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Why Is The Market Mispricing Uncertainty By 50%?

Tyler Durden's picture




 

By now there can be no doubt that due to Bernanke et al's endless intervention in any and all capital markets, the "market" is no longer a mechanism that discounts the future in any way. In fact, instead of predicting the future, all the market has become is a backward looking race in which collocated algos respond to historical data - flashing red headlines - and attempt to out run each other in who can buy or sell more free for all, knowing full well at least one other greater fool will be behind them to pick up the pieces.

Sadly, fundamentals as a driver to valuaton no longer exist. But such is life under central planning.

Yet there is one thing that the market responds to - it is politicians and the uncertainty that political risk brings with it. This certainly includes that most political of organizations, the Federal Reserve, whose stimulative intervention into capital markets two months before the presidential elections was without precedent. Yet even here, the market has managed to decouple from reality, and is trading at level far greater than what political uncertainty risk implies.

As the chart below from Citi's Matt King shows, a correlation between BBB spreads and a broader proprietary uncertainty index, there is currently a roughly 50% political risk premium that is not being priced into stocks.

This is certainly evident in stock prices, as with just 23 days left until the end of the year, politicians are nowhere nearer a Fiscal Cliff resolution than when they started the debate. Yet the biggest catalyst that could force an immediate compromise - the Dow Jones Industrial Average (D.C. continues to be oblivious about the SPX) - refuses to decline on the expectations that the cliff will be resolved. The paradox is that it won't unless the market tumbles.

So who blinks first, and what does the complete failure of any capital market to accurately reflect any and all risks (largely onboarded by every central bank in the world), macro, micro and political, mean for the future of asset prices?

One thing is certain: in a market addicted to $85 billion in monthly Fed-funded Flows each and every month: a nominal amount needed to avoid an all out collapse, the last thing the Fed will ever be able to do, is unwind its balance sheet which is now a $3 trillion (rising to $5 trillion by the end of 2014) buffer between myth and reality.

 

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Fri, 12/07/2012 - 14:26 | 3043383 tooriskytoinvest
tooriskytoinvest's picture

A Credit Rating Downgrade And A Market Collapse Coming In Weeks: Wealthy Fleeing France, UK, U.S. As The Country Is Entering An Era Of Fiscal Austerity And Tax Rates Becoming Unbearable, Fiscal Cliff Deal Looking Increasingly Unlikely, And Economic Growth In Advanced Economies Is Essentially Over!

http://investmentwatchblog.com/a-credit-rating-downgrade-and-a-market-collapse-coming-in-weeks-wealthy-fleeing-france-uk-u-s-as-the-country-is-entering-an-era-of-fiscal-austerity-and-tax-rates-becoming-unbearable-fiscal-cliff/

Fri, 12/07/2012 - 14:35 | 3043412 Spirit Of Truth
Spirit Of Truth's picture

So Syria unleashing a chemical war might come as a bit of a shock?

http://thespiritoftruth.blogspot.com/2012/12/apocalyptic-vision-syrian-c...

Fri, 12/07/2012 - 14:41 | 3043438 James_Cole
James_Cole's picture

- OT "So Syria unleashing a chemical war might come as a bit of a shock?

http://thespiritoftruth.blogspot.com/2012/12/apocalyptic-vision-syrian-c..."

What a bunch of nonsense, quick! Invade Syria! -

"refuses to decline on the expectations that the cliff will be resolved. The paradox is that it won't unless the market tumbles."

It's all part of the fun!

Fri, 12/07/2012 - 18:02 | 3044079 AldousHuxley
AldousHuxley's picture
  • fiscal cliff delayed with politicians doing some smoke and mirrors "fixes"...... 100% CERTAINTY
  • Fed will create another bubble......100% CERTAINTY
  • Another war in middle east in next 10 years....... 100% CERTAINTY
  • American middle class gets poorer while chinese elites get richer........100% CERTAINTY
  • everyone will be dead in the next 100 years ........100% CERTAINTY

 

 

 

As Marc Faber would say....."ONE HOUNDRED PERCENT CER-TEN-TEE!"

Fri, 12/07/2012 - 14:51 | 3043482 SheepDog-One
SheepDog-One's picture

OOo! Look! They've got 'WMD's' again and may USE them at any minute!!'

Gee how many times will people fall for the same old trick?

Fri, 12/07/2012 - 15:22 | 3043582 El Oregonian
El Oregonian's picture

You know, it only gets bitter from here...

