Volatility

Wall Street forecasts for 2015 were largely wrong across the board. Now we have no problem with anybody being wrong, but wwhat we do take issue with is that Wall Street largely insisted on staying wrong even though the facts were changing in 2015. The only thing that really changed was the narrative, i.e. “well if earnings are down so what then markets go up because fund managers have to chase performance”. And hence you end up with overly optimistic forecasts not based on reality. But Wall Street is in the business of selling supply to the public. If there was one key trading lesson to draw from 2015 it is this: Ignore the noise and focus on the technicals.

We believe the Credit Cycle has turned and with it will come some massive unexpected shocks. One of these will be the fall out in the Bond Market, centered around the dramatic growth explosion in Bond ETFs coupled with the post financial crisis regulatory changes that effectively removed banks from making markets in corporate bonds.  It is a ‘Witch’s Brew’ with a flattening yield curve bringing it to a boil.

The seventh anniversary of Zero Hedge is just around the corner, and so, for the seventh year in a row we continue our tradition of summarizing what our readers found to be the most relevant, exciting, and actionable news of the year, determined by the number of page views. We bring you the articles that you, dear reader, found to be the most interesting in the past 365 days.

Elections, elections, and more elections is the 'regime change' meme for 2016 but, as Bloomberg details, the key events of the year ahead vary from a California marijuana referendum to Brazil's Olympics, and from Davos to SCOTUS. No matter what, 2016 holds a lot of opportunity for volatility, and without The Fed's safety net, who knows what that means for markets...

America has never - ever - avoided a recession when Chicago's Business Barometer has collapsed to these levels. At 42.9, missing the expectations of 50.0 by the most ever, down from 48.7 in November, the final US economic data point of the year sums up perfectly what a disaster Yellen has hiked rates into.

It has come down to this: a year in which the US stock market (led by a handful of shares even as the vast majority of stocks has dropped) has gone nowhere, but took the longest and most volatile path to get there, is about to close either red or green for 2015 based on what happens in today's low-volume session following yesterday's unexpected last half hour of trading "air pocket" which brought the S&P back to unchanged for the year.

2015's stock market range (from high to low) is among the narrowest since World War II. This 'compression' has led the horde of asset-gatherers and commission-takers to suggest that stocks are a "coiled spring" ready to burst higher from this newly-formed permanent plateau. However, as S&P Capital IQ's Sam Stoval notes, that is the exact opposite of what to expect based on history. In fact a narrow range year is typically followed by a low return year, not a high return year.

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.

While most hedge funds will be glad to close the books on a year in which they once again dramatically underperformed a market which hugged the flatline courtesy of just a few stocks (even as most stocks posted substantial declines) and where "hedge fund hotels" such as Valeant suffered dramatic implosions, a handful of traders generated impressive returns for their investors and made billions by going against the herd.

"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."

"Essentially central banks, by unfairly inflating asset prices have compressed risk like a spring to unfairly tight levels. Unfortunately, the market is aware the price of risk is not correct, but they can’t fight it, and everyone is forced to crowd into the same trade. By manipulating markets they have also reduced investors’ inherent conviction by rendering fundamentals less relevant."

It becomes ever more tempting to conclude that the timing of the Fed’s rate hike was really quite odd, even from the perspective of the planners...

For a long time, we called for a big drop in the silver price. It stubbornly did not, or when it did drop it soon recovered. In the end, we were right and the silver bulls were wrong.