en How Investors Respond To A Market Crash <p><em>By Nicholas Colas of Convergex</em></p> <p><strong>Tell ‘Em That It’s Human Nature </strong></p> <p>The surge in volatility over the past week enabled this year’s aggregate number of plus or minus 1% moves in the S&amp;P 500 – currently 40 – to exceed last year’s total of 38. There were nineteen positive 1% or more days in 2014, and 19 negative days compared to 22 up days and 18 down days this year. We need 14 more 1% days in order to reach the annual average of 54 since 1958, representing only 16% of the next 86 trading days left in the year. As we progress throughout the balance of 2015, we expect to encounter more of the volatility of the past week than the past few years. One percent or more days tend to pick up by the fifth or sixth year of bull markets such as the rallies of the 1980s, 1990s, and 2000s, and we are in our seventh. Additionally, the VIX often hits its annual peak in October – for example last year – more so than any other month with a total of 5 since 1990. December may statistically register as the quietist month with 7 annual troughs over the past 25 years, but this year may prove different due to the uncertainty surrounding the Federal Reserve’s timing of an interest rate hike.</p> <p><strong>What do you think moved financial markets over the past week of turbulent trading? </strong>Perhaps slowing growth and unstable equities in China, renewed fears of deflation, the impending rate hike by the Federal Reserve, or all of the above. Each example certainly played a role. One underappreciated culprit irrespective of economic fundamentals, however, lends itself to volatile capital market environments: investor psychology. </p> <p><strong>In the midst of turmoil among asset classes, investors tend to make irrational decisions, such as panicking and liquidating at inopportune times.</strong> Nobel Prize-winning Psychologist Daniel Kahneman helps explain ill-conceived reactions to the market with his concept of loss aversion. That’s the fear and feelings of loss surpass the joy one may receive from a similarly sized potential gain. </p> <p><strong>In order to frame this discussion of volatility, we dug up old surveys of institutional and individual investors that recorded their responses to the 1987 market crash</strong>. They were conducted by Nobel Laureate Robert Shiller in October of that year, just as the field of behavioral finance started to garner credibility and attention. We recognize the market has evolved rapidly and grown in complexity since with the development of high frequency trading, for example, but our minds still work the same. </p> <p><strong>These surveys, therefore, serve as a useful case study to glean insight on the psychology of investors during significant market events.</strong> Here is a brief breakdown of the results (link included at the end of this note):</p> <ul> <li><strong>Survey methodology</strong>: Shiller sent out a questionnaire to 125 individual investors about the downturn in the stock market from October 14-16, 1987, and received 51 responses. He also sent out another survey following large price declines on the morning of October 19, 1987 and garnered 51 responses as well. Shiller then conducted a full study of 605 individual investors and 284 institutional investors’ responses to questionnaires distributed after October 19th, 1987 that accounted for the news of the day. </li> <li>&nbsp;"<strong>No clear-cut reaction to news”: </strong>Shiller asked participants to rate the importance of news stories that the media listed as possible causes of the stock market selloff from October 14-19, 1987. The 200-point drop in the Dow on the morning of the 19th was the highest rated among both institutional and individual investors, followed by the fall in prices during the prior week in second or third for either cohort. Other top of mind concerns, particularly among Institutional investors, was the recent climb in interest rates. With that said, Shiller concluded that investors likely reacted to price movements themselves on days of large market declines rather than specific news stories. </li> <li>&nbsp;“<strong>Much talk, much anxiety</strong>…”: Almost one fourth of individual investors and about 40% of institutional investors “reported experiencing a contagion of fear from other investors”. Of the individuals who sold on October 19, 1987, over half “reported experiencing contagion of fear”. Additionally, a little over one third of individual investors and slightly more than half of institutional investors said their conversations touched on the events of 1929 leading up to the 19th. </li> <li>&nbsp;“<strong>Many investors thought they knew what the market will do”: </strong>Just shy of 30% of both intuitional and individual investors said “yes” to a question that asked if they “had a pretty good idea when a rebound was to occur” on October 19, 1987. Many individuals said they knew based on “intuition” or “gut feeling”, while several institutional investors reported “gut feeling”, “historical evidence and common sense,” or “market psychology”. Obviously, the remaining 70% felt differently.</li> <li><strong>&nbsp;"Investors thought investor psychology moved the markets”. </strong>Several survey participants attributed the price declines from October 14-19, 1987 to the “overpricing of the market before the crash” or stop-losses on the institutional side. Another theme included investor irrationality, which garnered a quarter of individual and institutional responses. Moreover, 67.5% of individual investors and 64% of institutional investors said the theory of investor psychology rather than fundamentals explained the selloff. By contrast, Shiller noted that results obtained previously from a random sample of institutional investors showed 79% held an individual stock on a normal day due to a theory about fundamentals.