Fri, 12/07/2012 - 17:37 | 3043999 fourchan
fourchan's picture

collocated past participle, past tense of col·lo·cate Verb (of a word) Be habitually juxtaposed with another with a frequency greater than chance: "“maiden” collocates with “voyage.”".

Fri, 12/07/2012 - 14:35 | 3043411 bobthehorse
bobthehorse's picture

Are things looking up?

Are Bernanke's man tits squirting milk?

Or are we all truly fucked?

I'm going with truly fucked.

Run to the hills!  Humpty has fallen, and he's not getting up.

Sat, 12/08/2012 - 06:35 | 3045193 boogerbently
boogerbently's picture

"Why Is The Market Mispricing Uncertainty By 50%?"

The same reason it's "mispricing" gold.

EVERY known factor to raise the price of gold is happening, yet gold price is neutralized by the "strengthening dollar."

Too funny.

Fri, 12/07/2012 - 14:37 | 3043421 WhiteNight123129
WhiteNight123129's picture

Off topic.

PIMCO is now avoiding the long end of teh curve, focusing on the short end because of the end of FDIC insurance. That could make money market and T-Bills yield plunge, steepen the curve and make yield structure more negative. It is not totally correct to look only at the 10-Years and inflation over ten years to figure out the negative level fo yields. The short end is about to make real time alternative between cash at the bank and Gold a lot more attractive for Gold. Steepening the yield curve and punitive taxes on dividends and shares buy-back would force corporations to spend and create inflation, Krugman will be happy, Goldbugs too but for a different reason.

Goldman Sachs is full of BS, as usual.

 

Fri, 12/07/2012 - 15:09 | 3043537 kaiserhoff
kaiserhoff's picture

Good points.  It's not like money markets have any margin for error.

I've been looking at options, lately, simple stuff, grains and silver.  Junk I've traded forever.  Nothing looks right.  With an interest component of zero, spreads should tighten as we get over the drought, the election, whatever, but that isn't happening.  Option sellers are scared shitless. 

Fri, 12/07/2012 - 14:38 | 3043423 michiganmaven
michiganmaven's picture

good luck getting reality with all this money printing... what a farce.

Fri, 12/07/2012 - 14:54 | 3043492 seabiscuit
seabiscuit's picture

We are currency money creators, thus we cannot run out of money. Right?

http://www.youtube.com/watch?feature=player_embedded&v=JL9YET2gg0k

 

 

Fri, 12/07/2012 - 16:11 | 3043697 Radical Marijuana
Radical Marijuana's picture

An entertaining video ...

Both segments are based on military metaphors. However, the actual "mispricing" is more like in the order of magnitude of millions of percent, rather than 50%. The fundamentals are fraud backed by force, with quadrillions of units of funny money made out of nothing, backed up by an equal magnitude of threats from weapons of mass destruction. The irony of this kind of video is that it utilizes military metaphors, but, of course, can not come close to showing how INSANE the situation actually is, because none of the audience would understand that! The "political risk" is from the runaway insanity of global electronic fiat money frauds, backed by nothing but the credible threats of force from using weapons of mass destruction, that are many orders of magnitude bigger than anything in history. There are no big daddy tough guys who are even remotely close those orders of magnitude anymore.

Fri, 12/07/2012 - 14:54 | 3043493 seabiscuit
seabiscuit's picture

We are currency money creators, thus we cannot run out of money. Right?

http://www.youtube.com/watch?feature=player_embedded&v=JL9YET2gg0k

 

 

Fri, 12/07/2012 - 14:38 | 3043424 falak pema
falak pema's picture

sounds like those marvelous pills for underendowed men; or at least those who think they are; like hopium hooked traders think their portfolios underperform. 

Some people love to live on white powder sniffing, not Green apples but extracts from poppy fields. 

Hell-i-copter Ben flies for other men standing behind the curtain, as he sprinkles the world with his brand of "white powder". 

White house, white powder, white washed money, white knight of WS, white lies of media BS. 

In fact the white colour is not easy to make as pure white; as any painter who starts from scratch can vouch for, when grinding the mineral or herbal extracts himself.

So how do these guys white lie their way to hyping the market up so easily?

The prepackaged age of industrial CDO/CDS derivative finance casts a shadow of perputual virtual profit in all banking that fools the investor!  

Its time we went back to making our financial instruments from scratch like artisans of old!

And we shelf this TBTF shadow banking world of derivative nights in white satin. 

