Knight Research' Stunning Call: "The Game Is Over"

Tyler Durden's picture

From Knight Research. Presented without commentary.

The Game Is Over

The simple story is this: We believe the structural and cyclical terms of global trade have finally reached their tipping point. This will catalyze a wholesale change in sentiment and a historic repositioning of risk assets. The emerging market global growth story is over.

  • In meetings with clients throughout October, we began emphasizing our growing concerns about the nearly ubiquitous confidence the financial markets—and for that matter, global leaders and their body politic—have in China; and by extension, the rest of the emerging market story, commodities, and the direction of foreign exchange cross-rates.
  • Not surprisingly, our concerns were met with varying degrees of resistance; but the overall consensus clearly favored a very bullish, asymmetric outcome over both the near and intermediate terms. When pressed as to our own sense of timing and specific catalysts  for broad-based trend reversal, candidly we were unclear. Our sense then, was that the higher and faster the commodity markets pushed, the sooner the reversal would occur. But we have now clarified our view.
  • In just the past several weeks, we believe the data and government actions out of China, the back-up in US interest rates, the Fed’s emphatic commitment to QE2, intensifying pressures across the EU, broadly rising commodity prices, government efforts to control hot money flows, have finally pushed the global terms of trade to their tipping point.
  • And now, as is evident by the flight to safety, and growing evidence that China will soon try and effect price controls in addition to raising interest rates and significantly changing the rules for their vast network of Local Government Funding Vehicles (LGFVs); the writing is on the wall. The game is over.
  • The simple story is this: The structural and cyclical terms of global trade have reached their tipping point which will effect a wholesale change in sentiment and a historic repositioning of risk assets.
  • So what do we consider the “terms of global trade”? Structurally, per our top chart, they are the intersection of Government Policy (viz., rule of law, market systems, trade law, etc.,) Resource and Industry (viz., natural resources, labor/demographic pools, industrial advantages, import dependencies, etc.,) and Economic Security (viz., the sovereign’s competitive standing, the relative power/needs of the citizenry, the mandate/control of the government, etc.) And cyclically, (as represented by the light blue, bold arrows) the terms of trade are defined by the intersection of foreign exchange rates, commodity prices, and the cost and availability of trade finance.
  • And in our assessment given:
  1. The structural breakdown of the credit and labor markets in the developed world and the anemic outlook for nominal GDP growth
  2. The immaturity of the developing world and their vulnerability to credit shocks and uncontrollable inflation
  3. China’s dependence upon non-economic, and unsustainable credit expansion to maintain growth far beyond natural export and domestic demand, and
  4. Asia’s dependence upon imported energy and agriculture

the game is over. Presently, we believe that the broad-based resurgence of investor confidence in the emerging market and secular bull market in commodities will end badly; proving that the rally which commenced in Q2 2009, was in fact an “echo bubble” facilitated by massive—and unsustainable—stimuli from the Chinese Government

  • And although such cataclysmic shocks rarely result in rhythmic, straight line fractures, the chain of price adjustments should be  relatively clear. Accordingly, we expect a shockingly powerful rally in the dollar, broadbased weakness across the commodity sector, a dramatic widening of emerging market credit spreads, and what could prove to be a stampede of hot fund flows out of the emerging markets.
  • We appreciate both the gravity and the brevity of this note; but then again, the story is simple.

We believe that the end of the Great Consumer Credit Cycle and the vast structural differences in the terms of trade between the United States, the EU, and China, have finally caught up with the secular bull thesis on Emerging Market and Commodities. Quite ironically, the Fed’s aggressive policies will likely prove to be the catalyst which breaks China’s unbridled expansion of credit and non-economic growth, ushering in a wholesale rebalancing of risk assets.


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Rahm's picture






SMG's picture

After the all important GM IPO.

Whizbang's picture

Even if nobody else picks it up, the PD banks who are underwriting the IPO will buy it all. This offering will go off without a hitch. Obama will/have/has saved the country. That has been and will be the spin for the rest of history.

Ripped Chunk's picture

More worthless paper traded for more worthless paper (and both parties record a gain!)

Complete and utter FICTION

SheepDog-One's picture

All just a bunch of paper shuffling fiction.

nope-1004's picture

Utter nonsense if you're a gold bug.