&nbsp; </li> </ul> <p><strong>In sum, Shiller determined that the crash occurred due to investor reaction to price and investor reaction to each other</strong>: “the communications proceeded rapidly, and prices were checked with great frequency”. Fast forward to today, and this theory compounds itself in an age when communication, stock quotes, and financial news are all quickly available with simple swipes of the finger or a few taps of buttons. Consequently, the surveys from nearly 30 years ago inform Shiller’s most recent commentary on the collapse in U.S. stock prices over the past week. While most economists blame China, Shiller blames human nature.</p> <p><strong>We look to the number of annual one percent days for the S&amp;P 500 and seasonal patterns in the VIX – the market’s designated “fear indicator” – for historical context on what to expect in terms of market volatility relative to each year and economic cycle</strong>. The results highlight Nassim Taleb’s theory of Black Swans, or that outliers (in this case outsized moves in stock returns) occur more frequently than the math of Normal Distributions suggests. Consider this list of stats broken out into ten bullets (tables and charts of the data follow this note):</p> <ul> <li><strong>The average annual number of plus 1% moves in the S&amp;P 500 from 1958 to 2014 totals 53.6</strong>. This includes an average of 27.5 days up 1% or more, and 26.1 days down 1% or more.&nbsp; </li> <li><strong>The period from 1958 to 1970 was much less volatile, with an annual average of only twenty seven 1% or greater days per year</strong>. From 1971 through 2014, the annual average increased to 61.5 (32 up, 29.5 down). Since there are about 250 trading days in the year, this suggests a 25% chance that stocks rally or selloff by 1% or more in any session.&nbsp; </li> <li><strong>From 2010 to 2014, the average is 59.8 days (31.4 up, 28.4 down). </strong>Over the past three years through 2014, the average falls to 42.3 (23.3 up, 19.0 down).&nbsp; </li> <li><strong>Looking at the pattern of the annual 1% days in the S&amp;P 500 since 1958, market swings typically occur in the beginning of a bull market, wane, and then climb higher towards the end of consecutive annual gains in equities. </strong>Using the rally in the 1980’s up until the market crash, for example, shows eighty two 1% or more moves in 1982, which declined to 28 by 1985. This figure, however, picked back up to 61 in 1986 and 95 in 1987 during the fifth and sixth years of stock advances. Likewise, there were 118 plus or minus 1% moves in 2009 at the start of the most recent bull market, which fell to 38 in 2014 or its sixth year of gains. </li> <li><strong>Given that we passed last year’s total of thirty eight (19 up, 19 down) 1% days this week – currently at 40 (22, 18) – we expect that volatility will continue during the remaining four months of 2015 as part of a reversion to longer term averages</strong>. One percent days accelerated in the fifth and sixth years of the bull markets in the 1980s, 1990s, and 2000s. We are now in our seventh year as the Fed allowed the capital markets more time to hibernate with its easy monetary policies, but investors are waking up to the imminent tightening measures that may take effect as soon as this year.&nbsp;&nbsp; </li> <li><strong>Getting back to the annual average of 53.6 dating back to 1958 requires 13.6 more days of plus or minus one percent moves, or 16% of the next 86 trading days of the year</strong>. Reaching the annual average of 61.5 since 1971 would take 21.5 more days, or a quarter of the trading days left in 2015. </li> <li><strong>The CBOE VIX Index has registered both annual high and low points throughout most months of each year since 1990, but the peaks and troughs do tend to cluster... </strong></li> <li><strong>If the VIX were randomly distributed across time, you’d expect each month of the year to post both two highs and two lows over the last 25 years. </strong>Yet this is not the case; some months have substantially more or less than that average. October’s price action, for example, typically experiences the most volatility with the VIX hitting its annual high five times during this month over the measure’s existence. The “fear index’s” performance last year added to this total. Also, note that the VIX has never troughed in October in any year since 1990. </li> <li><strong>By contrast, investors don’t usually run into much market noise in the month of the “Santa Clause rally”. </strong>The VIX has fallen to its annual bottom in December during seven years. This measure only peaked in December once back in 1996 amid a weakening dollar and turmoil in China’s financial markets. </li> <li><strong>January, on the other hand, is a mixed bag with the VIX peaking and bottoming during four years each. </strong>As for the remaining months, most put at least one point up on the board but are less volatile comparatively: February (0 high, 0 low), March (1, 2), April (3, 1), May (1, 1), June (3, 1), August (3, 2), September (2, 0), November (2, 2). </li> </ul> <p>What does this signal about trading during the balance of 2015? <strong>Get used to the recent wide swings in the market because they are likely to continue as we head towards the most volatile month of the year: October</strong>. Perhaps December will provide some relief during the typically quiet month. But with the Fed likely pushing off raising short-term interest rates past September, Santa may bring coal this year as opposed to the gift of historically low rates that supported equity valuations over the past six. </p> <p><a href=""><img src="" width="500" height="706" /></a></p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="510" height="319" alt="" src="" /> </div> </div> </div> Black Swans Capital Markets CBOE China Federal Reserve High Frequency Trading High Frequency Trading Institutional Investors Market Crash Nobel Laureate Price Action Robert Shiller Volatility Fri, 28 Aug 2015 19:08:19 +0000 Tyler Durden 512544 at The Greatest Con Job In Central Banking History <p><span style="font-size: 10pt; line-height: 1.3em;">One of the greatest con jobs in history was convincing ordinary people that Central Bankers care about the &ldquo;economy&rdquo; or Main Street.