The surreal nature of this world as we enter 2015 feels like being trapped in a Fellini movie. The .1% party like it’s 1999, central bankers not only don’t take away the punch bowl – they spike it with 200% grain alcohol, the purveyors of propaganda in the mainstream media encourage the party to reach Caligula orgy levels, the captured political class and their government apparatchiks propagate manipulated and massaged economic data to convince the masses their standard of living isn’t really deteriorating, and the entire façade is supposedly validated by all-time highs in the stock market. It’s nothing but mass delusion perpetuated by the issuance of prodigious amounts of debt by central bankers around the globe. But now, the year of consequences may have finally arrived.
“Don’t look back - something might be gaining on you,” Satchel Paige famously warned. For connoisseurs of civilizational collapse, 2014 was merely annoying, a continued pile-up of over-investments in complexity with mounting diminishing returns, metastasizing fragility, and no satisfying resolution. So we enter 2015 with greater tensions than ever before and therefore the likelihood that the inevitable breakdown will release more destructive energy and be that much harder to recover from.
Something stunning and unexpected took place in the third quarter: Citigroup, or rather its FDIC-insured Citibank National Association entity, just surpassed JPM and is now the biggest single holder of total derivatives in the US. Furthermore, as the charts below show, while every other bank was derisking its balance sheet, Citi not only increased its total derivative holdings by $1 trillion in Q2, but by a whopping, and perhaps even record, $9 trillion in the just concluded third quarter to $70.2 trillion!
"Some folks are selling stocks..." and, according to The White House, President Obama is closely monitoring it. As The Hill reports, despite the meme that lower-oil-prices-are-unequivocally-good-news-for-Americans, the Obama administration is monitoring whether the fall in oil prices is affecting the US stock market. Just over 5 years ago, President Obama explained to the American public that "profit and earning ratios are starting to get to the point where buying stocks is a potentially good deal," so we can rest assured that our leaders are (for now) "hesitant" to say whether the fall of the stock market, which came as crude oil trades briefly dipped below $50, was related to oil prices.. so blamed Europe.
While the media continues to pound the table with all of the bullish arguments that should continue to drive the current advance in the markets, it is only prudent to at least attempt an understanding of the counter arguments. The "risk" to investors is not a continued rise in the financial markets, but the eventual reversion that will occur. Like Wyle E. Coyote, since most individuals only consider the "bull case," as it creates a confirmation bias to support their "greed factor", they never see the "cliff" until it is far to late. Hopefully, these charts will give you some food for thought. Remember, every professional poker player knows how to spot a "pigeon at the table." Make sure it isn't you.
That markets are rigged, at both the macro level, through central banks, and micro, through HFTs, dark pools and purposeful market fragmentation, should be painfully obvious to everyone by now. But when even the regulators engage in "jury rigging", or in this case blocking prominent HFT-critic Joseph Stiglitz, a Nobel prize winning economist (a prize which doesn't count for much on these pages but should - at least on paper - impress such statist cronies as the SEC), has been blocked from a government panel that will advise regulators on issues facing U.S. equity markets, it becomes clear as day that the rigging is not just in the markets: worse, it is openly involves the market's "regulator" and "enforcer."
The practice of sensible investment becomes difficult when our secondary information sources (“fundamentals”) are inherently subjective. We are coming to appreciate the counsel of a friend who suggested that the merit of gold lies not in its price so much as in its ownership. What matters is that you own it.
The biggest hurdle is too much debt, not the need for more cheap money. QE may also have sizable unintended consequences through rampant market speculation, herd-like investor behavior, and the creation of asset bubbles. Those potential ramifications have yet to be realized. ... The best investments or trades usually entail envisioning markets going to previously unforeseen levels and tying it to a coherent story line. Given the simple scenario outlined above, investors should become open minded to the potential for long-dated Treasuries continuing to rally. I can envision the 10-year note trading to a new low yield (below 1.38%) and even below 1%. I expect the yield curve to flatten viciously this year. I remain a bond bull and believe the 30-year yield will trade with a ‘one handle’ (i.e.; below 2%) in 2015.
Not satisfied with merely "nailing the number", Goldman Sachs' David Kostin forecasts the S&P 500's trajectory through 2015. Recognizing, as we did, that Bullish Sentiment is as highs as it gets, Kostin expects short-term weakness during the next month (the drop), earnings growth thanks to lower oil prices into mid-year (the pop), but multiple compression after rate hikes into year-end (the slop)...
For all the endless media buzz pitching the bullish spin of plunging gas prices, namely that while crude capex spending and energy company earnings are both crashing, high-paying shale jobs are about to suffer pervasive layoffs and energy HY bonds are entering mass default territory leading to who knows what unexpected downstream effects, the average US consumer will spend substantially more to offset all the adverse side-effects of the plunging oil price. Or rather, was supposed to spend more. Because as Gallup finds, this did not happen. Here is what did happen.
Blackfield Capital CJSC was one of Moscow’s hottest hedge funds, hosting glitzy parties and embarking on ambitious plans to expand to the U.S. The firm’s founder in 2013 even rented a Manhattan apartment for a record-setting price, and bought a $300,000 sports car; but now, as WSJ reports, 29-year-old Kim Karapetyan "just disappeared" leaving the staff of 50 stunned and making off with some $20 million in investor cash...
"It’s difficult to entertain both current 'realities' at once. One must simultaneously hold in mind reckless yield-seeking speculation, hypervaluation that rivals the 1929 and 2000 equity market peaks (see Yes, This is an Equity Bubble), zero interest rates, low prospective long-term returns all around, and persistent malinvestment that poses increasing systemic risks for the entire global economy, plus one fact that encourages us to forget it all: prices have been going up. Cognitive dissonance tempts us to reconcile this tension by ignoring one part of the story or another."
Just as T.Boone Pickens warned, watching the US Rig Count is key to comprehending the looming crisis in oil. The last 4 weeks alone have seen a drop of over 100 rigs - the 2nd fastest slide since 2001 in percentage terms. This is the worst December to January since 2008/9. As Pickens noted, "demand is down" - "lower demand is the main driver" - "rig count is gonna fall - drop 500 rigs in next 6-9 months"