Volatility

The half-life of the latest "market supporting" intervention by the Chinese government: just about 12 hours.

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.

If there’s one thing to take away from this year’s developments in markets and economies so far, it’s that they are all linked, they’re all part of the same thing. If you can’t see that, you’re not going to understand what’s happening. It’s tempting to see this as a China problem, but first of all there is no China problem that will not of necessity also gravely affect the west , and second of all when you read, just to name an example, that America’s new jobs pay 23% less than the jobs they replaced, it’s just plain silly to believe that the economy is doing well, let alone recovering.

Venezuela is currently going through its worst crisis in history, replete with an endless list of interesting problems. Foremost among these are severe shortages in even the most basic of necessities. Economists have used these shortages as textbook examples to illustrate the pernicious effects of price controls. Few people, however, are aware that many of the country’s problems are caused by a complex monetary arrangement that makes use of four different exchange rates simultaneously. The result is that Venezuela can either be extremely cheap, or unbearably expensive, depending on the rate used.

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."

Once China set the Yuan fixing some 0.5% lower, the biggest drop since the August devaluation, all hell broke loose and unleashed a global selling panic after China's stock market was promptly shut down less than 30 minutes into trading, then European shares dropped the most in more than 4 months as Asian equities plunges, as did US stock futures, the dollar weakened against the euro and the yen; crude plunged to fresh 12 year lows. Gold rose.

Surging volatility in global equity, currency, and credit markets and significant stress in a major world economy have George Soros on edge. Speaking at an economic forum in Sri Lanka, the billionaire hedge fund manager warned global markets are facing a crisis and investors need to be very cautious. On the heels of the second trading halt in four days, Soros exclaimed "I would say it amounts to a crisis... which reminds me of 2008."

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.

As Wall Street axioms (Santa rally, January effect, as goes January etc.) are rapidly falling by the wayside at the start of 2016, following a chaotic but return-less 2015, the UBS analysts who correctly forecast last year's volatility are out with their forecast for 2016. It's simple - Sell Stocks, Buy Gold... expect a Fed u-turn.

Many people start a new year with renewed optimism. However, "New Year, Same Problems" is the meme of 2016... and recent trading has dashed some of that optimistic 'This time it's different' hope.

We are currently in a transitional phase of geo-political-monetary power struggles, capital flow decisions, and fundamental economic choices. This remains a period of artisanal (central bank fabricated) money, high volatility, low growth, excessive wealth inequality, extreme speculation, and policies that preserve the appearance of big bank liquidity and concentration at the expense of long-term stability. The potential for chaotic fluctuations in any element of the capital markets is greater than ever. The butterfly effect - the flutter of a wing in one part of the planet altering the course of seemingly unrelated events in another part - is on center stage.

"It is time to accept that what we have done has worked brilliantly for twenty years but does not work anymore and move on. We are confident our process will eventually work again – for the laws of economics will never be repealed – but for now they are suspended and may be for some time; an indefinite period involving indeterminate levels of risk during which we think it would be wrong for us to be the stewards of your money."

It's not China, stupid... It's The Fed. "What The Fed did, and I was part of it, was front-loaded an enormous rally market rally in order to create a wealth effect... and an uncomfortable digestive period is likely now." Simply put Fisher concludes, there can't be much more accomodation, "The Fed is a giant weapon that has no ammunition left."

Yesterday JPM, which despite calling for a 2,200 year end price target, paradoxically warned that the regime of "buying dips" is over, and that "we take the view that equities are unlikely to perform well on a 12-24 month horizon" adding that "the regime of buying the dips might be over and selling any rallies might be the new one." So don't buy dips yet somehow the S&P will rise 150 points? Fair enough. Today, it is Citigroup's turn to try to somehow predict both a 12% "gain for global equities in 2016" even as it tells clients to start selling US stocks because "fading EPS momentum and rising Fed funds mean that, after 6 consecutive years of outperformance, we cut the US to Underweight."