</span></p> <p>&nbsp;</p> <p>Aside from the complete lack of relevance that Main Street has for Central Bankers from a professional perspective (more on this in a moment), when do you think was the last time that Janet Yellen or her ilk spent an evening with non-banker/financial types? Years ago? Decades ago?</p> <p>&nbsp;</p> <p>Yellen lives in a super-affluent, gated part of Washington DC. And even within that subset of the US population she lives in a higher echelon: her entourage of security annoys her wealthy neighbors&hellip; though I suspect part of the annoyance stems from jealousy.</p> <p>&nbsp;</p> <p>Regard professional significance&hellip; why would Janet Yellen care about ordinary people? They&rsquo;re just data points in her financial models. Ordinary people didn&rsquo;t place her at the Fed (the big banks did). And they didn&rsquo;t place her as Fed Chair (the financial/ political elite did&hellip; with the express intent of gaining future favors).</p> <p>&nbsp;</p> <p>Think of it this way&hellip; imagine there was a super cartel of English Professors who controlled what words you or I could use in daily conversation. These individuals literally could change the structure of the human language if they wanted&hellip; removing words or adding words at random.</p> <p>&nbsp;</p> <p>Now imagine that they randomly pick out a low level English Professor who they elevate to being the face of their organization. Do you think this professor would give a damn about how her decisions/ words affected speech? She literally was made one of the most powerful people <strong><u>in the world</u></strong> by this cartel.</p> <p>&nbsp;</p> <p>This is case worldwide. Most Central Bankers came up from the Too Big To Fails or Primary Dealers (or they are academics like Yellen or Banenke who get their first taste of the &ldquo;real world&rdquo; when they&rsquo;re literally <strong><u>running the financial system)</u></strong>.</p> <p>&nbsp;</p> <p><strong>Literally their entire personal net worth&hellip; their professional clout&hellip; and their sense of accomplishment was derived from working at these organizations.</strong></p> <p>&nbsp;</p> <p>And somehow they&rsquo;re supposed to give a hoot about Joe the Plumber or Bob the Boilermaker? They don&rsquo;t even deal with those people face to face when they have a problem with their homes. <em>&ldquo;Hello this is Mario Draghi&hellip; the man who controls the currency in your economy&hellip; could you please come fix the sink?&rdquo;</em></p> <p>&nbsp;</p> <p>This is why Yellen, Draghi and the like can say with a straight face that maintaining ZIRP or NIRP benefits the economy. It&rsquo;s why they can spent trillions to bail out/prop up banks without batting an eyelid. It&rsquo;s why <strong><u>no one </u></strong>who committed fraud went to jail. It&rsquo;s why lying and cheating in the financial system is allowed&hellip; even applauded&hellip; because the ones lying and cheating are the same people who picked out/ promoted the regulators.</p> <p>&nbsp;</p> <p>And this is why we&rsquo;re heading for another Crisis&hellip; one that will be even bigger than 2008. The fraud that caused 2008 was not solved. Instead it was allowed to spread into the public sector. Today most Central Banks are sporting leverage ratios that would put Lehman Brothers (pre-crisis) to shame.</p> <p>&nbsp;</p> <p>So the next time something breaks in the financial system&hellip; it won&rsquo;t be just individual banks going belly up. It will be entire countries.</p> <p>&nbsp;</p> <p>Indeed, consider China, where the Central Bank is pumping $29 billion <strong><u>per day</u></strong> into the financial system&hellip; and the stock market continues to Crash. There are in fact situations that are so dire that Central Banks cannot fix them.</p> <p>&nbsp;</p> <p>What&rsquo;s happened in China is coming to your neighborhood&hellip; wherever you are.</p> <p>&nbsp;</p> <p>If you&rsquo;ve yet to take action to prepare for the second round of the financial crisis, we offer a FREE investment report <strong><em>Financial Crisis &quot;Round Two&quot; Survival Guide </em></strong>that outlines easy, simple to follow strategies you can use to not only protect your portfolio from a market downturn, but actually produce profits.</p> <p>&nbsp;</p> <p>You can pick up a FREE copy if you</p> <p>&nbsp;</p> <h3 style="color:blue;"><strong><a href="">Click Here Now!!!</a></strong></h3> <p>&nbsp;</p> <p>Best Regards</p> <p>Phoenix Capital Research</p> <p>&nbsp;</p> <p>Our FREE daily e-letter: <a href=""></a></p> <p>&nbsp;</p> <p>&nbsp;</p> <p>&nbsp;</p> <p>&nbsp;</p> <p>&nbsp;</p> <p>&nbsp;</p> Central Banks China Janet Yellen Lehman Lehman Brothers Main Street Fri, 28 Aug 2015 18:59:09 +0000 Phoenix Capital Research 512546 at Is This The Most Important Chart In Global Finance? <p>First, we present the chart, followed by some brief color and analysis.</p> <p><a href=""><img src="" width="600" height="314" /></a></p> <p>Over the past two weeks, the world has begun to understand that, as Citi recently put it, EM FX reserve drawdowns do not "happen in a vacuum." <strong>That is, when emerging economies are forced to liquidate billions in USD assets to offset capital outflows, defend their currencies, and/or plug yawning budget holes, it puts pressure on those assets and works at cross purposes with the expansion of the Fed’s balance sheet.