Archive - Aug 24, 2015

"I do not believe that the global economy is healing. I believe that the global economy is heading into a slump once again... It's not a pretty picture. All those people who say they will buy... I wonder if they still have money?"

The trouble is that it’s not inconceivable Trump could get elected. Farfetched, perhaps, but not out of the question. The USA is heading for a very rough patch of history — as those of you with your eyes on the stock indexes lately may suspect. The country stands an excellent chance of waking up some morning soon to discover it is broke and broken. When that happens, all the anxiety and animus will be focused on looking for scapegoats, and they are likely to be the wrong ones. World leaders considered Hitler a clown in the early going, too, you know.

The similarities between the current crisis and that which unfolded in 1997/98 were so readily apparent that many analysts began to draw comparisons and that may have added fuel to fire over the past week. Now, there seems to be a concerted effort to calm the market by explaining that while there are similarities, there are also differences. And while some of the world's imperiled EM economies may be in better shape to defend themselves this time around, when attempting to cope with a meltdown it may be more important to look at where things are similar and on that note, here’s some color from Morgan Stanley and BofAML.

"The hedge fund guys didn't build this country. These are guys that shift paper around and they get lucky. They are energetic. They are very smart. But a lot of them - they are paper-pushers. They make a fortune. They pay no tax. It's ridiculous, ok?"

The correction may soon morph into a full-fledged bear market if the Fed makes good on its supposed intentions to raise interest rates this year. Have no illusions, while most market observers are quick to blame the sell-off on China, this market was given life by the Fed, and the Fed is the only force that will keep it alive. Unfortunately for the Fed, it won't be able to get away with doing nothing for too much longer. Events may soon force it to show its hand. Then perhaps some may notice that the Fed is holding absolutely nothing and has been bluffing the entire time.

It's been quite a day for your average high net worth investor in US equities... so here are two messages from the most important people in the world - China and their broker...

As the cost of insuring equity market risk (VIX) spiked higher this morning (having been broken for minutes after the open), catching up to the cost of insuring credit market risk (CDX HY) which has been screaming dead canaries for weeks, a funny thing happened to the volatility of volatility. VVIX (the estimate of the uncertainty of the cost of insuring equity risk) exploded to a level never seen before - as various ETF/hedging strategies imploded - a level twice as high as during the Lehman crisis...

"That's where we find ourselves now—i.e., interest rates around the world are at or near 0%, spreads are relatively narrow (because asset prices have been pushed up) and debt levels are high.  As a result, the ability of central banks to ease is limited, at a time when the risks are more on the downside than the upside and most people have a dangerous long bias.  Said differently, the risks of the world being at or near the end of its long-term debt cycle are significant.... We Believe That the Next Big Fed Move Will Be to Ease (Via QE) Rather Than to Tighten"

By starving investors of safe return, activist Fed policy has promoted repeated valuation bubbles, and inevitable collapses, in risky assets. On the basis of valuation measures having the strongest correlation with actual subsequent market returns, we fully expect the S&P 500 to decline by 40-55% over the completion of the current market cycle. The only uncertainty has been the triggers.

Once upon a time, Ron Insana tried running a fund of funds. He failed. Then he tried working at SAC. That didn't work out either. Then, he decided to write scathing opeds in the Huffpo bashing "doomsayers." Four years later, the Fed is terrified to hike rates by 25 bps from zero while in the meantime all other central banks have joined the Fed in a global, liquidity-injecting tsunami, confirming the doomsayers were right all along. So what is ole Ron, who once upon a time used to work at CNBC up to these days? Why "managing a virtual portfolio" it would appear... which he "took to cash last Thursday."

At a certain point, we suppose Joe Biden took a look at the state of the 2016 race for The White House and thought: "why not me?"

It's Not Just Your Imagination ...

As Congress prepares to vote on the Iran nuclear deal, the focus remains on what separates the Islamic republic from the United States, which, depending on your worldview is either a lot, or everything. The truth is that similarities, though perhaps few in number, do exist. Similar though contrasting religious convictions, a penchant for exceptionalism, and pistachios aside, water management stands to be a defining issue for both nations – and, truthfully, the world – as we approach mid-century.