Political risks in Europe are on the rise as the once prosperous middle class are forgotten, both financially (cannot compete with low cost Chinese workers) and culturally (if you do not like what is happening to your neighborhood you are a deplorable and irredeemable racist bigot and we do not need to listen to you). Losing life savings as deposits are bailed in left and right will be the straw that bring down any pretense of political correctness.
Once again FOMC policy is at odds with what is taking place in deeper and far more intellectually-sound money markets. The TED spread confirms risk not policy as the underlying mechanism, while the eurodollar futures price reveals the growing pessimism about what that could mean for the intermediate and long terms in real economic conditions.
Distortions in financial markets keep growing, as central banks all over the world are desperately intensifying monetary pumping. What is currently happening in various bond markets as a result of this and other interventions is simply jaw-dropping insanity. It is not so much that it defies rational explanation – in fact, all of these moves can be explained. What makes the situation so troubling is the fact that investors seem to be oblivious to the enormous risks they are taking. They are sitting on a powder keg.
Gold buying surged to record levels in H1, 2016 due to increasing concerns about the political, economic and monetary outlook. In particular, deepening concerns about the negative interest rate money "madness" of central banks today.
Due to the latest government intervention, differentiating between the signal of real market stress and the noise resulting from the shift due to 2a-7 reform, will now be impossible, and thus it will also be impossible to gauge if there is something truly broken with the market, at least until such a "breakage" becomes all too apparent for everyone to see.
In September, interbank credit markets flashed a quick and brief warning that something was up... and Janet folded. Three months later and following The Fed's oddly-timed rate-hike, interbank counterparty risk - as proxied by The TED-Spread - has spiked over 45% in 2 days, the most since Sept 2008 (Lehman).
Wall Street’s proclivity to create serial equity bubbles off the back of cheap credit has once again set up the middle class for disaster. The warning signs of this next correction have now clearly manifested, but are being skillfully obfuscated and trivialized by financial institutions. Nevertheless, here are ten salient warning signs that astute investors should heed as we roll into 2016.
From time to time, the data (from economic activity, inflationary pressure, risk appetite and asset valuations) points unambiguously in a single direction and experience tells us that such confluences are worth watching. We are today at such a point, and the worry is that each indicator is flashing red.
Last week we warned of the ominously rising risks evident under the surface in US financials. Following Yellen's decision to chicken-out yesterday, it appears interbank counterparty risk is even ominous-er. With bank stocks prices tumbling, catching down to credit market's concerns, the TED Spread - implicitly measuring interbank credit risk - jumped over 21% yesterday - to its highest in 3 years.
We have been anxiously reminding investors of the drip-drip-drip increases in market-perceived credit risk for US financials for much of 2015. Having risen to almost 90bps amid the chaos of 2 weeks ago (almost double the lowest levels post-Lehman hit in June of last year), it appears systemic counterparty risk is very much on the rise. What is more concerning however, as Alhambra's Jeffrey Snider notes, the TED spread has exploded higher (since China's devaluation) indicating, as convention has it, a marked increase in perceptions of interbank credit risk.