</strong>&nbsp;</p> <p>This dynamic is unfolding rapidly at present across EM. It began last November with the <a href="">quiet death of the petrodollar</a> and has now culminated with the <a href="">liquidation of more than $100 billion</a> in USTs by China during the last two weeks of August. The story, reduced to its simplest possible form is as follows. Saudi Arabia’s move to keep crude prices depressed in an effort to bankrupt the US shale space and tighten the screws on Moscow exacerbated a commodities downturn, sparking capital outflows from EM assets and pressuring EM currencies. In this environment, the yuan’s REER appreciated to the tune of 15% thanks to the RMB dollar peg, a situation which ultimately proved to be untenable for China amid decelerating economic growth. Apparently failing to realize that, as SocGen notes, the only way to have a stable currency is to either exercise absolute control or no control at all, China chose a half-measure and now, frequent open FX interventions are draining the country’s UST holdings (for more, see "<a href="">Why It Really All Comes Down To The Death Of The Petrodollar</a>").</p> <p>In the end, what started last November with the beginning of the end for the petrodollar, has created a situation where USD reserve assets are being liquidated across the emerging world with the two focal points being China and Saudi Arabia which have, respectively, the first and third largest stores of FX reserves on the planet. <strong>Needless to say, if both the Saudis and the Chinese continue to drawdown these reserves, the Fed would be forced to implement a massive round of asset purchases to offset the pressure on USTs and in turn, on the US economy.</strong></p> <p>Given the above, it would likely be no exaggeration to say that perhaps the most important chart in all of global finance is the one shown above:<strong> the yield on the 10Y Treasury bond versus the combined FX holdings of China and Saudi Arabia.</strong></p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="959" height="502" alt="" src="" /> </div> </div> </div> Bond China Crude Saudi Arabia SocGen Fri, 28 Aug 2015 18:50:50 +0000 Tyler Durden 512545 at Japan's Legendary "Twitter Trader" Reveals The Secret Of His Multi-Million Dollar Success <p><a href="">Two years ago, </a>when we first profiled <strong>Japan's mysterious "Mister Watanabe" daytrader - aka CIS</strong> - we thought it may just all be a hoax. But, as his claims this week that he <strong>made $34 million trading the panic on Monday - "I do my best work when other people are panicking,"</strong> <a href="">Bloomberg reports,</a> CIS - who claims JPY20bn AUM, has become a cult figure among Japan’s tight-knit community of day traders. Notorious for lines like "Not even Goldman Sachs can beat me in a trade," CIS drops some knowledge this week on how he has become so successful... <strong><em>"Buy stocks that are being bought, and sell stocks that are being sold."</em></strong> Just don't tell Cramer.</p> <p><strong>While a lot of investors were hitting the panic button Monday</strong>, <a href="">Bloomberg reports</a> a Japanese day trader who’d made a big bet against the market timed the bottom almost perfectly and <strong>narrated a play-by-play of the trade to his 40,000 Twitter followers. He claims to have walked away with $34 million.</strong></p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>As financial markets got crazy this week, many people turned cautious. Some were paralyzed. Not<strong> the 36-year-old day trader known by the Internet handle CIS.</strong></p> <p>&nbsp;</p> <p><strong>“I do my best work when other people are panicking,”</strong> he said in an interview Tuesday, about an hour after winding up the biggest trade of a long career betting on stocks. He asked that his real name not be used because he’s worried about robbery or extortion. To support his claims, he shared online brokerage statements showing his trades second by second.</p> <p>&nbsp;</p> <p>CIS had been shorting futures on the Nikkei 225 Stock Average since mid-August, wagering it would fall. By the market close on Monday, a paper profit of $13 million was staring him in the face. <strong>He kept building the position. When he cashed out late that night, a collapse in New York had caused his profit to double.</strong></p> <p>&nbsp;</p> <p>Instead of celebrating, he kept trading. He started betting the market had bottomed. When he finally took his winnings off the table on Tuesday, he tweeted,<strong> “That’s the end of my epic rebound trade.” His profit, he said, had almost tripled.</strong></p> <p>&nbsp;</p> <p><strong>“It was a perfect trade,” </strong>said Naoki Murakami, who follows CIS on Twitter and whose markets blog has made him a minor celebrity in his own right.</p> </blockquote> <p>CIS became a cult figure among Japan’s tight-knit community of day traders by trash talking on Internet message boards early in his career. He’s notorious for lines like “Not even Goldman Sachs can beat me in a trade.” Last year he opened a Twitter account, on which he talks about video games and, regularly, his trading. </p> <p><a href=""><img src="" width="600" height="448" /></a></p> <p>&nbsp;</p> <p><strong>There was still more money to be made from the panic though. </strong>Some investors that night were willing to pay a hefty premium for options that protected against the Nikkei crashing below 10,500. That would be a collapse of almost 40 percent. In CIS’s view, these investors were looking to buy insurance against a near impossibility...</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>He was happy to take the other side of that trade. The contracts were worth another $250,000 to him. He made the first deal within 10 seconds of what would prove to be the market’s bottom at 10:34 p.m.</p> <p>&nbsp;</p> <p><strong>“Too delicious,” he tweeted.</strong></p> <p>&nbsp;</p> <p>“Of course I’m happy about today, but you win some and you lose a lot, too,” he said, explaining <strong>the Greek financial crisis had cost him about $6 million.