Deflation is a bitch. The only way the rich can keep getting richer is if the rest of us keep getting poorer. Economic growth is a thing of the past. Deleveraging has started for real. Huge amounts of zombified ‘money’ are disappearing as we speak. That leaves the world with a lot less wealth. And still the rich seek to get richer, and they are in charge. The math is simple... but there is a point when the can gets so big and heavy, no-one can kick it down any road anymore.
Following our discussion of perhaps the most successful (and/or most risky) trades of the last decade - that of shorting the front-month VIX - we were less than surprised that VXX -the VIX ETF has collapsed to new record-lows this morning. A snap higher in VIX has been met by an avalanche of vol selling and, as we discuss below, the accelerating contango as expirations loom has encouraged yet more to take on unlimited risk positions to pick up pennies in front of the steamroller. All the time "The Fed has your back," it appears traders believe the steamroller driver has his foot on the brake... As if on cue - VIX has spiked and VXX surged.
If the longs use VIX products as hedging instruments, then why would anyone take the other side? Because, being short volatility can be very profitable, according to Goldman. Year-to-date this short vol index is up 56%, and selling the front-month VIX has earned a massive 114 vol points... The introduction of weekly VIX futures (and the exponential decay implied by these volatility-inducing instruments) offers, according to Goldman Sachs, even more opportunity for active risk takers to sell vol, scrape premium, and face unlimited downside risk... playing the contango collapse game until there are no more musical chairs left.
This is full on mania and with inventory building up, people are starting to crunch the numbers more carefully. I’m curious, how does someone justify a 144% increase on this place? As we all know, real estate is essentially a game of musical chairs, especially in boom and bust California. Someone is trying to cash in on a lottery ticket here for Venice.
“When Money Dies” is the title of a 1975 book by Adam Fergusson, in which he describes the downfall of the Reichsmark in Weimar Germany. A fascinating look at that period of history, one can glean quite a few useful pieces of advice on how to survive a currency crisis. But “when money dies” could also describe the current currency crisis in Greece, in which many Greeks seem to have taken those lessons from Fergusson’s account of the Weimar hyperinflation to heart.
"We've won a few months' respite but the problem will come back," France's Marine Le Pen said of Greece... "Today we're talking about Grexit, tomorrow it will be Brexit, and the day after tomorrow it will be Frexit." We shouldn’t need Le Pen to voice the obvious. But that no other ‘leader’, save for Nigel Farage, puts it into these crystal clear terms, does tell us a lot about all other European leaders. And unfortunately that includes Alexis Tsipras. Though we hold out some hope for him yet. Here’s hoping he will not sign that deal, whichever it may be in the end, and thereby set in motion the disintegration of the unholy Union.
Stock markets in the US and Europe are in for a correction, while the euro is set to rise, according to Saxo Bank’s Chief Economist Steen Jakobsen, nomatter what happens between Greece and its creditors. Steen also looks at the impact a rate hike from the US Federal Reserve would have on USD and what currencies could gain once the Fed decides to move on rates, noting that "the consensus has it wrong on the timing of US rate hike," as the credit cycle topped in June 2014. He believes that commodities and metals in particular offer opportunities for investors.
Stocks are pulling back ahead of a greatly anticipated FED meeting. Investors are holding their breath as they wait for news from Janet Yellen on whether or not the FED will give more indication of future interest rates.
The bond market may have gotten so fragmented in recent months that even Bloomberg was amazed at how little trading volume it necessary to make a price impact, the amount of bond traders (and certainly salesmen), and certainly their bonuses, appeared to only go up. "Appeared" being the key word, however, because as Bloomberg reports, "the average number of dealers providing prices for European corporate bonds dropped to a low of 3.2 per trade last month, down from 8.8 in 2009, according to data compiled by Morgan Stanley."
For decades, the rest of the planet has regarded the United States as “the land of opportunity” where almost anyone can be successful if they are willing to work hard. The “American Dream” has been transformed into a very twisted game of musical chairs. With each passing year, more people are falling out of the middle class, and most of the rest are scrambling really hard to keep their own places. Something has gone horribly wrong... We are the generation that gets to witness the end of the American Dream.
What we see now is the recovery of price discovery, and therefore the functioning economy, and it shouldn’t be a big surprise that it doesn’t come in a smooth transition. Six years is a long time. Moreover, it was never just QE that distorted the markets, there was – and is – the ultra-low interest rate policy developed nations’ central banks adhere to like it was the gospel, and there’s always been the narrative of economic recovery just around the corner that the politico/media system incessantly drowned the world in. That the QE madness ended with the decapitation of the price of oil seems only fitting.
History literally appears to be repeating. The mainstream media and our politicians are promising Americans that everything is going to be okay somehow, and that seems to be good enough for most people. But the signs that another massive financial crisis is on the horizon are everywhere.
From Bill Gross: "I’ll leave the specific forecasting for a few weeks’ time and sum it up in a few quick sentences for now: Beware the Ides of March, or the Ides of any month in 2015 for that matter. When the year is done, there will be minus signs in front of returns for many asset classes. The good times are over.... Be cautious and content with low positive returns in 2015. The time for risk taking has passed."
Blind faith in policymakers remains a bad trade that’s still widely held. Pressure builds everywhere we look. Not as a consequence of the Fed’s ineptitude (which is a constant in the equation, not a variable), but through the blind faith markets continuing to place bets on the very low probability outcome – that everything will turn out well this time around. And so the pressure keeps rising. Managers are under pressure to perform and missing more targets, levering up on hope. Without further delay we present our slightly unconventional annual list. Instead of the usual what you should do, we prefer the more helpful (for us at least) what we probably wouldn’t do. Five fresh new contenders for what could become some very bad trades in the coming year.
The big selloff in 2015 will come from housing and housing-related investments as the marginal cost of capital rises through regulation and through “margin calls” on banks as their profit-to-GDP ratios grow too high for the economy to function properly. The dividend society is here and the true manifestation of Japanisation is not a future event but a thing we are living in right now…