Capital Markets

In a word, the official unemployment rate is now in what has been the macroeconomic end zone for the past 45 years. Might this suggest that the emergency is over and done? Self-evidently, the only “incoming” information that can matter between now and next Wednesday is the stock market averages.  If the Fed takes no action in September, it’s hard to imagine any economic or jobs report that wouldn’t support ZIRP or near-ZIRP in the minds of the money printers and the Wall Street gamblers they pleasure.

The fallout from the demise of the petrodollar is becoming impossible to sweep under the rug even as Gulf states are keen to downplay the severity of the budget crunch. For the Saudis, who need crude at $100 to plug a budget deficit that’s projected at a whopping 20% of GDP, the situation is becoming particularly acute. For Qatar, the situation isn't quite as dire but that doesn't mean the country's officials aren't acutely aware that the world is now scrutinizing the budgets of petrostates in the wake of collapsing crude and indeed on Monday, Qatari Finance Minister Ali Sherif al-Emadi was at pains to reassure the market.

For anyone who (still) believes that Canada has a diversified economy...

To summarize: in order to get the Saudis to "agree" to the Iran deal, all the US had to do is remind King Salman, that as long as oil is where it is to a big extent as a result of Saudi's own record oil production, crushing countless US oil corporations and leading to the biggest layoffs in Texas since the financial crisis, the country will urgently need access to yield-starved US debt investors. If in the process, US corporations can invest in Saudi Arabia (and use the resulting assets as further collateral against which to take out even more debt), while US military corporations sell billions in weapons and ammo to the Saudi army, so much the better.

"there is a sense that policy is being priced to “fail” rather than succeed... why should equities always rise in value? Why should debt holders be expected to afford their debt burden? There are plenty of alternative viable equilibria with SPX half its value, longevity liabilities in default and debt deflation in abundance. In those equilibria traditional QE ceases to work and the only road back to what we think is the current desired equilibrium is via true helicopter money via fiscal stimulus where there are no independent central banks.

More debt begets higher market value of equites which in turn improves the debt/equity ratio which gives the incentive to issue more debt ad infinitum. Or in a slightly simpler version, debt begets more debt.  We have seen the story before. In the shaded grey areas we highlight episodes when the virtuous relationship turns ferociously vicious. Remember, markets take the escalator up, but the elevator down. And the longer the escalator the further down the elevator goes.

The destruction of honest financial markets by the Fed and other central banks has created a class of hedge fund hot shots that are truly hard to take. At length, both the epic bond bubble and the monumental stock bubble so recklessly fueled by the Fed and the other central banks after September 2008 will burst in response to the deflationary tidal wave now cresting. Needless to say, that eventuality will be the death knell for the risk parity trade. It will cause the volatility seeking algos to eat their own portfolios alive. Leon Cooperman and his momo chasing compatriots will soon be praying for an event as mild as October 1987.

Thousands of investors with stop-loss orders on their ETFs saw those positions crushed in the first 30 minutes of trading last Monday, August 24th. Seeing a price blow right through your stop is perhaps the worst experience in all of investing because it seems like such a betrayal. “Hey, isn’t this what a smart investor is supposed to do? What do you mean there was no liquidity at my stop? What do you mean I got filled $5 below my stop? Wait… now the price is back above my stop! Is this for real?” Welcome to the Big Leagues of Investing Pain.

Early last month, we noted the irony inherent in the fact that Saudi Arabia, whose effort to bankrupt the US shale space has been complicated by the Fed's ZIRP, was set to opportunistically tap the debt market in an effort to offset a painful petrodollar reserve burn. As Bloomberg reports, Qatar is now doing the same, "raising money from local banks as the slump in oil prices buffets the finances of the Middle East’s largest oil and gas exporters."

There is no doubt that the Chinese economy is in a material economic slowdown. Policy officials’ aggressive actions and scare tactics against equity short sellers could continue to cause capital flight. However, this does not mean that China is going to sell large quantities of Treasuries. There is too much co-dependency between the US consumer and Chinese exporter. Destabilizing the US Treasury market with large sales would be tantamount to shooting themselves in the foot.

"China is imposing fresh controls to prevent too much money from leaving the country, in an effort to keep badly needed funds at home to battle a deepening slowdown in the world’s No. 2 economy." This is undsiputedly bad news for China, but Blythe Masters would be the first to admit, escalating Chinese capital controls would be just the thing bitcoin needs to surge, and surpass, it previous all time highs...

In today's SmartKnowledgeU_Vlog_005, we discuss why an intelligent investment strategy is impossible without incorporation of market & banker fraud analysis

"One manager at a major fund - part of the 'national team' of investors and brokerages charged with buying stocks to revive prices – said a friend, also an executive at a large fund, was recently summoned for a meeting with regulators, along with all other mutual funds that had engaged in short-selling activity. 'If I don't come back, look after my wife,' his friend told him, handing the manager his home telephone number."

Call it the rigor mortis of the robo-machines. About 430 days ago the S&P 500 crossed the 1973 mark for the first time - the same point where it settled today. In between there has been endless reflexive thrashing in the trading range highlighted below. As is evident, the stock averages have not “climbed” the proverbial wall of worry; they have jerked and twitched to a series of short-lived new highs, which have now been abandoned. Surely most thinking investors have left the casino by now. So what remains is chart driven trading programs, racing madly up, then down, then back up again - rinsing and repeating with ever more furious intensity.

Attempts to explain exactly what happened last Monday when prices for a whole host of ETFs and mutual funds diverged markedly from fair value abound and while there's no way to know for sure exactly what went wrong, FactSet has drawn some tentative conclusions after conducting a bit of "voodoo, tea-leaf reading."