</strong></p> <p>&nbsp;</p> <p><strong>CIS said he has no idea whether or not China is going to drag down the global economy. He doesn’t even care. </strong>When he trades, he tracks volumes and price moves to follow the momentum.</p> <p>&nbsp;</p> <p>For him the basic rule is: <span style="text-decoration: underline;"><strong>“Buy stocks that are being bought, and sell stocks that are being sold.”</strong></span></p> <p><span style="text-decoration: underline;"><strong><br /></strong></span></p> <p><span style="text-decoration: underline;"><strong>“When a trade goes right I feel like bragging a little, but I don’t get on Twitter to talk about it if I lose,” he said with a laugh.<br /></strong></span></p> </blockquote> <p>*&nbsp; *&nbsp; *</p> <p>In a nutshell, CIS, a momentum day trader and living proof of survivorship bias in finance (because for every CIS who has, allegedly, made it, some 999,999 have failed) has amassed a fortune... at least in Twitter followers anyway.</p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="500" height="472" alt="" src="" /> </div> </div> </div> China Global Economy goldman sachs Goldman Sachs Japan Nikkei Twitter Twitter Fri, 28 Aug 2015 18:35:59 +0000 Tyler Durden 512543 at When The Yen Was A Last Resort Safety Bid, You Know It Was Bad <p><a href=""><em>Submitted by Jeffrey Snider via Alhambra Investment Partners,</em></a></p> <p><strong>It looks like the reversal of Monday&rsquo;s dramatic and frightful liquidation has held and gained in the past few days. From that we can infer, of <em>only</em> the near-term, that those forced repositions were enough to square the liquidity imbalance from the latest &ldquo;dollar&rdquo; run. </strong>The two words are related not just in a common semantic root, as liquidations are the necessary condition of illiquidity where base financial conditions are detrimentally misaligned. Every panic that has ever existed is in one form or another a systemic of near-systemic liquidation of financial positions in favor of present claims in the face of indiscriminately redirected basis (typically implosive). Even wholesale &ldquo;supply&rdquo; complications don&rsquo;t change that but only perhaps enhance the instability of the reversions since there is no obvious and clear mechanical means (what is being converted to what? We know what is being redirected as a result, but that is derivative to the actual seeds of disruption deep within the aggregate eurodollar inner workings) to interpret the size and reach of the reversal.</p> <p><strong>The difference between such a liquidity &ldquo;event&rdquo; and full-blown crash is simply one of magnitude on both sides: gaping liquidity supply which forces disorderly, widespread and momentous squaring to some greatly diminished settled state. The relative degree of chaos is just the last resort method of that realignment.</strong></p> <p><a href=""><img alt="ABOOK Aug 2015 Bubble Momentum Back" class="aligncenter size-full wp-image-32882" src="" style="width: 600px; height: 629px;" /></a></p> <p><strong>Given the widespread nature of this latest disturbance, and especially the appearance of a broad-based fear bid (gold, franc and, actually, yen), this was the most disruptive to date; the larger the run the greater the liquidation, and the more raw fear focused on stark hedging, necessary to accomplish its end.</strong> Obviously, given that near-term end, the dominant, conventional position remains that there is nothing wrong except specific problems here and there. The state of denial survives as connecting the continuous ripples of liquidiations to a unified and decaying foundation is too far outside recency bias. The fact remains, however, that the next one continues to be bigger and sharper than the last.</p> <p><strong>It goes until the &ldquo;big one&rdquo; shows up &ldquo;out of nowhere&rdquo; </strong>because everyone studiously ignores these events as if they can&rsquo;t possibly be what they so obviously are: continued <span style="text-decoration: underline;"><strong>warnings</strong></span>. This week&rsquo;s GDP report truly won&rsquo;t help because it seems to confirm the status quo even though it contains the seeds (inventory) of the big part of any contraction that may yet come; to which GDP hasn&rsquo;t been close to the mark in the face of <a href="" target="_blank">all the other accounts</a>. <strong>Anything comforting is still acceptable to the backward base case; anomalies are still taken as discrete anomalies no matter how frequent and regular, and very much linked; all those do is tighten the grip of self-delusion.</strong></p> <p>Until the dominant dynamic changes, the &ldquo;dollar&rdquo;, we should keep going until these warnings stop being warnings and start being &ldquo;it.&rdquo; It is impossible to say what the final turn will be, as you can&rsquo;t predict the level of &ldquo;necessary&rdquo; liquidations going too far because liquidity supply is totally hidden and derivative. <strong>The fact that one central bank after another continues to fall victim to the <a href="" target="_blank">same connecting degeneration</a> is cause for still deeper pause and reassessment, but that isn&rsquo;t any fun for the bull bubble and the &ldquo;easy money&rdquo; mindset.</strong> In any case, when the yen functions as the last resort bid of safety, you can pretty well assess just how messed up everything got &ndash; and start to make some determination about just how close to the precipice.</p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="201" height="172" alt="" src="" /> </div> </div> </div> EuroDollar Yen Fri, 28 Aug 2015 18:23:23 +0000 Tyler Durden 512542 at VIX ETF Short Squeezes For 6th Day In A Row, Long-Dated Vol Above Monday's Peak <p>While all eyes are on the front-end of the VIX term structure, <strong>today's volatility term structure in the out-dates is now higher than they were at the close on Monday at "peak crisis." </strong>VXX - the VIX ETF - is still surging, as the massive short position continues to get squeezed amid the ongoing backwardation in VIX...