The market is a giant living organism of human behavior and trying to predict what the market will do in two weeks, much less twelve months from now, is pure folly. However, by looking at the price trends, and using some statistical analysis, we can garner a view of the direction that the “herd” is most likely heading. There is a fascinating analogy in nature, called murmuration, that very much resembles the “herd mentality” in the markets.
The American miracle idea of energy independence is fully reliant on a shale patch that went over $100 billion deeper into debt every year for years running just to produce that not-so-miracle. Take away 40%+ of what revenue it did take in, and there is no independence left. All that’s left is fracking fluids in your drinking water, and a few trillion in debt that the Big Kahuna lenders will seek to unload upon the real economy.
Our nations (Western nations) are rapidly going bankrupt. This is not a suggestion or an assertion. It is a simple fact of arithmetic, for anyone capable of operating a calculator, and who can understand the concept of “compound interest”. Indeed, the bankruptcy of these already-insolvent regimes has only been delayed via permanently (fraudulently) keeping interest rates frozen at near-zero – to minimize their already gigantic interest payments.
To put the events of October 15 in context, here is a 1-minute clip courtesy of Nanex showing the daily history bond market liquidity starting with 2008 and going through November 2014.
A great many will rue the day when they bought into: “Pigs can fly,” “The markets are at these levels based on sound fundamentals,” “The Fed’s got their back,” and “Ebola is contained.” It is astounding just how far behind the curve many are finding themselves. Suddenly, almost everyone we meet is either doe-eyed, or worse, portraying signs of a deer stuck in the headlights. Today, everything is changing because the great masses whom many relate to as “the herd mentality” is now showing signs of great nervousness. And once this group gets spooked, it's over.
There is nothing like the release of secret tape recordings to clarify an inconclusive debate. Actually, what the tapes really show is that the Fed’s latest policy contraption - macro-prudential regulation through a financial stability committee - is just a useless exercise in CYA. Macro-pru is an impossible delusion that should not be taken seriously be sensible adults. It is not, as Janet Yellen insists, a supplementary tool to contain and remediate the unintended consequence - that is, excessive financial speculation - of the Fed’s primary drive to achieve full employment and fill the GDP bathtub to the very brim of its potential. Instead, rampant speculation, excessive leverage, phony liquidity and massive financial instability are the only real result of current Fed policy.
Gold Bears Have Wind at their Backs as Technicals likely to fail to downside over Near-Term.
David Rosenberg, in one of his recent missives, wrote: "...based on the current trend in the LEI and the level of the diffusion index, history suggests that the next recession is at least four years away." While anything is certainly possible, it is highly unlikely that the current economic environment is supportive of another four years of a "struggle along" economy. Given the artificial supports during recent years, the extreme extension in assets prices, record levels of margin debt and the chase for yield in "junk credits," it is highly possible that the next recessionary decline could be much larger than the historical average.
While it remains to be seen if Obama can put an end to what has been the hottest M&A trend in 2014, namely engaging in tax redomiciling "inversion" deals, it is clear that the C-suite is delighted to continue pursuing deals which minimize the cash outflows to the US Treasury, with some 52 redomiciling deals done since 1983, 22 taking place since 2009 and another 10 being finalized and many more in the works. But what is the track record of tax inversions when it comes to the bottom line, namely investor returns. According to a Reuters calculation, "companies that have done such "inversion" deals have failed to produce above-average returns for investors."
Those people piling into bonds on bad retail sales numbers based upon antiquated retail correlations are in for one big surprise.
The promises of the master, used as currency to compel and reward our willing participation, can no longer be fulfilled since the economic system that is the ultimate delivery vehicle for those promises is about to sink beneath the waves.
The inevitable shuttering of at least 3 billion square feet of retail space is a certainty. The aging demographics of the U.S. population, dire economic situation of both young and old, and sheer lunacy of the retail expansion since 2000, guarantee a future of ghost malls, decaying weed infested empty parking lots, retailer bankruptcies, real estate developer bankruptcies, massive loan losses for the banking industry, and the loss of millions of retail jobs. Since we always look for a silver lining in a black cloud, we predict a bright future for the SPACE AVAILABLE and GOING OUT OF BUSINESS sign making companies.
First we deny, then we deny we ever denied, and then we forget we were ever in denial. Man is an extremely efficient organic computing machine, so this is just kid’s stuff we learn right out of the crib.
A look back at the headlines and market movements of the last month provides some useful color for why markets are weak and why now... As Scotiabank's Guy Haselmann warned early last month, there is a threshold point during the Fed’s attempt to normalize policy where the tide reverses and investors join in a sell-off in a race to avoid being left behind. This is why it's called the greater fool theory.
This week, markets have been driven by position squaring and P&L management. There have been extraordinary price movements in various commodities and currencies due to extreme weather, the decline in the Chinese Renminbi, capital flight, Fed taper, and geo-politics. Such P&L volatility is causing decisions to be made in other, seemingly uncorrelated markets, due to the need to manage P&L risk. These movements are of elevated concern because the investment climate of recent years has created a herd mentality. Now that global stimulus is being withdrawn, those trades are under attack and a mini-contagion is unfolding. "The apt analogy is a playground see-saw where investors (and Fed) have a seat firmly on the ground and risk assets dangling in the air... The Fed would like to balance the see-saw, but history suggests the chances are infinitesimal.”