Makes complete sense if you're not.


maddy10's picture

30-40 trillion$ monetary assets under institutions as of June2010

They have to go somewhere

Sure , big money has realised it is time to go back to preservation of capital now that easy money has been made

PM markets total 100 billion[0.3%] and cannot sustain the huge capital inflows

Therefore Dollar assets aka treasuries and soforth will rise along with 300-400%rise in PMs

Lookout for huge windfalls in CAD,AUD

66Sexy's picture

nothing new here. we already knew the china model was based on empty GDP; fuzzy numbers that originated from non essential production like building empty skyscrapers,deserted cities, and overemployment.

but that still leaves the question of where does the money go? in this scenario described, its not bullsih for the dollar; it implies a currency disrpution if there is a flight from emerging markets. it implies a defacto commodities based system, at least temporarily, set to replace the fiat credit and growth system that is now waning. industrial metals, oil, key commodites become the new trade instruments, and the method of trade would have to be material.

as much as globalists would like nationalism and soverignty to die, it will not. and with a re-emergence of nationalism (brought on by the "envy" of the US's monetary creation option), we would see a collapse of the euro, european countries returning to their own currencies, and a major set back for one world government initiatives. 

Mr Lennon Hendrix's picture

I take it history ain't lasting too much longer.

NOTW777's picture

just wait til they announce they are out of koolaid

Problem Is's picture

Green Shots Lime is really hard to find anymore...

High Plains Drifter's picture

All I want to know is if they cleared this article with Leo first before posting it?

Eternal Student's picture

Or the Gonzo economists, or FOFOA? The rally in the dollar is what I was referring to back in September, when a lot of folks were predicting hyperinflation via a collapse in confidence in the dollar. Oh well.

It will indeed come, as I said before. Just not now.


Spitzer's picture


will it last as long as the rally did in 08 ?

jeff montanye's picture

dang good question.  quite the trading opportunity.  i had been waiting to reduce tsys on equity weakness/tsy strength.  may not happen quite like '08 this time (maybe more like '87 -- bond sell off to stock sell off with overnight huge bond rally after)?

Eternal Student's picture

I see you haven't changed your view since calling for "hyperinflation" via a dollar crash as soon as last September. The ongoing saga in currency wars has left no impression, I take it?

To answer your question,  it will be an ongoing race to the bottom, with everyone trying to cheapen their currency, and things zig-zagging as this tug-of-war goes on. The real question is how long can that game be played? Ask the Bond Markets for the answer to that one.


MeTarzanUjane's picture

I'm not sure about Leo, but I think Reggie at BustedBlogGoesBoom predicted this when he exited his moms womb.

EvlTheCat's picture

You mean Reggie from the virgin birth?  Yes, I am sure he told you that.

Realist's picture

Well, if Knight Industries Research says it's so, it must be:

Capsaicin's picture

Impressive depth on their website. Reminds me of the light switch in grandma's log cabin.

Bonesetter Brown's picture

If K.I.T.T says the game is over, then the game is over

spartan117's picture

I can't believe Tyler would post junk from these people...

Pondmaster's picture

Agree . It read like junk as well . The gypsy fortune teller at the county fir could do a better job of convincing . Pooorly written , un professional. 

SilverIsKing's picture

I've asked Tyler if he'd be willing to let you screen and approve all topics before he posts them on the ZH site.  I'll let you know what he says.

Howard_Beale's picture

I already know the answer you will get. It will be no response or no.

I think the article was more than worthy of being printed. And I've been a very long time. Too bad the commentors are one sided these days preaching conspiracy and gold bitchez.

Once upon a time ZH was a great blog.

vegaspilot03's picture



and Jim Cramer has a nicer site...

MeTarzanUjane's picture

No you missed it by this much. Nice little raccoon. As Scooby would say; Ruh-roh Raggy, Rorots.

"Knight's Algorithmic Execution Strategies Win Buy-Side Technology Awards"

Popo's picture

Funny, but it's here:

More interesting however, is that their banking sector analysis is mostly positive:

Which would suggest that they believe the game is in fact, not over.



toathis's picture

restart? it already did! The event happened in 2008. Now the worst is over. Nothing else is coming!

Turd Ferguson's picture

This article is bullshit. Well reasoned and insightful but bullshit nonetheless.

One day soon, this scenario will play out but NOT YET. Give it another 12-18 months and then we'll see.

SpeakerFTD's picture

I like the term "echo bubble".    Reminds of that great band Echo and the Bubblemen.


Calvin Jones and the 13th Apostle's picture

And there is always the splinter group: Bennie and the Bubblemen.

Pondmaster's picture

I thought it was the "Bunnymen" ?

alex_g's picture

Saw them in New York in '87 or '88.  Actually a great show

TruthInSunshine's picture

Sounds painful!

That POMO thing... is up with that lately?

NOTW777's picture

does this mean the summer of recovery is canceled?

what about hope and change?

I Am The Unknown Comic's picture hope has been's not called hope anymore...

HomemadeLasagna's picture

It has been replaced with grope for change...