The mispricing of assets across world markets has reached epidemic proportions.
As if several markets tumbles and heartstopping short squeezes in just the first two months of 2016 have not been enough to turn professional traders' hair prematurely gray and drive all retail daytraders permanently out of the "market", here is a warning from Wedbush's otherwise quite somber repo market analyst, Scott Skyrm, according to whom the volatility is only just starting.
The financial world is growing increasingly crazy-looking. What is alarming is that central banks are brandishing these new tools without any viable evidence or theory that they will even work. This itself presupposes that central banks have any idea of what “work” might even mean in this brave new context. It used to be said, ‘Don’t fight the Fed’. Now as investors, if we want to protect our capital, we are all obligated to fight the Fed, and its international cousins, with whatever we have.
Inflation targeting has been a giant cover story for a monumental power grab. The academics who grabbed the power had no idea what they were doing in the financial markets that they have now saturated with financial time bombs. When these FEDs (financial explosive devices) erupt in the months and years ahead, the central bankers will face a day of reckoning. And they will surely be found wanting. The immense social damage from the imploding bubbles dead ahead will be squarely on them.
The imbalances that low rates and elasticity produce may “return us to the modern-day equivalent of the divisive competitive devaluations of the interwar years; and, ultimately, [trigger] an epoch-defining seismic rupture in policy regimes, back to an era of trade and financial protectionism and, possibly, stagnation combined with inflation.”
"[Central Banks] think they are smarter than the market," exclaims billionaire investor Jim Rogers, "they are not!... the inevitable consequence of disastrous easy-money policy from central planners is war..."
European Banks holding European sovereign debt may have to take haircuts and be part of bail in plans should that same debt default, according to a plan being pursued by German government advisers. In another attempt to shelter German tax payers from the largess and excess of fellow European neighbouring countries' national banks, the move could trigger a run on billions of euro of sovereign debt of said banks. In an article penned by the Telegraph's Ambrose-Evans Pritchard, one of the council's dissenting members describes the plan as the "fastest way to break up the Eurozone".
"Truth is like poetry. And most people f**king hate poetry." - From the Big Short movie (overheard at a Washington D.C. bar)
"The world has fundamentally shifted over the last decade, especially since we’ve emerged from the Great Recession... But the professional class has been very slow to understand what is going on, not just quantitatively but qualitatively in a new generational configuration that I call the Fourth Turning. They don’t accept the new normal. They keep insisting, just two or three years out there on the horizon, that the old normal will return – in GDP growth, in housing starts, in global trade. But it doesn’t return."
According to Citi's Matt King, here is the biggest surprise about the recent global market crash: that on one hand it has been very orderly in some products, and yet very volatile, chaotic, and acute in others...
"There is excessive debt everywhere and negative interest rates are dangerous... My number one fear? That’s the same as asking me where it will start. When you view the economy as a complex, adaptive system, like many other systems, one of the clear findings from the literature is that the trigger doesn’t matter; it’s the system that’s unstable. And I think our system is unstable... Central Bank models are just wrong"
All signs are that things are in fact in danger of getting out of hand...
Simply put, either large cap Financials are cheap, or the entire U.S. equity market is still overpriced. Their precipitous decline year to date means markets fear they are both the transmission mechanism for a global slowdown/recession to come and a primary victim of that event.
How the Chinese central bank derailed the yuan and help Donald Trump rose to power.
Now that talking about NIRP in the US is no longer anathema but a matter of survival for market participants for whom frontrunning the Fed's policy failure has emerged as a prerequisite trade, the question is: what are the mechanics of NIRP, what are the implications of negative rates for US markets. Here is the handy answer