Bond

There’s really one supreme element of this story that you must keep in view at all times: a society (i.e. an economy + a polity = a political economy) based on debt that will never be paid back is certain to crack up. Its institutions will stop functioning. Its business activities will seize up. Its leaders will be demoralized. Its denizens will act up and act out. Its wealth will evaporate. Given where we are in human history - the moment of techno-industrial over-reach - this crackup will not be easy to recover from. Things have gone too far in too many ways. The coming crackup will re-set the terms of civilized life to levels largely pre-techno-industrial. How far backward remains to be seen.

A lot of people were expecting some really great things to happen in 2015, but most of them did not happen.  But what did happen? A global financial crisis began during the second half of 2015 threatens to greatly accelerate as we enter 2016. This is what the early stages of a financial crisis look like, and the worst is yet to come.

• China stocks tank, triggers circuit breaker (Reuters)
• Stocks Slump Across Europe and Asia Following Shanghai's 7% Crash (BBG)
• China Halts Stock Trading After 7% Rout Triggers Circuit Breaker (BBG)
• Iran says Riyadh thrives on tension after relations cut (Reuters)
• Saudis and Bahrain Face Off With Iran in Worst Clash Since 1980s (BBG)
• Syrian rebel group backs Saudi move to cut ties with Iran (Reuters)

The sources of growth for US corporates have all dried up. Stocks have yet to adjust to this, but when they do it’s going to be an all out collapse.

It all started off relatively well: oil and US equity futures were buoyant on hopes Iran and Saudi Arabia would break out in a bloody conflict any minute boosting the net worth of shareholders of the military industrial complex, and then, out of nowhere, like a depressed China in a bull shop, the "mainland" crashed the party and it all well south very, very quickly...

As Wilbur Ross so eloquently noted, for Puerto Rico "it's the end of the beginning... and the beginning of the end," as he explained "Puerto Rico is the US version of Greece." However, as JPMorgan explains, for some states the pain is really just beginning as Municipal bond risk will only become more important over time, as assets of some severely underfunded plans are gradually depleted.

Main Street is vulnerable to leveraged trading algorithms and Brazilian bonds because it’s not just exotica that is overleveraged. Risk-off, in short, is no longer just a temporary swing of the pendulum, guaranteed to reverse in a year or two. As amazing as this sounds, we’ve borrowed so much money that as hedge funds go, so goes the world.

Another possible step would be to reduce short-term interest rates below zero if needed to provide additional accommodation... Could negative interest rates be a policy response that the Federal Reserve could choose to employ in a future crisis? ... these are transitional problems, but they might be sufficient to make a move to negative rates difficult to implement on short notice.

As we start the new year, there is a debate raging within the market.  No the debate isn’t whether there is weakness in the manufacturing economy, that is taken as a given, especially after Friday’s awful Chicago Purchasing Manager number of 42.9. Instead, the debate boils down to this: 'bears' believe the manufacturing economy and the service economy act in conjunction with each other – that one cannot turn, without the other; 'bulls' view each segment of the economy as relatively independent and they highlight the size of the service economy relative to the manufacturing. The answer lies in the missing cog - the 'wealth' economy.

Ever since it started making complicated bets against some leveraged ETFs, Miller’s Catalyst Macro Strategies Funds has since grown from $500,000 in assets at the start of the year to about $170 million. It achieved a more than 50 percent return this year, placing it far ahead of its competitors.

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While the market might have been disappointed by the ECB’s “underdelivery in December, it came as a relief for the Riksbank, the SNB, the Norges Bank, and the Nationalbank who are effectively forced to cut each time the ECB eases or risk seeing upward pressure on their respective currencies. That dynamic has led to a veritable race to the Keynesian bottom with Norway as the last man standing in terms of conducting monetary policy with rates above zero. As we enter the new year, a number of questions remain regarding Europe's headlong plunge into NIRP-dom.

Important pillars of the bull case evaporated throughout 2015. Global price pressures weakened, the global Credit backdrop deteriorated and the global economy decelerated. The huge bets on central bank policies left markets at high risk for abrupt reversals and trade unwinds – 2015 The Year of the Erratic Crowded Trade. Indeed, a global bear market commenced yet most remain bullish. Serious and objective analysts would view this ominously.

The deeper we dig into the story of Dubai's vaporized gold, the more skeletons just tumble out of the closet on what may be the world's biggest gold smuggling ring ever, one involving not just Turkey and Iran, but the mother of all gold smuggling: China itself...

We believe the Credit Cycle has turned and with it will come some massive unexpected shocks. One of these will be the fall out in the Bond Market, centered around the dramatic growth explosion in Bond ETFs coupled with the post financial crisis regulatory changes that effectively removed banks from making markets in corporate bonds.  It is a ‘Witch’s Brew’ with a flattening yield curve bringing it to a boil.