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On The Cusp Of Exposing The Full Iceberg
Via Scotiabank's Guy Haselmann,
Financial markets are being pushed and pulled by a variety of cross-currents. Much of the turbulence unfolding is the culmination of imbalances and tensions that have been brewing for many years. Amplified volatility in FX and commodity markets are warning signs. They appear on the cusp of spilling more broadly into other markets, exposing the full size of the iceberg.
The current environment is distinct from the period of 2009-2013 when governments and central banks were quasi-coordinated in providing gargantuan amounts of stimulus, and when the geo-tensions were only chirping modestly. This year, governments and central banks have focused more generally on domestic issues. This is good in theory, but it has splintered coordination into a quasi-fracturing of the global monetary system.
It should be widely known by now that past stimulus measures have ballooned sovereign debt levels and pushed official interest rates toward the zero lower bound; while other policies and regulatory changes have prodigiously distorted and manipulated asset prices and the cost of money. Stimulus, however, is no longer a one-way street.
Diverging policies serve as a trigger for capital flow movements. They are shaking the foundation of capital markets, which in turn is causing second order effects like a mini-contagion. In addition, new and ever-evolving rules for investing and financial transacting have had a deleterious impact on market liquidity that will make the swishing capital flows even more magnified and treacherous for financial markets.
For several decades, the global economy has benefited from globalization made possible by technological advancements. Technology has shrunk the world by being able to access more markets, and move capital and goods more efficiently. Political change (e.g., fall of the Berlin Wall) has mostly created larger and more market-friendly policies. The changing landscapes unleashed innovative capacities that typically provided great benefits and opportunities. While these factors will continue to exist, they are being met with the strongest headwinds in decades.
Protectionism, nationalism, and separatist movements could begin to have great negative impacts. The social contract between people and governments has been breaking down, as witnessed in voting booths and through violent protests. Going forward, portfolios could begin to be impacted, as they activate large capital flows between sectors, securities, asset classes, and geographic regions. Investors are probably ill-equipped for a market shift from a state of low-volatility and herd-mentality investing, toward one characterized by greater bifurcation and a sustained spike in volatility.
Markets have largely ignored the wars and tensions occurring in the Middle East and elsewhere. This is because, while everyone recognizes the tragedies occurring at a human level, investors realize that most disputes are far away with little effect (so far) at the investment level. In addition, troubles abroad can mean capital inflows for the US (“a cleaner dirty shirt”).
A successful Scottish independence vote next week could be the game-changer. Until earlier this week, most believed there was no chance of Scotland breaking from the UK. Even after a flip in one poll showed a 1 point advantage for the “yes” campaign (for independence), most still assumed that it would not occur because they assumed that fear of what it would entail would prevail. The “no” camp fuels the fear by labelling such a scenario as an act of “madness”.
However, in all likelihood, a vote for independence may not be as far-fetched and radical as the “no” campaigners suggest. The transition into independent statehood could actually go fairly smoothly with particulars negotiated in a fair and level-headed manner. There will be initial costs, but for supporters, pride trumps (unknown) costs. Fear about using the British Pound is also over-hyped as the Pound is a highly tradable freely-convertible currency. Moreover, Scotland could set up a currency board monetary authority in less than one day.
The arguments and grassroots campaign of the “”yes” camp has been superior in most aspects to the disjointed fear-emphasis campaign of the “no” camp. Due to the momentum and organization of the “yes” camp, the odds of “yes” are better than even-money (even though betting organizations put it at 36%).
The bottom line is that a “yes” vote is a distinct possibility; one that markets are not fully prepared for. This is because it would encourage separatist movements across Europe and beyond. As these types of uncertainties and anti-globalization aspects mount, long-dated USD-denominated Treasuries should be the marginal benefactor.
In addition, tomorrow is 9/11 and the last of the August refunding auctions. The other auctions were purchased at decent levels after reasonable concessions, helping to place the securities in stronger hands. It was also a good sign that German Bunds fully regained early losses today. These are just a few reasons to own long Treasuries. Too many cross-currents and too much yield pick-up and carry makes it too soon to focus on the 2015 Fed (just yet).
