The biggest bubble is in investors' belief that there is no risk.
To many institutional investors, buying the Russell 2000 is merely the highly levered bet with which the bulk of institutions (recall that almost all hedge funds, and a majority of mutual funds, are underperforming the S&P for a 5th consecutive year) seek to make up for losses in their portfolios by chasing high (and even higher with leverage) beta. Which is why as the next chart below shows, in a furious scramble to catch up by year end, the institutional Russell net futures (i.e. levered) positioning just hit a record high: the biggest investors are now all-in the smallest names. So is the massively overbought small cap sector due for a correction? With these manipulated, centrally-planned markets, nobody has any idea. However, for those who have once again bet all in, which just happens to be most plain vanilla dumb money, it may be time to reevaluate.
Already, the Chinese have stopped accumulating dollars - preferring safer currencies, infrastructure, hard assets and commodities and of course gold. Even a small amount of Chinese selling could lead to substantial dollar weakness and much higher bond yields plummeting the U.S. into another recession.
Hong Kong's richest are busy offloading local assets which institutions are happy to buy. It's exhibit A why institutional money often represents dumb money.
Yesterday, in the aftermath of first Apollo then Blackstone, it was the turn of that third mega Private Equity shop, Fortress, to "say that now is the time to exit investments as stocks rally and interest rates start to rise. "This is a better time for selling our existing investments than making new investments," Pete Briger, who oversee the New York-based firm's $12.5 billion business said on a call with investors yesterday. "There’s been more uncertainty that’s been fed into the markets." Ironically, this is precisely the opposite of what one will hear on the mainstream media, but such is life: for every smart money seller, there must be a willing sheep led to the slaughter.
China's GDP number should be in the 6.7% range for the quarter. This is the black swan ...
Gold miners hedged by selling their production forward during the bear market. Later, when the price was rising, they bought back their hedges at great expense (Barick alone wasted $6B). There is a better way.
Bonds, shares plus gold and silver fell sharply around the world this morning after the U.S. Federal Reserve again suggested an end to their easy money policies. Data also showed China's economy slowing down amid growing concerns that a credit crunch in China is worsening.
This is no time to be complacent. Massive economic problems are erupting all over the globe, but most people seem to believe that everything is going to be just fine. In fact, a whole bunch of recent polls and surveys show that the American people are starting to feel much better about how the U.S. economy is performing. Unfortunately, the false prosperity that we are currently enjoying is not going to last much longer. Unfortunately, the majority appear to be purposely ignoring the economic horror that is breaking out all over the globe.
Just three weeks ago we noted Apollo Group's Leon Black's comment that his firm was "selling everything not nailed down," and that he sees "the market is pricey... in our view, priced for perfection." It seems he is not alone in the 'buy-low-sell-high' crowd. If wonderful times are ahead for U.S. financial markets, then why is so much of the smart money heading for the exits? Does it make sense for insiders to be getting out of stocks and real estate if prices are just going to continue to go up?
Those who recall about the implicit housing subsidy we discussed when we coined the term "foreclosure stuffing" which is merely the well-planned systemic bottleneck to clearing foreclosed properties already in the system, and thus artificially reduce housing supply will be happy to learn that according to RealtyTrac the average time for a foreclosed property to sell just hit a record at nearly 400 days across the entire nation.
Investors borrowed $384.4 billion in April, a 1.3% gain from the previous month and a 29% rise from the same month last year. This is an all-time record for margin debt and it exceeds the previous high mark set in June 2007. Some may see this as an increased sign of investor confidence but we are not among them. To me this is a giant red warning flag blowing in the financial breeze indicating the leveraging of dumb money making very risky bets. We are once again in the crack house of substance abuse! In each age the gods of the marketplace show up once more. The packaging may be different but the powder is the same. Each dealer uses the same line, "Nothing addictive here."
While the extreme volatility associated with the 8amET hour in Gold and Silver trading is no surprise, the strength of the USD (helped by JPY weakness along with pretty much every other major) is slamming WTI crude, Gold, and Silver lower this morning. The Dollar Index move in the last two days is the largest in 16 months; Gold's 2-day drop is the biggest (ex-the crash) in 10 months. "If you consider what is happening in the currency markets and then factor in the demand for the physical delivery of gold there should be some additional note of caution in your evaluation of the markets. Smart money always moves first while dumb money lingers and is baited by those that take advantage of it. A sniff of Fear has returned to the marketplace and Greed may be in the process of giving way."
If there is any market that demonstrates the complete and total misallocation of capital that results from Banana Ben Bernanke’s money printing and artificially low interest rate policy, it the latest phony American housing bubble. With a record numbers of citizens on the food stamp electronic breadline, with unemployment stubbornly high no matter what data you use, billionaire financial oligarchs are running around bidding up “homes for rent” and pricing out the random average person that actually has the capacity or desire to bid. What follows below demonstrates the degree of insanity that has now been unleashed upon the streets of Las Vegas - in their QE-forever induced delirium, homebuilders have gone Chinese and in Las Vegas "permits for new home construction are up 50 percent, twice the national average."
Q. What is your view on gold?
Soros: That’s a complicated question. It has disappointed the public, because it is meant to be the ultimate safe haven. But when the euro was close to collapsing in the last year, actually gold went down, because if people needed to sell something, they could sell gold. Therefore they sold gold. So gold went down together with everything else. Gold was destroyed as a safe haven, proved to be unsafe. Because of the disappointment, most people are reducing their holdings of gold. But the central banks will continue to buy them, so I don’t expect gold to go down. If you have the prospect of a crisis, you will have occasional flurries or jumps. So gold is very volatile on a day-to-day basis, no trend on a longer-term basis.