Bond

One of the (many) fascinating things about this latest global financial crisis is that there’s no single catalyst. Unlike 2008 when the carnage could be traced back to US subprime housing, or 2000 when tech stocks crashed and pulled down everything else, this time around a whole bunch of seemingly-unrelated things are unraveling all at once.

Having correctly foreseen in September that "China's devaluations are not over yet" it appears Nomura's infamous 'bear' Bob Janjuah has also nailed The Fed's subsequent actions (hiking rates into a fundamentally weakening economy in a desperate bid to "convince markets that strong growth and inflation are on their way back"). In light of this, his latest note today should be worrisome to many as he warns the S&P 500 will trade down around 20% to 25% from current levels in H1, down to the 1500s and for dip-buyers, it's over: "I now feel even more certain that debt-driven asset bubble implosions cannot merely be 'fixed' with even more debt and another round of central bank-driven asset bubbles."

When Mario Draghi “disappointed” markets in December by “only” cutting the depo rate by 10 bps and “merely” extending PSPP by six months while electing not to expand monthly asset purchases, the Riksbank, the Nationalbank, the Norges Bank, and the SNB all breathed heavy sighs of relief. And while we doubt the ECB is done when it comes to going "full-Krugman" (as it were), Mario Draghi’s “hawkish” ease did buy his counterparts some breathing room. Case in point: Denmark just hiked.

"Demographics may not rule absolutely, but they likely will dominate investment markets and returns for the next few decades until the Boomer phenomena fades away. The 1% – in addition to the 99 – will need extra doses of Xanax, or additional slices of cake, to cope."

Once China set the Yuan fixing some 0.5% lower, the biggest drop since the August devaluation, all hell broke loose and unleashed a global selling panic after China's stock market was promptly shut down less than 30 minutes into trading, then European shares dropped the most in more than 4 months as Asian equities plunges, as did US stock futures, the dollar weakened against the euro and the yen; crude plunged to fresh 12 year lows. Gold rose.

Since The December 16th FOMC decision to hike rates, Gold is up over 2%, Bonds up 1%, and stocks down 3% suggesting the word "error" with regard Fed policy. As The FOMC Minutes are released, traders anticipate confident-hawkishness and a focus on ignoring current data in favor of preferring their own confident outlook:

• *ALMOST ALL FED OFFICIALS AGREED LIFTOFF CONDITIONS MET IN DEC.
  
• *FED: LINGERING RISKS TO OUTLOOK INCLUDED FURTHER USD STRENGTH
  
• *A FEW FED OFFICIALS SAID FINANCIAL RISKS COULD ALTER RATE PATH

January's meeting has negligible probabilities for a rate move but March has 45% chance of a hike and 3% chance of a cut. The apparent unanimity of December's decision appears questionable given the Minutes suggestions of some dissent.

Pre-FOMC Minutes: S&P Futs 1983.25, 10Y 2.19%, Gold $1094, EUR 1.0755, WTI $34.05

Before we go into details of the overnight carnage, this is where we stand currently: S&P futures now down 33 points or 1.63% while 2Y Treasury rallies pushing its yield back below 1% as EU stocks extend their drop after China weakened its currency, North Korea says it tested a hydrogen bomb; Brent crude falls to lowest level since 2004.

There is a populist idea of money printing. The idea is that banks can just print what they want, enriching themselves... does it really work this way?

Default Rate Highest since 2009, US Distress Ratio Soars.

We are currently in a transitional phase of geo-political-monetary power struggles, capital flow decisions, and fundamental economic choices. This remains a period of artisanal (central bank fabricated) money, high volatility, low growth, excessive wealth inequality, extreme speculation, and policies that preserve the appearance of big bank liquidity and concentration at the expense of long-term stability. The potential for chaotic fluctuations in any element of the capital markets is greater than ever. The butterfly effect - the flutter of a wing in one part of the planet altering the course of seemingly unrelated events in another part - is on center stage.

Derivatives like credit default swaps turned a mere bubble in the US housing market into a global financial catastrophe... 

After yesterday's historic -6.9% rout in the Shanghai Composite, which saw the first new marketwide circuit breaker trading halt applied to Chinese stocks (on its first day of operation), many were wondering if the Chinese government would intervene in both the once again imploding stock market, as well as China's plunging and rapidly devaluing currency. And, after the SHCOMP opened down -3%, the government did not disappoint and promptly intervened in both the Yuan as well as the stock market, however with very mixed results which global stocks took a sign that the "national team" is no longer focused solely on stocks, and have resumed selling for a second consecutive day. 

Bill Dudley and the Federal Reserve (Fed), in their efforts to influence economic growth may have created a speculative and consumption driven environment that is crushing productivity growth. Ingenuity, not debt, made America an economic powerhouse. If we are to resume down that path we need the Fed to end their “self-defeating” policies and in its place we must demand ingenuity from them. The Fed, along with government, needs to properly incent productivity. The Fed should start this arduous task by removing excessive stimulus which will take the speculative fervor out of markets and allow asset bubbles to deflate.

Because our macroeconomic policies have false targets and actually incentivize short term strategies the Fed has directly led us off of an economic cliff. Now that the Fed has boxed itself out of any further action, the market is at the peril of a collapsing, breadwinner-job-less and debt ridden economy and so prepare yourself for the largest market ‘correction’ the world has ever faced.