Fri, 12/07/2012 - 17:53 | 3044049 LooseLee
LooseLee's picture

Just more reason why it is obvious that the enemies of the State are the essence of Wall St. and when the time comes they shall all be walking with BULLSEYES on their back!

Fri, 12/07/2012 - 21:23 | 3044573 WhiteNight123129
WhiteNight123129's picture

I am working in the hedge fund industry, and even guys in the business want the end of this charade, it is like Adolf Hitler, in the end even his generals want to wack him. Look at PIMCO, he is sick of that charage I am sure. He should quit like Druckenmiller, Soros and others, just shut down, go in reclusion and when the shit hits the fan come back to redeem yourself and do some good.

 

Fri, 12/07/2012 - 14:43 | 3043439 Dr. Engali
Dr. Engali's picture

The politicians will have their puts in place for any sell off, and long before any deal is done they will have their call options in place to capture the upside. There is more than one reason the inept leave Washinhton with oodles of money

Fri, 12/07/2012 - 14:43 | 3043442 Milton Waddams
Milton Waddams's picture

Someone please check the pulse of the Russell 2000.  The index, consisting of 2000 underlying stocks, has traded in a 10 point range (roughly 1.2%) over 7 consecutive days.

Fri, 12/07/2012 - 14:43 | 3043444 Frank N. Beans
Frank N. Beans's picture

50% certainty you mean.

fixed it.

 

Fri, 12/07/2012 - 14:47 | 3043455 seek
seek's picture

Another OT, but the first three posts immediately after a new story is put up are blog spam -- which I've noticed has increased a lot lately.

I really enjoy how free and open the ZH discussions are, but it may be time for the heavy hand of Tylers to smite thee asses, spammers.

On topic -- given how badly capital is being misasllocated due to Bernankus Prime's roboprinting, is it any surprise at all that mispricing is happening, regardless of reason?

Fri, 12/07/2012 - 14:50 | 3043471 SheepDog-One
SheepDog-One's picture

Why? Because they've got nothing else at the moment....but dont worry, mom and pops will get the rug pulled out from under their 401K/pension funds real soon after they 'compromise' and 'find a solution'.

Fri, 12/07/2012 - 14:51 | 3043477 nasdaq99
nasdaq99's picture

Head & Shoulders alert:  SPX, Naz & DJ30 dead ahead!!!!!!!!!!!!!!!!!!!!!!!

Fri, 12/07/2012 - 16:27 | 3043544 LouisDega
Fri, 12/07/2012 - 14:50 | 3043478 Piranhanoia
Piranhanoia's picture

This reminds me of a dozen old movies where guys are on the floor playing craps,  waiting for the inevitable raid from the police or the SP's to break up a dirty game the players all know is rigged.

Is that all the market is?  Gamblers trying to front run day traders?

Fri, 12/07/2012 - 14:51 | 3043480 TrustWho
TrustWho's picture

Daddy Bernanke and his Fed buddies played a significant role in creating this financial house of cards. The Fed believed the financial myth, irrational exuberance, prior to the subprime mess and helped drive the irrational consumption. They continue to drive the irrational consumption until we are all consumed by their debt driven nominal GDP.

People should talk to east europeans and russians to understand the future we have created onced the financial inderpinnings of our society collapses. They have seen this elite driven collapse and may help you understand which daughter you will sell for food. The american future is DARK.  

Fri, 12/07/2012 - 15:02 | 3043517 LawsofPhysics
LawsofPhysics's picture

Spent considerable time in Saint Petersburg in 1994,1995, and 1996.

Long black markets, any physical assets of real value, and personal security teams.

 

Fri, 12/07/2012 - 14:52 | 3043487 XtraBullish
XtraBullish's picture

Buy buy buy - making huge coin here buying the fucking dips. Never underestimate the replacement power of equities within an inflationary spiral. Ka Ching!

Fri, 12/07/2012 - 14:53 | 3043489 Cognitive Dissonance
Cognitive Dissonance's picture

I always did like to play Chutes and Ladders as a kid. Too bad the grown up version can be will be lethal.

<Wow, that was fun. Can we do it again Ben?>

Fri, 12/07/2012 - 14:55 | 3043501 LawsofPhysics
LawsofPhysics's picture

WTF?!?!?  Where is this "market" they speak of?  I thought we were simply front-running the central planners.  What am I missing here?

