- Hilsenrath: Fed Appears to Hold Line on Rate Plan (WSJ)
- Europe, Asia stocks set for worst monthly drop in three years on China, Fed (Reuters)
- Beijing abandons large-scale share purchases (FT), if only for a few hours
- China’s Next Problem: Paying for Its Stock-Market Bailout (WSJ)
- Crises Put First Dents in Xi Jinping’s Power (WSJ)
- Man Group’s China Chief Said to Assist Police in Probe (BBG)
In the midst of turmoil among asset classes, investors tend to make irrational decisions, such as panicking and liquidating at inopportune times. Nobel Prize-winning Psychologist Daniel Kahneman helps explain ill-conceived reactions to the market with his concept of loss aversion. That’s the fear and feelings of loss surpass the joy one may receive from a similarly sized potential gain. In order to frame this discussion of volatility, we dug up old surveys of institutional and individual investors that recorded their responses to the 1987 market crash
Americans associate the morning with “Time to trade equities”. They hear news – in the case of the last few days, bad news from overseas – first thing in the morning. By the time the market opens, they have made their decisions and entered their orders. About half as many will check in around the close to see how things turned out, but for many the next piece of market news won’t hit their mental “Screen” until 20 hours or so later.
“The way to wealth in a bull market is debt. The way to oblivion in a bear market is also debt, and nobody rings a bell.” – James Grant
“Maybe this isn’t a great indication of the state of the economy.”
A new academic study from researchers at Stanford, UCLA, and the Arison School of Business in Israel suggests that ETFs are contributing to a lack of liquidity for the stocks they hold. Essentially, the argument is that increased ETF ownership leads to wider bid-asks, less analyst coverage, and higher correlations with broad market moves.
In "historic step," Norway may be forced to tap into its $875 billion sovereign wealth fund to help make ends meet in the face of persistently low crude prices.
Earlier today, Bloomberg TV blasted an amusing snippet from an article that was based on some deep revelations about what is happening in the bond market: It says: "China sells $180 billion of US Treasuries but no one notices." Which is ironic considering the following ZH headlines:
May 18: Revealing The Identity Of The Mystery "Belgian" Buyer Of US Treasurys
June 15: China Dumps Record $120 Billion In US Treasurys In Two Month Via Belgium
July 17: China Dumps Record $143 Billion In US Treasurys In Three Months Via Belgium
and of course July 22: "China's Record Dumping Of US Treasuries Leaves Goldman Speechless"
"Increasingly concerned about the markets, I’ve taken more aggressive action than in 2007, the last time I soured on the equity markets. Let me explain why and what I’m doing to try to profit from what may lie ahead."
More and more insiders are warning of a potential systemic event.
"Defendants used electronic chatrooms, instant messaging, and other electronic and telephonic methods to exchange confidential customer information, coordinate trading strategies. Traders at some of these primary dealers talked with counterparts at other banks via online chatrooms and swapped gossip."
In the middle of the biggest criminal scandal involving the Fed, but also an FT-owned expert network (an FT which until today was owned by Pearson), the expert network known as Medley Global Advisors just changed its owners, from the FT/Pearson to Japan's Nikkei, in a transaction advised by Rothschild for the buyer and Goldman, Evercore and JPM for the seller.
There could be trouble ahead....
With a central bank following an asset inflation policy the flows are following performance. The Fed has unknowingly created winners and losers in the asset management business on a massive scale. The asset inflation environment also creates a volatility vacuum. Volatility is necessary to keep markets honest and provide long term stability. An investor must truly believe in their investment and must have performed significant due diligence to have the confidence to ride out the volatility. The market that is not kept honest is the one where reckless behavior proliferates, because it works and is profitable. The most prominent example is the massive carry trading that occurred during the last tightening cycle.