Australian Dollar

While most hedge funds will be glad to close the books on a year in which they once again dramatically underperformed a market which hugged the flatline courtesy of just a few stocks (even as most stocks posted substantial declines) and where "hedge fund hotels" such as Valeant suffered dramatic implosions, a handful of traders generated impressive returns for their investors and made billions by going against the herd.

With the oil price collapse accelerating (Brent just dropped below $40 for the first time since Feb 2009), the currencies of major oil-exporting nations - such as the Canadian dollar and Norwegian crown - are plunging...

The lack of fear in risky assets is another way of saying that risk premia have been low, or as we also like to put it, that complacency has been high. Not fully appreciative of this inherent risk, it seems many investors have refrained from rebalancing their portfolios, and bought the dips instead. We believe the Fed’s efforts to engineer an exit from its ultra-low monetary policy should get risk premia to rise once again, that if fear should come back to the market, volatility should rise, creating headwinds to ‘risky’ assets, including equities. That said, this isn’t an overnight process, as the ‘buy the dip’ mentality has taken years to be established. Conversely, it may take months, if not years, for investors to shift focus to capital preservation, i.e. to sell into rallies instead.

“Do not believe in anything simply because you have heard it. Do not believe in anything simply because it is spoken and rumored by many. Do not believe in anything because it is found written in your religious books. Do not believe in anything merely on the authority of your teachers and elders.” - Buddha

It is only logical that a day after the S&P500 surged, hitting Goldman's 2016 target of 2,100 more than a year early because the US manufacturing sector entered into a recession, that Europe would follow and when Eurostat reported an hour ago that European headline inflation of 0.1% missed expectations of a modest 0.2% increase (core rising 0.9% vs Exp. 1.1%), European stocks predictably surged not on any improvement to fundamentals of course, but simply because the EURUSD stumbled once more, sliding by 40 pips to a session low below the 1.06 level.

...and what will the implications be?

If it smells like a rat it probably is a rat, and so it is with respect to these deals by collusion between China and Western governments, and their chosen corporate protégés, whether on currency or trade or investment matters. This is all an exercise in some combination of crony capitalism (with cronies on both sides!) and diplomacy by stealth. The gains and gainers are deliberately kept opaque. The losers are much less evident than the gainers, on whichever side of the fence, but principle and practice tells us that the total losses are much larger than the gains.

Gold is up 3.1% in October and had even larger gains in other currencies. Entering gold’s “seasonal sweet spot” in November, December, January and February.

China's key index, the Shanghai Composite, was is up over 1%, or 40 points in early, to just under 3,500 - the highest in 2 months, a gain which however is well below Friday's pre-rate cut gain and if prior rate cut history is any indication, not to mention the weak reaction by commodities on Friday (continuing into today, where WTI turned green by the smallest of margins just seconds ago we would not be surprised to see China's stocks sliding back into the red very shortly as "sell the news" concerns return, and as the increasingly more addicted "markets" demand even more liquidity from central banks just to stay unchanged, let alone rise to new all time highs.

Correction continues, but it is only a correction.

Gains in the foreign currencies appears to be mostly short-covering rather than bottom-picking per se.  In bigger picture the dollar is consolidating its earlier gains.

The reaction function of officials takes on added importance in the week ahead.

The poor jobs report weighed on the dollar, but the greenback recovered as the session progressed.  It is not clear the jobs report was a game changer.  Stay tuned.  

The signs of deflation are now flashing all over the globe and the possibility of an associated financial crisis is now dangerously high over the next few months. Our preferred model for how things are going to unfold follows the Ka-Poom! Theory, which states that this epic debt bubble will ultimately burst first by deflation (the "Ka!") before then exploding (the "Poom!") in hyperinflation due to additional massive money printing efforts by frightened global central bankers acting in unison. First an inwards collapse, then an outwards explosion.

The global Bubble is bursting – hence financial conditions are tightening. Bubbles never provide a convenient time to tighten monetary policy. Best practices would require central bankers to tighten early before Bubble Dynamics take firm hold. Central bankers instead nurture and accommodate Bubble excess. It ensures a policy dead end -  the faltering global Bubble has progressed beyond the point where Fed rate policy has much impact.