Fri, 12/07/2012 - 15:00 | 3043512 _ConanTheLibert...
_ConanTheLibertarian_'s picture

Someone release a replicating algo which recognizes political risk, please. That would be fun.

Fri, 12/07/2012 - 15:01 | 3043519 walküre
walküre's picture

The geezers are still working or working again. They LOST their home equity and lost their portfolio. Never investing again.

The young ones work multiple jobs to keep the lights on and feeding the family. They work longer and harder, still making less than they made in the good jobs they lost due to the Depression. Not going to spare a dime to Wall Street's games.

What is left? The big guys who are figuring out that they can't pass the hot potato to anyone else? They're busy trying to stash what they have and convert into tangibles like PMs or land?

Equities are at a dead end. Commodity trade is at a dead end. Ever checked the volumes in the commodity contracts lately? Dead as a door nail. The gig is up which is why more and more brokers, traders and bankers getting purged.

Fri, 12/07/2012 - 15:06 | 3043532 magne13
magne13's picture

Come on guys this is an easy one, if you know anything about capital formation and yield chase strategies, you will then understand why BBB is no proxy for risk, BBB is the new AAA in terms of yield hunt and where else can money go next...meaning as long as the FED stays with its ZIRP yield compression on down the Credit quality road or pot hole filled road will continue, perhaps chart the risk chart in this post to junk and then maybe we can see correlation still holding, that is at least till 2014 when Junk becomes the new AAA! Dont fight the FED just join em....(I of course am Joking) We will see how the banks handle the FDIC endless guarantee, which will shoot short US rates even further negative.

Fri, 12/07/2012 - 15:08 | 3043535 Skyprince
Skyprince's picture

This is what happens when "risk" is socialized and gains flow to the "elites."  The decoupling we witness is due to the fact that those throwing money at this market KNOW they won't lose--moral hazard and all that good stuff.  Just follow the money folks.  Answer this question.  What best serves TPTB?  Going off the cliff?  Or...a jigged up compromise that allows ever more vampire squid activity?  My bet is on the grand compromise at the last moment and champaigne corks flying through the air as CNBC tools don their party hats and ring in the New Year. Obama may want to go off the cliff in order to shame the Republicans and get the House back in two years, but his handlers simply won't allow that....sorry Obama...not his time.  

 

Fri, 12/07/2012 - 15:11 | 3043546 LawsofPhysics
LawsofPhysics's picture

Correct.  Address the moral hazard and restore real consequences for bad behavior, and so much of this fixes itself.

Fri, 12/07/2012 - 17:02 | 3043884 dexter_morgan
Fri, 12/07/2012 - 15:13 | 3043552 Glass Seagull
Glass Seagull's picture

Fed buying the hell out of treble B paper?  Looks like a big ending diagonal (60-weeks developed) on the HYG chart.

 

Good luck with that, Ben.

 

 

Sat, 12/08/2012 - 12:13 | 3045460 yogibear
yogibear's picture

Bubble Bernanke wants to save anything he perceives as a risk with his printed money.

The Fed is doing all they can to kill the US dollar. Eventually people will dumping it in droves once they realize what's going on. 

The emperor has no clothes.

 

Fri, 12/07/2012 - 15:55 | 3043666 Hohum
Hohum's picture

Why a mispricing of risk?  Why can't we have a 20,000 DOW and 20% unemployment?  Bank gives FED a crappy security; FED overpays; bank has fun with the liquidity.  It's a closed loop, fellas.

Fri, 12/07/2012 - 16:09 | 3043688 Quinvarius
Quinvarius's picture

Maybe the undertainty index of political uncertainty is complete horse shit.  Look what is in it.  People disagreeing?  Seriously?  How about this instead.  There is no uncertainty.  There are only liars, the lied to, and those that understand the certainty of the printing press.

Sat, 12/08/2012 - 10:11 | 3045320 RiverRoad
RiverRoad's picture

What uncertainty?  The "market" is discounting uncertainty because there is no uncertainty with central planning.  At the 11th hour Congress will do exactly what the Fed/Goldman et al tells/pays them to do.  The only certainty is that the sheeple, as usual, have been thoroughly screwed.  The rest can expatriate if they haven't already.

Sat, 12/08/2012 - 12:04 | 3045448 yogibear
yogibear's picture

Maybe the bots can trigger a blowup of  the derivatives. Once those go they will cause massive damage. In some cases not much backing up hedges.

The more complex, the better the chance of implosion. Once it starts it will make the last downturn look good.

 

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