If you think you're fighting the market, or the banks, or the Fed, you're dead wrong!
Importantly, while the "bias" of the market is to the upside, primarily due to the psychological momentum that "stocks are the only game in town," the mounting risks are clearly evident. From economic to earnings-related weakness, the "bullish underpinnings" are slowly being chipped away.
The sums in play are so staggering (an estimated $11 trillion in emerging market debts denominated in other currencies) that even the Fed won't be able to stop the meltdown.
If the Fed raises the short-term interest rates next month, it will do so only as a token. And it will continue doing so only as long as it has no negative effect on asset prices. Higher rates, in other words, will only happen as long as – and only insofar as – they are irrelevant. Should higher rates begin to do the work of tightening credit, as they are supposed to, the Fed will back off and fly to the aid of Wall Street and fellow bankers coast to coast. They have rigged the system to function on fraudulently low interest rates; now the fraud has gotten into its bones. The economy – especially the Wall Street economy – depends on cheap money. It will fall in a heap without it.
The odds of a December rate hike have slipped in recent days from over 70% intraday to 64.0% today as, while economists remain convinced that rates will rise in December, traders appear a little less confident. One of the most outspoken - having doubted The Fed (and questioned the economy's ability to handle even a 25bps rate hike) since Spring - DoubleLine Capital co-founder Jeffrey Gundlach said on Sunday that the Fed may hesitate to raise rates given rocky economic and financial conditions making it clear, as Reuters reports, "certainly [a Fed] No-Go is more likely than most people think. These markets are falling apart."
It is important to note that the current weakness of gold is primarily in dollar and sterling terms. For investors in Canada, Australia, New Zealand and the EU gold is once again acting as a hedge.
The torrid October, with its historic S&P500 point rally, is finally in the history books, and at least for a select group of hedge funds such as Glenview, Pershing Square and Greenlight and certainly their L.P.s, a very scary Halloween couldn't come fast enough, leading to losses between 15% and 20%. How did everyone else fare? Below, courtesy of Deutsche Bank's Jim Reid, is a summary of what worked in October (and YTD), and what didn't.
"It’s different this time works very well if you need to rationalize how to beat your return benchmark next quarter or win an election." The truth is that central banks cannot manipulate raw supply and demand the way they can financial assets.
Credit Suisse has released a reported titled "Client perspectives: lost and bearish" in which it lists the 12 bricks of the global wall of worry and adds that "this is the first time that we have come across so many people who say they are completely 'lost' in the current environment." So, to help out those who just have to be in this market yet share the same total confusion, here is BofA listing what the two key trading camps in the market: "the consensus" and "the contrarians" are doing.
We can however state with confidence that the bubble will eventually burst and that the greatest monetary policy experiment of the post WW2 era will fail – in all likelihood quite spectacularly. So we have every reason to remain long term bullish on gold and gold-related investments. Moreover, by looking closely at past lows of significance we have hopefully been able to provide a bit of a road map in case the recent low does indeed represent a major pivot point.
Correction continues, but it is only a correction.
Update: Rumor confirmed- *PANDORA WINS PRELIMINARY CRB DECISION, SUSQUEHANNA’S CLAPS SAYS (market disappointed)
Pandora is now up 11% on the day after twice being halted (on absolutely no news)...
Almost two weeks after we explained why any hope for a QQE boost by the BOJ is a myth, and that any increase in monetization will simply lead to a faster tapering and ultimately halt of Kuroda's bond purchases the market finally grasped this, when overnight the BOJ not only did not easy further as some - certainly the USDJPY - had expected, but kept its QE at the JPY80 trillion level and failed to offer any hints of further easing that many had hoped for, pushing the Nikkei down from up almost 400 point intraday to virtually unchanged and sending the USDJPY back under 120. JGBs also traded lower on concerns there may not be much more QE to frontrun.
The Fed’s zero interest rate policy has provided a subsidy to investors for the past 7 years. The lure of easy profits from cheap money was wildly attractive and readily accepted by investors. The Fed “put” gave investors great confidence that they could outperform their exceptionally low cost of capital. These implicit promises by central banks encouraged trillions of dollars into ‘carry trades’ and various forms of market speculation. Complacent investors maintain these trades, despite the Fed’s warning of a looming reduction in the subsidy, and despite a balance sheet expected to shrink in 2016. It has been a risk-chasing ‘game of chicken’ that is coming to an end. Changing conditions have skewed risk/reward to the downside. This is particularly true because financial assets prices are exceptionally expensive...There are warning signs and visible market stresses beyond those mentioned yesterday.
A sample of charts currently on our radar