Capital Markets

"The collapse in inflation expectations tells us that the market believes the central banks, despite their monetary profligacy, are failing to prevent the western economies from turning Japanese, and thus at risk of repeating their devastating slide into outright deflation in the 1990s."

The takeaway is that to the extent the overnight relief rally in the ringgit and then subsequently in other Asia EM "assets" was catalyzed by a "better" than expected read on the situation in China, the market may be making a mistake because just like Chinese GDP prints, the headline figure on the PBoC's store of FX reserves should be taken with a grain (or perhaps a whole shaker) of salt when it comes to drawing conclusions about the pace of outflows from the world's second most important economy.

"A smart politician can see that if somehow the consumption of middle-class householders keeps rising, if they can afford a new car every few years and the occasional exotic holiday, and best of all, a new house, they might pay less attention to their stagnant monthly paychecks. And one way to expand consumption, even while incomes stagnate, is to enhance access to credit."

"Central bank credibility is priceless and they desperately need to reclaim the intellectual high ground. The continuous public back-and-forth through speeches and attempts at expectation management just aren’t working."

"The world needs a reliable, sustainable supply. Best way to do it is to make sure that demand and supply should be equal, so there will not be fluctuation of price. The biggest problem for everybody, producer and consumer today, is fluctuation — the ups and downs."

Of all sectors the one which may pose the biggest surprise to investors is financials: it is here that Q3 (and Q4) earnings estimates have hardly budged, and as of September 30 are expected to rise by 10% compared to Q3 2014. This may prove to be a stretch according to Morgan Stanley whose Huw van Steenis is seeing nothing short of a bloodbath in banking revenues, with the traditionally strongest performer, Fixed Income, Currency and Commodity set for a tumble as much as 25%, to wit: "we think FICC may be down 10- 25% YoY (FX up, Rates sluggish, Credit soft), Equities marginally up but IBD also down 10-20%."

"There’s a lack of faith in monetary policy -- you’ve thrown the kitchen sink at it, you’ve cut rates to zero, you’re printing money -- and still inflation is lower. I think this is a dangerous situation if people perceive that it has the responsibility and it doesn’t have the tools."

With oil prices declining, are oil & gas investors and the financial system about to have another "whoops!" moment?

The US Federal Reserve orchestrated an artificial boom from 2001 to 2007 through artificially low interest rates and has resumed doing so once again. Entrepreneurs operating under faulty market signals created by the Federal Reserve malinvested hundreds of billions of dollars into capital intensive projects primarily in the housing sector. We paid for our boom with millions of destroyed jobs, wasted labor, and wasted resources. The Chinese Central Bank learned nothing from the Fed’s catastrophic experiment. They will reap the same rewards.

How many of us are bored to tears with the Fed’s Hamlet act on raising rates, and yet have been staring at this debate for so long that we have convinced ourselves that we have a meaningful view on what will transpire, even though it’s a decision where we have zero investing edge and unknowable risk/reward odds. The hardest thing in the world for talented people is to avoid turning a low edge and odds opportunity into an unreasonably high conviction bet simply because we want it so badly and have analyzed the situation so smartly. In both poker and investing, we brutally overestimate the edge and odds associated with merely ordinary opportunities once we’ve been forced by circumstances to sit on our hands for a while. Investment discipline suffers under the weight of dullness and low conviction in at least four distinct ways here in the Golden Age of the Central Banker...

But the question remains whether financial condition concern should manifest itself through unemployment and inflation dual mandate forecasts or be a separate consideration all together? To me, the danger in the latter is it turns central bankers into traders and market timers and that is something they are unlikely to have trained for

Courtesy of JPM we find something curious: it is no longer the Fed, nor its capital markets proxy, Citadel, nor even the banks or hedge funds that are the primary sellers of volatility. It is retail investors themselves!

Today's most popular hedge fund strategy among institutional investors globally is "Alternative Global Macro Funds". Also known as a “go anywhere” investment style, active managers employ opportunistic trading tactics across asset classes, financial instruments, and geographic regions. Like many liquid alts, global macro funds grew rapidly following the financial crisis as investors looked for strategies that could diversify their portfolios in the midst of volatility in the global marketplace and historically high sector correlations against the S&P 500, thereby improving their risk-return profiles. Ultimately, success in this classification resides in selecting the right active manager given the strategy’s wide dispersion of returns.

Over the past few years no institution has had more consequences beholden to their words than the Federal Reserve. So much so one could reasonably argue in response to prevailing circumstances their communiques overshadowed most others; including presidents and other leaders. The problem today is; in their effort to bring more clarity via press-ers, and more as to what might be transpiring behind the doors at the Eccles building, they’ve now communicated more confusion in the last two weeks nullifying all previous efforts. In our eyes it seems to be working exactly the same as its other policy outcomes: adding confusion, uncertainty, and having the exact opposite of intended results.