Archive - Sep 25, 2011

It's just getting plain idiotic in France and Europe. After last week the global stock market soared (then crashed) on two separate micro-occasions (since everything is now measured in HFT time) following rumors first from the FT then from someone we don't even remember who, that French banks would be recapitalized, here comes the strawman reset for the next 24hours. From Reuters: "French banks are solid and can face any risk from their exposure to Greek sovereign debt, the head of the Bank of France, Christian Noyer, told a French newspaper, adding that there was no secret plan in place to recapitalise them." Well, no, they are not. Just ask the Chinese. Or Siemens. But at least this latest refutation gives France hope that when BNP, SocGen and CA are all down 15%, leaking this same rumor for the third time, may provide a short-term temporary boost. Alas, not even the vacuum-tube controlled market is that dumb.

With pretty much everyone else mocking the comedic interlude that nearly daily GOP debates have become, it was only a matter of time before Saturday Night Live had something to say on the matter. Sure enough, last night it did... And with Alec Baldwin doing Rick Perry, the conservative response aftershock begins in 5...4...3...

Modern economics is analogous to the junk-science of 17th century medicine, and it serves a symbolic economy of phantom wealth and freedom. Back in the bad old days, the premier physicians of the age accepted and practiced the idea that the cure for illness was to bleed very ill patients, effectively weakening them. Countless patients who might have recovered if simply left "untreated" died as a result of the misguided "science of healing" of the era. Only with the advent of a true understanding of the nature of infection, the immune system and disease did the "folk" pseudo-science of bleeding pass from accepted medical practice. We are mired in a similar era of pseudo-science being accepted as actual science, i.e. as reflecting the underlying causal mechanisms of life and the universe, and that pseudo-science is called economics. As I have noted here many times, we are experiencing not just a standard-issue financial crisis but the failure of the entire pseudo-science edifice of modern conventional economics.

The topic of surging market return correlation (and the death of alpha on broader terms) is nothing new to long-term Zero Hedge readers: every time the market appears poised to crash, stock and sector correlations reach new highs while return dispersion drops as fundamentals and technical are broadly ignored, and only the roar of the thundering herd matters. And while whether a spike in volatility is a precondition to correlation jumps, or simply a coincident factor, is unknown, in recent weeks an equity correlation of 1.000 has been matched by a jump in volatility not seen since the days of September 2008. What this has done is to make return dispersion for the hedge fund community higher than historical associated with comparable episodes of palpable market fear, exposing a broad rift between the outperformers (very few, mostly macro hedge funds) and underperformers (many, long-biased primarily). Curiously in the (massively levered) mutual fund community everyone is broadly underperforming with roughly the same intensity. Which means that while in the past one’s returns could suck, at least so would everyone else’s, the past month has accentuated the ability of funds to generate alpha (and even beta) lead to broad reallocation of capital by fund LPs. The will force the en masse selling of winners to satisfy margin calls, exacerbated by record low mutual fund cash "dry powder" positions, and sets the groundwork for even more volatility as all traditional hedging strategies fail. So what is an investor to do in such a confusing environment? Pray... is the short answer. As for the longer one, there is not much that can be done according to Goldman, which in its latest weekly chartology has little if any words of encouragement for both clients and market speculators alike.

Roubini and Soros talked the same double dip recession doom regarding the U.S. and the rest of the world.