Market Crash

As most of Asia is on vacation for the lunar new year, UBS' Art Cashin is growing more and more concerned with the excessively bullish tone. While not screaming for an outright short, the venerable volatility-handler fears many factors he sees in the market currently from sentiment to vauation, and a lack of 'rotation', and while the January Effect and the Super-Bowl are in the bulls favor, he gently reminds that the 'Year of the Snake' has typically not been a good one for markets or man...

We now live in an entirely fabricated fiscal environment.  Every aspect of it is filtered, muddled, molded, and manipulated before our eyes ever get to study the stats.  The metaphor may be overused, but our economic system has become an absolute “matrix”.  All that we see and hear has been homogenized and all truth has been sterilized away.  There is nothing to investigate anymore.  It is like awaking in the middle of a vast and hallucinatory live action theater production, complete with performers, props, and sound effects, all designed to confuse us and do us harm.  In the end, trying to make sense of the illusion is a waste of time.  All we can do is look for the exits…

Bob Janjuah may nt have rvrted to his RBS wrtng style of yore, yet, but the New Nrml appears to also fnly b getting to 1 of our fvrte strategists, who has finally gone bold, ALL CAPS. "IF I AM WRONG AND WE TRULY HAVE FOUND ECONOMIC AND MARKET NIRVANA SIMPLY THROUGH THE CENTRAL BANK PRINTING PRESS AND ENORMOUS INDEBTEDNESS, THEN I WILL HAVE NO HESITATION IN ENJOYING THE FUTURE, THINKING ABOUT THE FUNNY MONEY MIRACLE, NEVER NEEDING TO WORRY ABOUT ECONOMIES OR GROWTH EVER AGAIN (all hints of sarcasm entirely intentional)....Real wealth can only be created by innovation and hard work in the private sector, with policymakers, the financial sector and financial markets there to aid and encourage/incentivise. Real wealth is not created by the printing press and by excessive government spending. We simply cannot turn wine into water – after all, if it were that easy, why have we not done this before (with any lasting success, as opposed to abject failure, for which there is plenty of evidence)! "

It was rumored that the 2008 crisis hit the Queen of England particularly hard – over USD 40 million in stock market losses. This experience must have jilted something, as when The Queen was visiting the esteemed London School of Economics she asked the professor a rather “un-queen” like question – why did economists fail to predict the biggest global recession since the Great Depression? Speaking on behalf of economists, investment managers and mutual fund sales people everywhere, the professor responded that “at every stage, someone was relying on somebody else and everyone thought they were doing the right thing.“ In short, no one could have predicted the 2008 crash. Meanwhile, in the parallel universe called America, Ben Bernanke January 2013 The Queen was selling everyone the exact same story. If the famed London School of Economics and the Chairman and full committee of the US Federal Reserve were unable to predict the crisis, what hope does the World have with predicting future crises? In actual truth, and despite claims by the US Federal Reserve and the London School of Economics, many people accurately predicted the collapse of the US housing market and the subsequent collapse of the stock market. Fortunately, it doesn’t have to be that way. Accepting, understanding, and embracing the fact that today there are plenty of investment professionals who are willing to view the World objectively should be comforting.

Some time ago when we looked at the the performance of the world's largest and best returning hedge fund, Ray Dalio's Bridgewater, it had some $138 billion in assets. This number subsequently rose by $4 billion to $142 billion a week ago, however one thing remained the same: on a dollar for dollar basis, it is still the best performing and largest hedge fund of the past 20 years, and one which also has a remarkably low standard deviation of returns to boast. This is known to most people. What is less known, however, is that the two funds that comprise the entity known as "Bridgewater" serve two distinct purposes: while the Pure Alpha fund is, as its name implies, a chaser of alpha, or the 'tactical', active return component of an investment, the All Weather fund has a simple "beta isolate and capture" premise, and seeks to generate a modestly better return than the market using a mixture of equity and bonds investments and leverage. Ironically, as we foretold back in 2009, in the age of ZIRP, virtually every "actively managed" hedge fund would soon become not more than a massively levered beta chaser however charging an "alpha" fund's 2 and 20 fee structure. At least Ray Dalio is honest about where the return comes from without hiding behind meaningless concepts and lugubrious econospeak drollery. Courtesy of "The All Weather Story: How Bridgewater created the All Weather investment strategy, the foundation of the "risk parity" movement" everyone else can learn that answer too.

Currency wars have captured the imagination of many. However, the modern history of the foreign exchange market demonstrates that is has always been an arena in which nation-states compete. Typically central banks want the currency's exchange rate to affirm not contradict monetary policy. The synchronized crisis and easier monetary policy makes it appear that nearly ever one wants a weak currency. Yet most officials are on low rungs of the intervention escalation ladder. Moreover, there is no sign of it spilling over to a trade war. Has any one else noticed that Japan's largest trading partner and regional rival China has been quiet, not joining the the chorus of criticism?