“…And the hypnotic splattered mist was slowly lifting…” - Bob Dylan
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The Central Bank Titanic has to have its hull gouged by the iceberg from stem to stern before it will be exposed.
And thanks to global warming that seems unlikely any time soon.
Is that a Denmark iceburg?
If Scottie, from Star Trek, was in charge of the Western financial system you'd likely be hearing: "She's breaking up Capt'in, I can't hold 'er much longer!"
this is what ive been saying all along will be the real black swan: the status quo can continue however potemkin in its structure, but at some point the oligarchy will fracture and self-preserving defectors will make the music stop
Blah, blah, blah... ...all I want is a market that allows for true price discovery, period. Independent Scots or not, fuck all the middelmen and the "skim"...
Listen Physics. You must then trade the "COIN" or a derivative of the "COIN" on reggie's "COIN DERIVATIVE" web site.
~$500! True stable price discovery. Nice!
Reggie still trying to pawn off that ultra coin nonsense
As long as the fear inside the walls is less than the fear outside, we will remained walled in.
"Protectionism, nationalism, and separatist movements could begin to have great negative impacts."
Yea, 'cause NAFTA and GATT worked so well for jobs here in USA. So well in fact that liar loans have made a resurgence and ZIRP....ehhh hhhhhhoookkkaaaayyyy..
Negative? Great!
coincidentally, this came up.
.
Bob Dylan - Sweetheart Like You
http://www.youtube.com/watch?v=PpRKstHl7Y0
.
"patriotism is the last refuge to which a scoundrel clings,
steal a little and they throw you in jail,
steal a lot and they make you king." b.d.
zimmy
.
I tryed to listen to The Total Money Make-Over audio book by Dave Ramsey but it was to depressing so I read this article.now I'm really down. Don't we have any Ebola news?
Somethings up. They are hammering gold for a reason and I expect we will find out pretty soon what it is...
on sale. they will say we bent over backwards
for you, put it on sale, please don't convict us.
you had your opportunity, we manipulated the price
"for you too".
who knows the future and who really cares?
not me
The downward trajectory is too smooth. I'm guessing TPTB are expecting a pop in PMs and want to drive the price as low as possible before it happens...
scottish independence would not be considered a game changer.
no, it changes nothing about nato. changes nothing about nukes. changes nothing about world globalist corporatism. changes nothing about the continuing devaluation of the pound, the euro and other currencies.
it changes nothign about central banking either!
Notice Americans were told to “create an emergency fund”. Even Suze Orman got in on the emergency fund rhetoric.
We’re going to get screwed out of our bank accounts. You watch. And I bet money market funds will eventually pay us out at about 18 cent to the dollar.
Although the BOJ pioneered quantitative easing – targeting the amount of liquidity injections rather than an interest rate – in the early 2000s, negative yields represent new territory for a central bank that already buys the equivalent of 70% of new government debt issued.
WTF! Does this mean that Japan borrows 70% of its expenditures from its own central bank. Bootstraping, or am i missing something here?
Good point.
Exactly who comprehends the financial system?
When it finally rains in California, it's gonna pour. Maybe your iphone will save you.
https://www.youtube.com/watch?v=4p5gf5by7UU
4-6 inches of rain can flood a millionaires house in Palm Springs just as well as some trailer park....
"Yeh, but wot about the workers !!"
The recent drum beats and flames of war have distracted many people from focusing on the economy. The markets are extended beyond beyond, all this comes at a time when the IMF is calling for more QE. It seems this might be a good time to review the reasons this is economically unsound and a bad idea while markets are setting new record highs and economies continue to struggle.
The policies of the last six years have yet to produce the desired and expected results promised. As a consolation many economist, bankers, and those who have benefited greatly tell us we would be in far worse shape if we had not taken this course. Now it seems Central Banks and the IMF are clueless on how to proceed and a policy going forward. More on the lack of a clear path in the article below.
http://brucewilds.blogspot.com/2014/09/central-banks-and-imf-clueless-on...
well, atleast this will stir up the currency markets, hopefully it will stir up the us equities and global equity markets too