May 24th, 2015
It’s not monetary easing, but the attitude of investors toward risk that distinguishes an overvalued market that continues higher from an overvalued market that is vulnerable to vertical losses. That window of vulnerability has been open for several months now, and the immediacy of our downside concerns would ease (despite obscene valuations) only if market internals and credit spreads were to shift back toward evidence of investor risk-seeking. Eventually, the final refuge of speculation is to abandon historically reliable measures wholesale, resting faith instead on the advent of some new era in which the old rules simply don’t apply.
The fact that such books dominate the book sales in this category tells us a thing or two about how the near consensus of approval once enjoyed by the Fed (and other Western central banks) is long gone.
We all know the difference between reality and wishful thinking. Many of us know just how quickly the jaws of reality can crush the life out of unicorn and fairytale stories when fiction is used to cover the facts. Where the businesses and happy customers that are supposedly represented on an income statement turn out to be little more than the Non-GAAP application of a fairy’s wand and pixie dust. However, this doesn’t stop people from buying in (literally) to the illusion. And what has far more onerous consequences is when the story tellers themselves begin to believe their own works of fiction.
This won't end well... As far as the Empire of Chaos goes, Divide and Rule remains the sweetest game in town.
"I would be more than happy to see the cradle of democracy put the imperial autocrats and financial kleptocrats in their place, teaching them a thing or two about enlightened self governance."
Another crony buck...
More than merely a subjective, psychological state, the complacency of market participants can be effectively quantified, which is precisely what Deutsche Bank's David Bianco has done by looking at the ratio of the market's P/E to implied vol or VIX. As the chart below shows, on a daily basis the PE/VIX ratio just hit 1.49x - it has never been higher, and again based on DB's estimation, market sentiment has now crossed from the complacency zone into outright Mania. The last time this ratio was at the current level: late 2007/early 2008, just before the Fed had to launch a multi-trillion bailout to save capitalism as we know it.
On such a 'patriotic' weekend, we thought it appropriate to consider who is the 'MVP' superhero of our time. Captain America? No. How about Ironman? No. What about Superman? Nope... The most valuable superhero of our time is a dark, deranged masked-human dressed in black...
Overnight Xinhua also reported that a gold sector fund involving countries along the ancient Silk Road has been set up in northwest China's Xi'an City during an ongoing forum on investment and trade this weekend. (read more about the "New Silk Road" which could change global economics forever here). The fund, led by Shanghai Gold Exchange (SGE), is expected to raise an estimated 100 billion yuan (16.1 billion U.S. Dollars) in three phases. The amount of capital allocated to nothing but physical gold purchases (without plans for financial paper intermediation a la western ETFs) will be the largest in the world.
The global Central Banks, driven by their Keynesian lunacy, have induced the single largest misallocation of capital in history.
Memorial Day commemorates soldiers killed in war. We are told that the war dead died for us and our freedom. US Marine General Smedley Butler challenged this view in 1933: "War is just a racket... our soldiers died for secret agendas of which they knew nothing. Capitalists hid their self-interests behind the flag, and our boys died for the One Percent’s bottom line. Our Soldiers Died for the Profits of the Bankers." It appears 82 years later - nothing has changed.
As measured by the Russell 2000 Volatility Index (RVX), volatility expectations for the small cap index have only been this low a couple of times since its inception in 2006. Of course, volatility expectations can always go even lower. Looking historically, though, the rubber band is essentially as stretched to the down side as it has ever been. Therefore, if the RVX continues lower, it would be pushing a new lower bound on its all-time chart.
The revelation from an internal US intelligence document that the very US-led coalition supposedly fighting ‘Islamic State’ today, knowingly created ISIS in the first place, raises troubling questions about recent government efforts to justify the expansion of state anti-terror powers.
Clinton, or Clint-off...
Economics 101 tells us that prices in a free market are set by the interaction of supply and demand. The world oil markets have gotten a graphic lesson in that truth over the last year, as the dramatic surge in US oil production has met stagnant demand. This, in turn, has pushed down spot prices by nearly half. The recent uptick in oil prices, however, has buoyed hopes among market watchers that a strong oil price rally is in order. Unfortunately economics is working against these investors.