</p> <p>&nbsp;</p> <p><strong>6th day of short squeeze in a row...</strong> It sems picking up pennies in front of the steam roller does have consequences...</p> <p><a href=""><img src="" width="600" height="382" /></a></p> <p>&nbsp;</p> <p>&nbsp;</p> <p>And VIX is now higher than in it was during Monday's crisis in the out-months...</p> <p><a href=""><img src="" width="600" height="329" /></a></p> <p>&nbsp;</p> <p>This is the longest period of sustained bakcwardation since 2011...</p> <p><a href=""><img src="" width="600" height="298" /></a></p> <p>&nbsp;</p> <p>and The skew (cost of downside tail risk vs 'normal' risk) is extreme...</p> <p><a href=""><img src="" width="600" height="232" /></a></p> <p>&nbsp;</p> <p><em>Chart: BBG</em></p> <p>&nbsp;</p> <p>Finally, a 1 year time series of the implied vol surface:<em>&nbsp;</em></p> <p><em><a href=""><img src="" width="600" height="435" /></a></em></p> <p><em>h/t @noalpha_allbeta<br /></em></p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="910" height="660" alt="" src="" /> </div> </div> </div> Backwardation Volatility Fri, 28 Aug 2015 18:00:41 +0000 Tyler Durden 512541 at Why QE4 Is Inevitable <p>One narrative we’ve pushed quite hard this week is the idea that China’s persistent FX interventions in support of the yuan are costing the PBoC dearly in terms of reserves. Of course this week's posts hardly represent the first time we've touched on the issue of FX reserve liquidation and its implications for global finance. Here, for those curious, are links to previous discussions:</p> <ul> <li><span style="font-size: 1em; line-height: 1.3em;"><a href="">China Dumps Record $143 Billion In US Treasurys In Three Months Via Belgium</a></span></li> <li><span style="font-size: 1em; line-height: 1.3em;"><a href="">China's Record Dumping Of US Treasuries Leaves Goldman Speechless</a></span></li> <li><a href="">How The Petrodollar Quietly Died And Nobody Noticed</a></li> <li><a href="">Why It Really All Comes Down To The Death Of The Petrodollar</a></li> <li><span style="font-size: 1em; line-height: 1.3em;"><a href="">Devaluation Stunner: China Has Dumped $100 Billion In Treasurys In The Past Two Weeks</a></span></li> <li><span style="font-size: 1em; line-height: 1.3em;"><a href="">What China's Treasury Liquidation Means: $1 Trillion QE In Reverse</a></span></li> <li><span style="font-size: 1em; line-height: 1.3em;"><a href="">It's Official: China Confirms It Has Begun Liquidating Treasuries, Warns Washington</a></span></li> </ul> <p>And so on and so forth. </p> <p><strong>In short, stabilizing the currency in the wake of the August 11 devaluation has precipitated the liquidation of more than $100 billion in USTs in the space of just two weeks, doubling the total sold during the first half of the year.&nbsp;</strong></p> <p>In the end, the estimated size of the RMB carry trade could mean that before it’s all over, <strong>China will liquidate as much as $1 trillion in US paper, </strong>which, as we noted on Thursday evening, <span style="text-decoration: underline;"><strong>would effectively negate 60% of QE3 and put somewhere in the neighborhood of 200bps worth of upward pressure on 10Y yields.&nbsp;</strong></span></p> <p>And don't forget, this is<strong> just China</strong>. Should EMs continue to face pressure on their currencies (and there's every reason to believe that they will), you could see substantial drawdowns there too. Meanwhile, all of this mirrors the petrodollar unwind. That is, it all comes back to the notion of recycling USDs into USD assets by the trillions and for decades. Now, between crude's slump, the commodities bust, and China's deval, it's all coming apart at the seams.</p> <p>Needless to say, this "<a href="">reverse QE</a>" as we call it (or "quantitative tightening" as Deutsche Bank calls it) has serious implications for Fed policy, for the timing of the elusive "liftoff", and for the US economy more generally. Of course we began detailing the implications of China’s Treasury liquidation months ago and now, it’s become quite apparent that analyzing the consequences of China’s massive FX interventions is perhaps the most important consideration when attempting to determine the future course of global monetary policy.&nbsp;</p> <p><span style="font-size: 1em; line-height: 1.3em;">On that note, we present the following from Deutsche Bank’s George Saravelos, which can be summarized with the following snippet:</span></p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><span style="font-size: 1em; line-height: 1.3em;">The potential for more China outflows is huge: set against 3.6 trio of reserves, China has around 2 trillion of “non-sticky” liabilities including speculative carry trades, debt and equity inflows, deposits by and loans from foreigners that could be a source of outflows (chart 2). <strong>The bottom line is that markets may fear that QT has much more to go.&nbsp;&nbsp;&nbsp; </strong></span></p> <p>&nbsp;</p> <p><span style="font-size: 1em; line-height: 1.3em;">What could turn sentiment more positive? The first is other central banks coming in to fill the gap that the PBoC is leaving. <strong>China’s QT would need to be replaced by higher QE elsewhere, with the ECB and BoJ being the most notable candidates.