Risk Premium

The rift between Saudi Arabia and Iran has quickly ballooned into the worst conflict in decades between the two countries. The effect from the brewing conflict on oil is murky, but for now it is not having a bullish impact. But what if the current “Cold War” between Saudi Arabia and Iran turned hot?

Market psychology established in recent years is reversing. Market volatility is rising and will remain pervasive for a while as psychology, the change in direction of Fed policy, and the increases in general uncertainties, will all conspire to shape an environment ripe for sharp spikes in volatility which will be further amplified by rickety market liquidity.

If at first you don't succeed, try, try, keep trying again and again. That appears to be the mantra of Goldman's credit strategists.

"Security prices are not low. I wouldn’t say high, but full. So people are thinking cautiously but they’re acting bullish and they’re behaving in a pro-risk fashion. While investor behavior hasn’t sunk to the depths seen just before the crisis, in many ways I feel it has entered the zone of imprudence... The market is not an accommodating machine. It will not go where you want it to go just because you need it to go there."

Financial fraud is any method by which deception or duplicity induces those with money to "invest" in a scheme...   

 I am sure corporations, wildcatters and trading firms are all making business decisions based upon these low natural gas prices, and they are not from the bullish side of the equation.

"The irony in this year’s batch of outrageous predictions is that some of them are “outrageous” merely because they run counter to overwhelming market consensus. In fact, many would not look particularly outrageous at all in more “normal” times – if there even is such a thing!"

"While funding continued to be available, such a large negative basis indicates potential market dislocations. And this may call into question how smoothly US dollar funding conditions will adjust in the event of an increase in US onshore interest rates. Similar pricing anomalies have also emerged in interest rate swap markets recently, raising related concerns."

Overnight, Credit Suisse became the latest bank to join Goldman, JPM and increasingly more banks in predicting that 2016 will be a year in which investors will want to rotate out of equities. Specifically, the second largest Swiss bank said that it is "we reduce our equity weightings to our most cautious strategic stance since 2008 and take our mid-2016 S&P 500 target down to 2,150, the same as our end-2016 target." Here are the five reasons why CS just looked at the mounting wall of worry... and began to worry.

Financial crises can happen quickly, like the bursting of the tech stock bubble in early 2000, or slowly, like the late-1980s junk bond bust. The shape of the crash depends mostly on the asset in question: Equities can plunge literally overnight, while bonds and bank loans can take a while to reach critical mass. China’s bursting bubble is of the second type. "If, as seems likely, the government has succeeded in getting funding to higher risk sectors by relaxing bond approvals," wrote Christopher Wood of brokerage CLSA in a recent note, "it is all rather scary, given the regulatory failures exposed by the A share boom-bust cycle."

The world is changing in so many ways which is ignored by markets and commentators. The Paris event is yet another wake up call for the markets on geopolitical risk, for the under-investment in education and basic research, but most importantly for how we continue to ignore facts. First it will get worse... we are simply not prepared for geopolitical risk to matter for markets neither are we yet willing.

Swap spreads recently took a nosedive and are once again trading at negative levels, even for shorter maturities. This market perversion suggest that Wall Street is a safer counterpart than the very institution that underwrites the whole fractional reserve fraud in the first place. To price in a higher risk premium on the US government than on US banks is a contradiction in terms so there need to be another explanation behind this puzzling market phenomenon... There is, and you're not going to like it.

The sums in play are so staggering (an estimated $11 trillion in emerging market debts denominated in other currencies) that even the Fed won't be able to stop the meltdown.

1. Top Trade #1: Long USD vs short EUR and JPY
2. Top Trade #2: Long US 10-year ‘Breakeven’ Inflation
3. Top Trade #3: Long MXN and RUB versus short ZAR and CLP.
4. Top Trade #4: Long EM ‘External Demand’ vs. Banks stocks
5. Top Trade #5: Tighter Spread between Italy and Germany Long Rates
6. Top Trade #6: Long large-cap US Banks relative to the overall S&P500

Following the weakness in the few minutes of after-hours trading on Friday's US session that overlapped with the first headlines from France, we are getting a first glimpse at the posible fallout from the Paris terror attacks. The Middle Eastern stock markets tumbled significantly with Saudi Arabia's Tadawul All Share index down 3% (biggest drop in 3 months) to its lowest since December 2012, and Dubai's FMG Index plunged 3.7% to its lowest since 2014. Short-run implication for the equity market is likely to be negative according to Goldman, with a notably higher risk premium regarding uncertainties about the medium-term political implications.