Black Swan

While the entire financial world is hanging on to every Mario Draghi word in hope Europe finally improves the market's (if not the economy's) "fundamentals" to new record highs, and joins the rest of the "developed" world's central banks in injecting trillions of liquidity into the Div/0 P/E stocks "whatever it takes" (because in a world where only multiple expansion is left, the ECB is the last wildcard at least until the US is dragged right back into the global recession and the Fed admits any pipe dreams of a rate hike in 2015 were just that), something far more different may be taking place behind the scenes. According to at least one journalist, the Fiscal Times' Patrick Smith, "Draghi appears set to leave Frankfurt and return to his native Italy the first chance he gets."

Oil is not just something that is refined into fuel--it is capital, collateral, debt and risk. In other words, it is intrinsically financial. Simply put, the sharp drop in oil revenues has knocked over a line of financial dominoes whose end is not yet in sight.

One of our old rules of trading is that whenever a major asset class, index, or other benchmark has a sudden, rapid move in price, something blows up. Sky high. That’s because people get used to regimes. They get used to a certain state of affairs with a lack of volatility. They become complacent. Maybe they stop hedging. Maybe they allow themselves to have unbounded downside risk. Maybe they start gambling. So what's going to blow up?

Underneath the Propaganda, the Economy Is In BAD SHAPE …

With oil prices plunging to 5-year lows, perhaps it is time to consider the cheapness of betting on the other oil black swan...

The price drop is a head-fake: it doesn't usher in a new era of permanently cheap oil. Rather, it unleashes dynamics that impair supply on multiple levels: geophysical, geopolitical, demographic and financial.

Is this weakened system able to absorb a spike in one-directional volume? Will it step up and keep order? Or will it back off and allow volatility to roar?

All the analysts chortling over the "equivalent of a tax break" for consumers are about to be buried by an avalanche of defaults and crushing losses as the chickens of financializing oil come home to roost.

Have a fractal trading day...

In some respects we’re in danger of running out of appropriate descriptive superlatives for the current bout of “irrational exuberance” (we’re open for suggestions). The current asset bubble is in many respects reminiscent of the late 1990s tech bubble, but it also differs from it in a number of ways. One of the major differences is that the exuberance recorded in the data is largely confined to professional investors, while the broader public is still licking its wounds from the demise of the previous two asset bubbles and remains largely disengaged (although this has actually changed a bit this year). Monetary pumping merely redistributes existing real wealth (no additional wealth can be created by money printing) and falsifies economic calculation. This in turn distorts the economy’s production structure and leads to capital consumption, thus the foundation of real wealth that allows the policy to seemingly “work” is consistently undermined. At some point, the economy’s pool of real funding will be in grave trouble (in fact, there are a number of signs that this is already the case). Widespread recognition of such a development can lead to the demise of an asset bubble as well.

It's not a bubble. Until it is...

While OPEC has been mostly irrelevant in the past 5 years as a result of Saudi Arabia's recurring cartel-busting moves, which have seen the oil exporter frequently align with the US instead of with its OPEC "peers", and thanks to central banks flooding the market with liquidity helping crude prices remain high regardless of where actual global spot or future demand was, this Thanksgiving traders will be periodically resurfacing from a Tryptophan coma and refreshing their favorite headline news service for updates from Vienna, where a failure by OPEC to implement a significant output cut could send oil prices could plunging to $60 a barrel according to Reuters citing "market players" say.

The consensus - perhaps until today, judging by the performance of Japanese stocks relative to the Yen - is that Abe calling a snap election is bullish, enabling him to re-confirm his mandate to push ahead with uber-dovish devastation of the Japanese economy. However, what few are willing to consider is... what happens if the world's greatest policy madman does not get elected? As the following chart shows, with only 4.4% of Japanese households believing they are better off in the past year, perhaps an unelected Abe is the black swan no one is considering currently...