Lehman

As the cost of insuring equity market risk (VIX) spiked higher this morning (having been broken for minutes after the open), catching up to the cost of insuring credit market risk (CDX HY) which has been screaming dead canaries for weeks, a funny thing happened to the volatility of volatility. VVIX (the estimate of the uncertainty of the cost of insuring equity risk) exploded to a level never seen before - as various ETF/hedging strategies imploded - a level twice as high as during the Lehman crisis...

The last three times inflation expectations tumbled this low, the Fed was about to launch QE1, QE2, Operation Twist and QE3.

Three weeks ago, "something just snapped." Now, it is getting worse by the day.

The following story is guaranteed to make you sick. Once again, we’re shown that following trillions in taxpayer funded bailouts and backstops, TBTF Wall Street banks immediately went ahead and focused all their attention obtaining loopholes in order to transfer risk and make billions upon billions of dollars in the financial matrix, as opposed to adding any benefit whatsoever to society.

Imagine that the Food and Drug Administration (FDA) was a corporation, with its shares owned by the nation's major pharmaceutical companies. How would you feel about the regulation of medications?  Whose interests would this corporation be serving? Or suppose that major oil companies appointed a small committee to periodically announce the price of a barrel of crude in the United States. How would that impact you at the gasoline pump? Such hypotheticals would strike the majority of Americans as completely absurd, but it's exactly how our banking system operates.

It's amazing to think that just earlier this week VIX traded at 13: as of this moment it is up nearly 100% since Tuesday (and all those 'sure thing' shorters of VXX are about to get some very unpleasant margin calls). But what would be far scarier is if whoever is suddenly offering a nickel for the VIX Sept 50 calls actually knows something.

"I have learnt from history that it is very hard working out what the trigger is. In 2008, it was the collapse of Lehman Brothers that triggered a credit crunch. Now it could be a major event in Turkey or a default of the Brazilian oil company Petrobras or some event in Malaysia. But if I have to pick one I would say it is Turkey introducing capital controls. Such controls will mean that Turkey will not pay back principals amounting to 400 Bio. $ and the interests on it." - Russell Napier

At this point, it almost feels like kicking someone while he’s down. Jeb Bush can’t even stand up to Donald Trump, let alone his own growing series of scandals.

• $1 trillion in Emerging Market outflows in the past 13 months (FT)
• German lawmakers back third Greek bailout (Reuters)
• Dutch government faces test in "junkie" Greece debate (Reuters)
• China c.bank offers selected banks medium term lending facility (Reuters)
• Another "expert network" busted: Promontory settles over StanChart probe (FT)
• Angola to Ship Most Crude in Four Years to Meet Asian Demand (BBG)
• Hackers dump data online from cheating website Ashley Madison (Reuters)
• Yuan’s Devaluation Brings Losses for Some (WSJ)

The US and world economies are frauds that are coming unraveled. The Greek bailout is the most recent example of “kick the can down the road” solutions. The US housing bubble was an attempt to cover up/recover from the dot-com bust. Now the US is in a financial bubble engineered to recover from the housing bubble debacle. Soon this bubble will burst. Only the date is unknown.

As it turns out it is not just in the US that the "smart money" is bailing out as fast as it can: according to Bloomberg, the wealthiest investors in China’s stock market are also scrambling for the exits. To wit: "The number of traders with more than 10 million yuan ($1.6 million) of shares in their accounts shrank by 28 percent in July, even as those with less than 100,000 yuan rose by 8 percent, according to the nation’s clearing agency. While some of the drop is explained by falling market values, CLSA Ltd. says China’s rich have taken advantage of state buying to cash out after the nation’s record-long bull market peaked in June."

Just two days ago we warned of the dramatic disconnect between equity insurance and credit insurance markets - at levels last seen before Bear Stearns collapse. As the Yuan devaluation shuddered EURCNH carry traders and battered European assets, US equity markets stumbled onwards and upwards, impregnable in their fortitude with The Fed at their back no matter what. However, US corporate bond markets were a bloodbath...

Central bankers are beginning to see what it has been like for their colleagues in Japan, where for twenty-five years with zero interest rates nothing tried seems to work. Welcome to Keynes's world of euthanized savers and state-sponsored funding. Welcome to the world of ZIRP zombies.