the pig was running so fast it didn’t see an irrigation pipe and it tripped, with the pig flying over.”

What to make of it?

Bigfoot sightings, no doubt, are pro-growth.  They’re bullish for stock prices.  So, too, are warnings from North Korea that nuclear war “may break out at any moment.”

How do we know these two unrelated events are bullish?  Because if you plot the S&P 500’s price movement since their occurrences, you’ll find that the market is up.  There is a direct – albeit false – correlation.

And these days a correlation of any kind is what matters.  No one cares that correlation does not imply causation.  Such a pesky detail doesn’t matter to Phillips Curve adherents.  Why should it matter for anything else?

Indeed, there are plenty of things that used to matter, which no longer matter.  For example, stock valuations don’t matter.  Profits don’t matter.  Most of all, deficits don’t matter.

To continue reading: Tales from a Late Stage Bull Market

 

Ray Dalio’s Shorting The Entire EU, by Raúl Ilargi Meijer

The head of the world’s biggest hedge fund complex is bearish on Europe. From Raúl Ilargi Meijer at theautomaticearth.com:

A point BOE Governor Mark Carney made recently may be the biggest cog in the European Union’s wheel (or is it second biggest? Read on). That is, derivatives clearing. It’s one of the few areas where Brussels stands to lose much more than London, but it’s a big one. And Carney puts a giant question mark behind the EU’s preparedness.

Carney Reveals Europe’s Potential Achilles Heel in Brexit Talks

Carney explained why Europe’s financial sector is more at risk than the UK from a “hard” or “no-deal” Brexit. [..] When asked does the European Council “get it” in terms of potential shocks to financial stability, Carney diplomatically commented that “a learning process is underway.” Having sounded alarm bells about clearing in his last Mansion House speech, he noted “These costs of fragmenting clearing, particularly clearing of interest rate swaps, would be born principally by the European real economy and they are considerable.”

Calling into question the continuity of tens of thousands of derivative contracts , he stated that it was “pretty clear they will no longer be valid”, that this “could only be solved by both sides” and has been “underappreciated” by Europe . Carney had a snipe at Europe for its lack of preparation “We are prepared as we should be for the possibility of a hard exit without any transition…there has been much less of that done in the European Union.”

In Carneys view “It’s in the interest of the EU 27 to have a transition agreement. Also, in my judgement given the scale of the issues as they affect the EU 27, that there will ultimately be a transition agreement. There is a very limited amount of time between now and the end of March 2019 to transition large, complex institutions and activities…

If one thinks about the implementation of Basel III, we are alone in the current members of the EU in having extensive experience of managing the transition for individual firms of various derivative and risk activities from one jurisdiction back into the UK. That tends to take 2-4 years. Depending on the agreement, we are talking about a substantial amount of activity.” [..] “I wouldn’t want to use financial stability issues as leverage. I wouldn’t want them to be addressed in a bloodless technocratic way in the interests of all the citizens.”

To continue reading: Ray Dalio’s Shorting The Entire EU

Pentagon Worried about Hackers Causing Stock Market Crash, by Wolf Richter

Governments and central banks are fine with equity markets being manipulated upward. However, manipulation downward would be a national emergency. From Wolf Richter at wolfstreet.com:

The Pentagon?! But no one’s worried when stocks get manipulated higher.

It’s funny, the all-out government effort to prevent a major decline of the stock market, or of individual stocks, via manipulation or hacking. Now even the Pentagon is looking into it.

What’s funny is that everyone cheers when manipulation, hacking, and other shenanigans cause the market or individual stocks to soar. It’s just declines they’re worried about at these precarious levels.

Manipulating stocks higher is a time-honored game that routinely receives kudos from all around. The Fed printed nearly $4 trillion and cut rates to zero for eight years – no matter what the damage to the real economy – for the sole purpose of manipulating up asset prices including stock prices. “Wealth effect,” Ben Bernanke called it. Corporate executives and analysts exaggerate future earnings only to deflate them at the last minute, because stock prices are “forward looking” and fake future earnings is all that matters, even if reality now sucks. And on and on. Whatever it takes to push stock prices up, by hook or crook, is cool. These are our heroes.

But when some lonely dude might hack into high-speed stock trading systems or spook the trading algos, quant-fund managers, and high-speed traders and throw algorithmic trading off track to where prices might actually fall in a major way, all heck breaks loose, and the Pentagon feels empowered to step in.

Trading by automated systems, such as used by quant funds and high-speed traders, is beginning to dominate stock trading. The risk of hacking into those systems or manipulating those systems in other ways is a real issue – but it should cut both ways. And the systems themselves are designed to manipulate prices, so….

Nevertheless, the Pentagon’s research arm, the Defense Advanced Research Projects Agency (Darpa), is working with “dozens” of high-speed traders, quant-fund managers, “people from exchanges and other financial companies,” executives, and “others” from Wall Street to figure out how hackers “could unleash chaos in the US financial system.”

To continue reading: Pentagon Worried about Hackers Causing Stock Market Crash

Tesla Shareholders: Are You Drunk On Elon Musk’s Kool-Aid? by Michael Lewitt

A Tesla short excoriates the longs. From Michael Lewitt at forbes.com:

Tesla shareholders (and bullish Wall Street analysts) are either geniuses or delusional and I am betting on the latter. Typical of the lack of gray matter being applied to this investment is a recent post on Seeking Alpha, often a place where amateurs go to pump stocks they own.

Someone calling himself “Silicon Valley Insights” issued an ungrammatical “Strong Buy” recommendation on October 11 based on the following syllogism: (1) “Tesla CEO Elon Musk has stated very firmly that they can and will reach his goal of producing 5,000 cars per week by the end of this year.” (2) “Musk has a history of setting aggressive targets (more for his staff than investors) [Editors’s Note: That is a lie.] and then missing them on initial timing but reaching them later. [Editor’s Notes: That is another lie–Musk has NEVER reached a production target.] (3) “Reaching anything [sic] significant portion of that 5K target (say 1-2K) by the end of December could drive TSLA shares significantly higher.” This genius then suggests that investors stay focused on the Model 3 ramp as the key price driver over the coming weeks and months and argues that the announcement that only 260 Model 3s were produced in the third quarter leaves “much of the risk…now in the stock price.” He is correct– there is a great deal of risk embedded in a stock trading at infinity-times earnings with no prospect of profitability , a track record of breaking promises, a reluctance to sell equity to fund itself even at price levels above the targets of most analysts, and a market cap larger than rivals that are pouring tens of billions of dollars into putting it out of business.

Undeterred, he offers two investment strategies. The first he terms a “reasonable and conservative” one that waits to invest in TSLA shares until the early November third quarter earnings call. In my world, a reasonable and conservative strategy would be to run for the hills or short the stock (as I am doing). A “more aggressive and risky strategy” (compared to skydiving or bungee jumping) would be “to buy shares before that third quarter report and call on the bet that the Model 3 production update will be taken positively.”

To continue reading: Tesla Shareholders: Are You Drunk On Elon Musk’s Kool-Aid?