</strong>.. Either way, it is hard to become very optimistic on global risk appetite until a solution is found to China’s evolving QT</span></p> </blockquote> <p><span style="font-size: 1em; line-height: 1.3em;">In other words, first according to Deutsche, and soon according to virtually all sellside strategists who are slowly but surely grasping the significance of what we have been warning for month on end, QE4 is inevitable. The only problem is that when the Fed pivots from "imminent rate hike" to QE4, it will loose the last shred of credibility it had left. The Fed is now completely trapped. <br /></span></p> <p>* &nbsp;* &nbsp;*</p> <p><em>Beware China’s Quantitative Tightening</em><span style="white-space: pre;"> </span></p> <p>Why have global markets reacted so violently to Chinese developments over the last two weeks? There is a strong case to be made that it is neither the sell-off in Chinese stocks nor weakness in the currency that matters the most. Instead, it is what is happening to China’s FX reserves and what this means for global liquidity. Starting in 2003, China engaged in an unprecedented reserve-accumulation exercise buying almost 4trio of foreign assets, or more than all of the Fed’s QE program’s combined (chart 1). The global impact was indeed equivalent to QE: the PBoC printed domestic money and used the liquidity to buy foreign bonds. Treasury yields stayed low, curves were flat, and people called it the “bond conundrum”.</p> <p>Fast forward to today and the market is re-assessing the outlook for China’s “QE”. The sudden shift in currency policy has prompted a big shift in RMB expectations towards further weakness and correspondingly a huge rise in China capital outflows, estimated by some to be as much as 200bn USD this month alone. <strong>In response, the PBoC has been defending the renminbi, selling FX reserves and reducing its ownership of global fixed income assets. The PBoC’s actions are equivalent to an unwind of QE, or in other words Quantitative Tightening (QT).</strong></p> <p><strong>What are the implications? For global risk assets, they are clearly negative –global liquidity is falling. </strong>For fixed income, the impact on nominal yields is ambivalent because private safe-haven demand for bonds may offset central bank selling. But real yields should move higher, inflation expectations lower, and there should be steepening pressure on curves. This is indeed how markets have responded over the last two weeks: as if the Fed has announced it is unwinding its balance sheet!<span style="font-size: 1em; line-height: 1.3em; white-space: pre;"> </span></p> <p><span style="font-size: 1em; line-height: 1.3em; white-space: pre;"><a href=""><img src="" width="600" height="285" /></a><br /></span></p> <p><strong>The potential for more China outflows is huge: set against 3.6trio of reserves (recorded as an “asset” in the international investment position data), China has around 2trillion of “non-sticky” liabilities including speculative carry trades, debt and equity inflows, deposits by and loans from foreigners that could be a source of outflows (chart 2). The bottom line is that markets may fear that QT has much more to go.<span style="font-size: 1em; line-height: 1.3em; white-space: pre;"> </span></strong></p> <p>What could turn sentiment more positive? The first is other central banks coming in to fill the gap that the PBoC is leaving. China’s QT would need to be replaced by higher QE elsewhere, with the ECB and BoJ being the most notable candidates. The alternative would be for China’s capital outflows to stop or at least slow down. Perhaps a combination of aggressive PBoC easing and more confidence in the domestic economy would be sufficient, absent a sharp devaluation of the currency to a new stable.<strong> Either way, it is hard to become very optimistic on global risk appetite until a solution is found to China’s evolving QT.</strong></p> <p><strong>* &nbsp;* &nbsp;*</strong></p> <p><strong><img src="" width="500" height="302" /><br /></strong></p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="613" height="372" alt="" src="" /> </div> </div> </div> Carry Trade Central Banks China Deutsche Bank fixed Monetary Policy Renminbi Yuan Fri, 28 Aug 2015 17:51:48 +0000 Tyler Durden 512540 at We Are All Preppers Now <p><a href=""><em>Via The Mises Institute,</em></a></p> <div class="body-content"> <p><strong>Damian McBride is the former head of communications at the British treasury and former special adviser to Gordon Brown,</strong> erstwhile Prime Minister of the U.K. Yesterday he <a href="" target="_blank">tweeted some surprising advice</a> in response to the plunge in global equities markets.;</p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>Advice on the looming crash, No.&nbsp;1: <strong>get hard cash in a safe place now; don&#39;t assume banks &amp; cashpoints will be open, or <a href="" target="_blank">bank</a>&nbsp;cards will work.</strong></p> <p>&nbsp;</p> <p>Crash advice No. 2: <strong>do you have enough bottled water, tinned goods &amp; other essentials at home to live a month indoors?</strong> If not, get shopping.</p> <p>&nbsp;</p> <p>Crash advice No. 3: <strong>agree a rally point with your loved ones</strong> in case transport and communication gets cut off; somewhere you can all head to.</p> </blockquote> <p>Evidently, McBride interprets the wipe-out of over $3 trillion in total global market cap during the three-day rout as a prelude to a much broader and deeper financial crash that will precipitate civil unrest.</p> <blockquote class="twitter-tweet" lang="en"><p dir="ltr" lang="en">Just like mid-October last year, the market howls; the Fed panics &amp; puts the dummy back in; and we all pretend it&#39;s OK again. It&#39;s madness.</p> <p>&mdash; Damian McBride (@DPMcBride) <a href="">August 25, 2015</a></p></blockquote> <script async src="//" charset="utf-8"></script><blockquote class="twitter-tweet" lang="en"><p dir="ltr" lang="en">Every day the era of easy borrowing persists just means even more loans that won&#39;t be repaid when the real crash finally comes.</p> <p>&mdash; Damian McBride (@DPMcBride) <a href="">August 25, 2015</a></p></blockquote> <script async src="//" charset="utf-8"></script><blockquote class="twitter-tweet" lang="en"><p dir="ltr" lang="en">Today is just the stock market catching up with the terror over defaults that&#39;s been gripping the bond market for months.