Yesterday we broke the news of what is prima facie evidence, sourced by none other than the Federal Reserve's official August 16, 2007 conference call transcript, that then-NY Fed president and FOMC Vice Chairman Tim Geithner leaked material, non-public, and very much market moving information (the "Geithner Leak") to at least one banker, in this case then Bank of America CEO Ken Leiws, in advance of a formal Fed announcement - an act explicitly prohibited by virtually every capital markets law (and reading thereof). It was refreshing to see that at least several other mainstream outlets, including Reuters, The Hill and the NYT, carried this story which is far more significant than Season 1 of Lance Armstrong's produced theatrical confession and rating bonanza. What, however, the mainstream media has not touched upon, yet, is just how profound the market response to the Geithner Leak was, and by implication, how much money those who were aware of what the Fed was about to do, made. Perhaps, it should because as we show below, the implications were staggering. But perhaps what is even more relevant, is why the Fed's previously disclosed details of Mr. Geithner's daily actions at the time, have exactly no mention of any of this.

It is a “fraudulent transfer” to transfer assets with intent to leave the transferor with inadequate capital... Thus every bank “sale” done for the purpose of reducing regulatory capital is, by definition, fraud – a form of bank theft. 

You truly have to be mentally challenged if you follow the gold/silver market action and cannot appreciate something is very amiss, as per the confused Mitsui gold people, as brought to your attention the other day.

By the Deceptive means of Misinformation and Manipulation of economic data the Federal Reserve has set the stage for broad based moral hazard. Through Distortions caused by Malpractice and Malfeasance, a raft of Unintended Consequences have now changed the economic and financial fabric of America likely forever. The Federal Reserve policies of Quantitative Easing and Negative real interest rates, across the entire yield curve, have been allowed to go on so long that Mispricing and Malinvestment has reached the level that markets are effectively Delusional. Markets have become Dysfunctional concerning the pricing of risk and risk adjusted valuations. Fund Managers can no longer use even the Fed's own Valuation Model which is openly acknowledged to be broken.

It may not be apparent immediately, but in the aftermath of last night's epic collapse in fiscal cliff negotiations, which incidentally was perfectly obvious to anyone with half a brain and who experienced last summer's debt ceiling fiasco, which sadly excludes all paid political and financial - including sellside - commentators, all of whom expected a prompt resolution to this polarized issue as recently as a week ago, there is major behind the scenes panic. Because while banks would write profuse, long-winded essays to explain the logic and rationality of the "deal", now that they are all faced with adjusting their narrative the best they can come up with are two sentence fragments such as this one from Citi's Steven Englander "Problem is that it is the right wing of the Republican Party that wouldn’t give Boehner their support, making it less likely that he could win broad support among Republicans for a compromise with the White House. Also he will have to spend next couple of days negotiating with both his own party and the Democrats without knowing how much he can deliver." The answer: nothing at all. In fact as Scott Rigell said “I’m not sure the people who have been up here 20 or 30 years really understand what the next iteration of this process is”.  He is speaking for pretty much everyone else who has now been made a total fool by the Black Swan that is Congress. As a reminder a 3 month delay resolution assures a US recession, and a ~20% or so minimum correction in the stock market, which has been priced for absolute perfection for months, and which will once again have to be used by Wall Street as a means to get a consensus out of DC. Just as we predicted over a month ago. Finally while we may have avoided the Mayan apocalypse, we do have a quad witching and a NASDAQ rebalance to look forward to. Enjoy!

No, really, there is a big, huge, massive rotation out of those dangerous, inflationary bonds into safe, predictable equities...

The Fiscal Cliff cat and mouse game is entering its last two weeks of calendar 2012, with Congress now officially closed for the year. And while we would have expected major updates in the Cliff timeline to only hit during trading hours, usually just as AAPL once again threatens to trade with a 4-handle, Reuters reports that out of the blue Boehner, who last we checked is back in Ohio, has made a radical departure with the Norquist pledge status quo, and has offered to raise tax rates on high earners to break the "fiscal cliff" deadlock in exchange for major cuts in entitlement programs, "but President Barack Obama is not ready to accept, a source said late Saturday."

InTrade may have gotten the Obamacare outcome horribly wrong, but it was spot on in predicting the Obama presidential victory. And if it has continued its accurately predictive ways, it will mean a lot of pain is in store for the market (if not so much the President) very shortly, because the online betting service, now only accessible to offshore based US residents just saw odds on a debt ceiling deal plunge to all time lows of 10% earlier today, before rebounding weakly to 16%. As a reminder, Harry Reid has said on numerous occasions that there will be no Fiscal Cliff resolution without a favorable debt ceiling outcome, which therefore means that according to InTrade the odds of a Fiscal Cliff getting done in 2012 have plunged to 16%, and the probability of a market tumble, as the cliff moving over to 2013 means a cornucopia of unintended consequences, is logically (1-16%).

Back in June, we wrote an article titled "On The Verge Of A Historic Inversion In Shadow Banking" in which we showed that for the first time since December 1995, the total "shadow liabilities" in the United States - the deposit-free funding instruments that serve as credit to those unregulated institutions that are financial banks in all but name (i.e., they perform maturity, credit and liquidity transformations) - were on the verge of being once more eclipsed by traditional bank funding liabilities. As of Thursday, this inversion is now a fact, with Shadow Bank liabilities representing less in notional than traditional liabilities.