Market Crash

There are times when some people bite their own nose of just to spite their face. According to a report that has just been published by the Chartered Institute of Personnel and Development (CIPD), the people working in the financial sector in 120 different countries in the world think in the overriding majority of cases that they are paid far too much for what they do. Were they serious?

If we are to believe what they said, then this is the year. 2013! It’s going to happen.. The stock-market is ready to crash yet again this year and this time it’s going to be a big one. Let’s take a look at what was said, when, why and by whom.

Given that ALL of the stock market gains since 2008 were based on Fed money printing… what do you think will happen when the Fed tries to taper QE?

Despite the mainstream media's desperate need to play down any and every potential indication that all is not well with the "buy the dip" mentality, there is no hiding the fact that volatility is back and nowhere is that more evident in the guts of the Hindenburg Omen calculation. Just as we saw in October 2007, when NYSE margin was just as extended, credit spreads were just as compressed (and today's extreme range), and valuations were just as high, the Hindenburg Omen signals are starting to cluster (in a confirming manner). First on April 15th, second on Friday, and now third today marks the first such cluster since Bernanke saved the day in August 2010. Perhaps for those not running for the hills, UBS' Art Cashin's views are noteworthy, "proponents of the Omen will tell you there has never been a crash without the presence of the Hindenburg Omen. Sounds pretty compelling, indeed. Skeptics, however, note that every occurrence of the Hindenburg Omen has not been accompanied by a crash. In fact, three out of four times, there is no crash. Sounds a lot less compelling now. So, an omen is a caution – not a cause."

The store of wealth demand is not just from Chinese ‘aunties.’ There remains an under estimation of the demand coming from wealthy Chinese and high net worth and ultra high net worth individuals (HNWs and UHNWs). 

This has not been commented upon or analysed but we have direct experience of wealthy Chinese people looking to store gold in Hong Kong and Switzerland, as have other storage providers.

Now that the BOJ's "interventionalism" in the capital markets is increasingly losing steam, as the soaring realized volatility in equity and bond markets squarely puts into question its credibility and its ability to enforce its core mandate (which, according to the Bank of Japan Act "states that the Bank's monetary policy should be aimed at achieving price stability, thereby contributing to the sound development of the national economy) Japan is left with one wildcard: the Government Pension Investment Fund (GPIF), which as of December 31 held some ¥111.9 trillion in assets, of which ¥67.3 trillion, or 60.1% in Japanese Government Bonds. Perhaps more importantly, the GPIF also held "just" ¥14.5 trillion in domestic stocks, or 12.9% of total, far less than the minimum allocation to bonds (current floor of 59%).  It is this massive potential buying dry powder that has led to numerous hints in the press (first in Bloomberg in February, then in Reuters last week, and then in the Japanese Nikkei this morning all of which have been intended to serve as a - brief - risk-on catalyst) that a capital reallocation in the GPIF is imminent to allow for much more domestic equity buying, now that the threat of the BOJ's open-ended QE is barely sufficient to avoid a bear market crash in the Nikkei in under two weeks.

There are some problems, however.

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.

About once or twice a month for the past few years, it's been a steady ritual of mine to conduct a Google search for the words "all-time high" and "all-time low". The results provide an interesting big picture perspective on what's happening in the world.

The wild ride in Japan's bond market is a prelude to what will happen in other developed markets.

"QE detractors... see something quite different. They see QE as not responding to the collapse in the money multiplier but to some extent causing it. In this account QE – and the flatter yield curves that have resulted from it – has itself broken the monetary transmission mechanism, resulting in central banks pushing ever more liquidity on a limper and limper string. In this view, it is not inflation that’s at risk from QE, but rather, the health of the financial system. In this view, instead of central banks waiting for the money multiplier to rebound to old normal levels before QE is tapered or ended, central banks must taper or end QE first to induce the money multiplier and bank lending to increase."

However, the best argument why the type of Quantitative Easing imposed by Ben Bernanke, and the associated "necessary and sufficient" condition to exit this greatest of all monetary experiments, or eventually allow Ben and Kuroda to taper QE, i.e., the "great rotation" from government bonds into stocks (because otherwise both the Fed and the BOJ will be stuck monetizing and monetizing and monetizing until one day, soon, they own all government bonds), will never work in Japan is a simple one. And quite visual...

With the long-weekend rapidly approaching, ConvergEx's Nick Colas takes a trip to the Hamptons, but through a time warp back to the Great Depression.  Examining the social registers (colloquially called the “Blue Book”) from 1927 and 1940, he finds that “The great and the good” of the day had real trouble holding their status during the social upheavals of the late 1920s and 1930s.  Only 32% of the families appearing in the Blue Book in 1927 were still there in 1940.  The ratio was even worse, at 29%, for the ultra-elite who belonged to the Meadow Club in Southampton.  It’s too early to tell what the last few volatile years will do to the upper crust of East Coast society, of course.  Or what may still be in store.  But when the hedgie in the Bentley cuts you off on Route 27 this weekend, take some solace in knowing he may not be there in a few years. “Yes, the wealthy are different. Every year there are different wealthy people.”

What was that single that soul singer Otis Clay brought out in 1980? Oh yeah, ‘The only way is up’! Well, if ever there were a more fitting signature tune these days for CEOs in the USA, then that’s what I’d be betting (my bottom) dollar on!

In all the hoopla over Japan's stock market crash and China's PMI miss last night, the biggest news of the day was largely ignored: copper, and the fact that copper's ubiquitous arbitrage and rehypothecation role in China's economy through the use of Chinese Copper Financing Deals (CCFD) is coming to an end.

Yesterday afternoon, following the rout in the US stock market, we made a spurious preview of the true main event: "So selloff in JGBs tonight?" We had no idea how right we would be because the second Japan opened, its bond futures market was halted on a circuit breaker as the 10 Year bond plunged to their lowest level since early 2012, hitting 1% and leading to massive Mark to Market losses for Japanese banks, as we also warned would happen. That was just the beginning, and suddenly the realization crept in that the plunging yen at this point is not only negative for banks, but for the entire stock market, leading to what until that point was a solid up session for the Nikkei to the first rumblings of a ris-off. Shortly thereafter we got the distraction of the Chinese Mfg PMI which dropped into contraction territory for the first time since late 2012, and which set the mood decidedly risk-offish, although the real catalyst may have been a report on copper from Goldman's Roger Yan (which we will cover in depth shortly) and whose implications may be stunning and devastating and may have just popped the Chinese credit bubble (oh, btw, short copper). And then all hell broke loose, with the Nikkei first rising solidly and then something snapping loud and clear, and sending the index crashing a massive 1,143 an intraday swing of 9% high to low, leading to an over 200 pips move lower in the USDJPY, and leading to a global risk off across the world.