</p> <p>&mdash; Damian McBride (@DPMcBride) <a href="">August 24, 2015</a></p></blockquote> <script async src="//" charset="utf-8"></script><p>According to McBride, </p><p>&nbsp;</p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p><span style="text-decoration: underline;"><strong>We were close enough in 2008 and what&#39;s coming is on 20 times that scale.</strong></span></p></blockquote> </div> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="228" height="162" alt="" src="" /> </div> </div> </div> Mises Institute Fri, 28 Aug 2015 17:36:54 +0000 Tyler Durden 512539 at Joe Biden's Son Blames "Russian Agents" For Ashley Madison Profile <p><a href="">Last night we heard the best 'excuse' yet if you are caught with an Ashley Madison account, from Dan Loeb</a> - <strong><em>"due diligence."</em></strong> Today, not to be outdone by a married hedge fund manager, Vice-President Joe Biden's son "Hunter" has unleashed his own set of excuses for member ship of the extramarital affairs website, <a href="">as Breitbart reports</a>&nbsp; - <strong><em>Biden thinks international agents, possibly Russian, who objected to his board membership with a Ukrainian gas company set up a fake account to discredit him.</em></strong> However, IP mapping suggests otherwise...</p> <p>&nbsp;</p> <p><a href=""><em>As Breitbart reports,</em></a></p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><strong>Vice President Joe Biden’s son Hunter Biden’s account on the extramarital dating website Ashley Madison was used and likely created on the Georgetown University campus while Biden was teaching there.</strong></p> <p>&nbsp;</p> <p>Business executive Robert “Hunter” Biden, reportedly an adviser to his father’s political career, told Breitbart News Monday that he suspected his enemies of creating a fake Ashley Madison account for him in order to discredit him. <strong>The email address provided for “Robert Biden’s” account matched a personal email address once used by Biden</strong>, the vice president’s son confirmed.</p> <p>&nbsp;</p> <p><strong>Biden thinks international agents, possibly Russian, who objected to his board membership with a Ukrainian gas company set up a fake account to discredit him. </strong>A source close to Biden <a href="">told People Magazine</a> after the first Breitbart story ran that the IP address for the account traces to Jacksonville, Florida.</p> <p>&nbsp;</p> <p>But account information shows that the profile, which was confirmed by a credit card purchase in 2014, was used at the latitude/longitude point of 38.912682, -77.071704.</p> <p>&nbsp;</p> <p><a href=""><img src="" width="600" height="472" /></a></p> <p>&nbsp;</p> <p><strong>That <a href="'45.7%22N+77%C2%B004'18.1%22W/@38.9125667,-77.0715232,311m/data=!3m1!1e3!4m2!3m1!1s0x0:0x0">latitude-longitude point</a> just happens to exist on the Georgetown University campus, at an administrative building on Reservoir Road. And Hunter Biden just happened to be teaching there around the time the account was set up.</strong></p> </blockquote> <p>*&nbsp; *&nbsp; *<br /><span style="text-decoration: underline;"><strong>Faced with the new information, representatives for Biden said that the vice president’s son would not comment on the story </strong></span>beyond his original statements to Breitbart News denying that the account was his.</p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="518" height="457" alt="" src="" /> </div> </div> </div> Florida Joe Biden Fri, 28 Aug 2015 17:26:52 +0000 Tyler Durden 512538 at Atlanta Fed Cuts Q3 GDP Forecast To A Paltry 1.2% <p>Earlier today, following the disappointing July personal spending data and yesterday's record surge in inventories as part of the spike in Q2 GDP, we predicted that the Atlanta Fed would cut its already painfully low Q3 GDP forecast of 1.4%.</p> <blockquote class="twitter-tweet"><p dir="ltr" lang="en">Atlanta Fed Q3 GDP update due today: should be a drop from 1.4%</p> <p>— zerohedge (@zerohedge) <a href="">August 28, 2015</a></p></blockquote> <script src="//"></script><p>Moments ago, it did just that, when the <a href="">Atlanta Fed GDPNow "nowcast" </a>was revised <strong>lower to just a 1.2% annualized growth rate</strong>, more than two-thirds below the BEA's first revision of Q2 GDP. </p> <p>If officially confirmed in two months, this would be the lowest GDP since Q1 2014, and just fractionally higher than the "harsh winter" double-seasonally adjusted GDP print from the first quarter which economists tell swear was due only to harsh weather. So what was the culprit this time: the record hot July?</p> <p><a href=""><img src="" width="480" height="400" /></a></p> <p>Here are the reasons:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2015 is 1.2 percent on August 28, down from 1.4 percent on August 26. The forecast for real GDP growth in the third quarter decreased by 0.2 percentage points following this morning's personal income and outlays report from the U.S. Bureau of Economic Analysis. <strong>The slight decline in the model's forecast was primarily due to some weakness in real services consumption for July, which lowered the model's estimate for personal consumption expenditures from 3.1 percent to 2.6 percent for the third quarter.</strong></p> </blockquote> <p>And while normally this downward would be vehemently opposed by the permabulls, today it comes as a welcome relief as this may be just the catalyst those who are terrified about <span style="text-decoration: line-through;">a market drop&nbsp;</span> "premature" rate hike will latch on to, crying how it would be foolhardy for the Fed to hike rates in a quarter in which GDP is set to tumble. </p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="480" height="400" alt="" src="" /> </div> </div> </div> Personal Consumption Personal Income Fri, 28 Aug 2015 17:08:05 +0000 Tyler Durden 512537 at