Meltdown

The U.S. government, in particular, has been overrun by the wrong kind of person. It’s a trend that’s been in motion for many years but has now reached a point of no return. In other words, a type of moral rot has become so prevalent that it’s institutional in nature. There is not going to be, therefore, any serious change in the direction in which the U.S. is headed until a genuine crisis topples the existing order. Until then, the trend will accelerate.

It's been a roller coaster year for China's legions of semi-literate day traders who have seen the heights of feast and the depths of famine with Chinese equities over the past 12 months. Now, in the wake of more volatility, many Chinese retail investors are throwing in the towel. 

“Deutsche Bank AG officials are reviewing whether some employees exaggerated demand as they marketed new securities backed by risky auto loans, potentially suppressing yields for investors,” Bloomberg reports. "The bank has looked at communications between the employees and investors to determine whether such marketing practices were normal salesmanship or if they crossed a line, said the person, who asked not to be named because the matter is private.”

As the towering forces that are prevailing against failing global economic architecture and the pit of debt beneath that structure, as laid out below, it is clear that the 'Epocalypse' - encompassing the roots "economic, epoch, collapse" and "apocalypse" - is here, and it is everywhere. The Great Collapse has already begun. What follows are the megatrends that will increasingly gang up in the first part of 2016 to stomp the deeply flawed global economy down into its own hole of debt.

Is the U.S. economy in recession? Is it heading for recession? These questions can only be answered in hindsight, but it's worth looking for clues to what might be just ahead.

This decline is inevitable in fast-expanding economies that play fast and loose with credit/debt and leverage. All the phantom wealth piled up in China's boost phase is now melting down, and the China Syndrome will trigger a meltdown in global phantom assets.

The collapse of China's economy will have serious implications for India, the country's top investment banker warns. With exports in free fall and the government caught between fiscal retrenchment and the need to keep the economy afloat, it could be a rough year for the country Goldman swears will be a top economic performer in 2016.

The risk of a fracture in risk markets when lower liquidity meets forced selling, is high in our view. Should this weakening of spread sectors in fixed income continue, we will see a further rally in Treasuries – back in Aug/ Sep, 10y USTs broke below 2%, and there is no reason we can’t get there later this month.

It was an ominous beginning to what is poised to be a most tumultuous year. Market participants are quickly coming to appreciate that China does in fact matter. Few understand why. Most – from billionaires to fund managers to retail investors – will “Do Nothing.” This has worked just fine in the past – repeatedly. Not understanding and not doing anything will be detriments going forward.

Perhaps weak manufacturing, construction, and trade data are mere outliers.  Maybe the Fed can see beyond the fog to clearly capture the big picture.  Or maybe the Fed has lost its marbles.  Their outlook doesn’t jive with that of the regular working stiff.

While the "sell in 1973, and go away" plan had worked out for some in the commodity space, the destruction of the last decade has only one historical comparison... the middle of The Great Depression.

Saudi Arabia, which entered 2015 with virtually no debt and an FX reserve war chest that amounted to around three quarters of a trillion dollars, is now viewed as less creditworthy than a country where a coalition of socialists, left-wingers, and communists just overthrew the government.

It's requiring more borrowed yen/yuan/dollars/euros just to keep the global economy from collapsing in a heap of impaired debt. The costs of waste, fraud and mal-investment are finally coming home to roost, and while near-zero interest rates serve to mask the future costs, near-zero rates cannot stem the rising tide of mal-investment. Rather, near-zero rates have fueled mal-investment, waste and unproductive spending. The diminishing returns on that strategy of "growth" are inescapable.

Update: *CHINA SUSPENDS  STOCK CIRCUIT BREAKER RULE - In Q&A, CSRC insists circuit breakers didn't cause the China meltdown but admits they may have aggravated sell-off.

"It couldn't be worse," exclaims one manager who started his fund mid-year in 2015, blaming China's equity market carnage on its newly-created circuit-breakers (as opposed to the fact that the Chinese market trades at 64x P/E and there are sellers everywhere). "Panic will eventually turn into a buying opportunity," hopes one strategist while another proclaims "poorly-designed" circuit breakers need to be adjusted to 10% (seriously). Blame is everywhere,  but it is Chen Gang who summed up the panic best, "this is insane... we were forced to liquidate all our holdings this morning."

Derivatives like credit default swaps turned a mere bubble in the US housing market into a global financial catastrophe...