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What If The Easy Money Is Now On The Bear Side?
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
Complacent melt-ups aren't just boring--they're not very profitable.
File this under Devil's Advocate: what if the easy money in the stock market is no longer the "guaranteed" Bull melt-up but the Bearish bet on a sudden air pocket? Just as a thought experiment, put yourself in the shoes of the money managers who have the leverage to move the markets.
You probably know the drill: program your trading bots to recognize every technical trading scheme's key support and resistance levels, and then unleash huge futures/options buys after hours or pre-open so the market jumps in the direction that makes you the most money.
Unleashing a tsunami of buy orders forces Bears to cover their bets on a decline (shorts), goosing the market higher. The melt-up depends not just on trading bots hammering the market in the desired direction with massive buy orders--it depends on a supply of nervous Bears to cover their shorts by buying stocks. This buying triggers others' trading bots to buy into the rally.
Short-covering is an essential source of the self-reinforcing buying that has kept the U.S. market melting up for years without any gyrations down of more than a few percentage points.
Buy the dips has entered the Pavlovian realm of automatic response because the managed tsunamis of futures/options force those betting on a decline to cover their shorts by buying, pumping the rally up with steroid-like buying.
The problem with this guaranteed melt-up is the unceasing advance and immediate buy the dip response has decimated the ranks of Bears willing to bet against the melt-up. This has removed one of the primary fuel sources of the melt-up.
In other words, the managers' great success with forcing Bears to seek cover has drained a key reservoir of buying power. Eradicating the Bears has all been jolly good sport, but it has also reduced the shorts who can be forced to cover, which means the market is left with only the managers' manipulations and the other institutional trading bots that follow trends.
Consider this chart of the Rydex ratio of Bear/Bull assets, from John Hampson:
If Market Bears were tallied, they'd be on the list of Endangered Species. There is some confusion about the true number of Bears left, as prudent money managers may buy puts (bets on a market decline) to hedge their portfolios. As a result, a mass of put buying may reflect hedging, not Bearish bets.
The net result of eradicating the Bears is the gains from the melt-up are now limited. If you're a serious manager of serious money, squeezing out a couple of points from the melt-up is not only boring--it's detrimental to your career, because you need to beat the index melt-up to keep your big-bucks job and skim your payoff.
Which leads to the notion that the really big money waiting to be skimmed from the unwary is not more melt-up but a sudden "unexpected" meltdown that catches everyone who isn't short off-guard. The most profitable trade would be to stealthily build a short position while telling everyone else how the melt-up was guaranteed essentially forever ("the Fed, ECB and Bank of Japan have your back," etc.).
To make sure nobody strayed from the long side of the boat, you'd unleash the usual frenzy of buy orders at every dip, because the last thing you'd want is to give anyone else an easy entry to the Bearish short side.
The ideal situation is a boat heavily tilted to one side with complacent Bulls confident in the continuation of the never-ending melt-up, and only yourself and a few insider cronies on the short side.
Then, when all the Bulls are happily swapping stories about how the yen carry trade guarantees capital flows into U.S. equities and other Bull stories--
BANG! You unleash a tsunami of sell orders that triggers all the trend-following trading bots to sell. When the buy the dip crowd confidently enters their buy orders, you crush them with a load of futures and options orders that reverse the uptick. This triggers another wave of bot selling.
Since there are no Bears left except you and your cronies, the buy the dip retraces have no legs: they quickly peter out because no Bears are left to spark short-covering buying.
Since there are no Bears left, there's only the trading bots programmed to follow trends: and with your leverage and bag of tricks, that trend can go down faster than complacent Bulls thought possible.
Then, when the Bulls are stampeding in panic selling, you cover your Bear bets and start buying from the panic-stricken Bulls. The Hobby Bears who went short near the bottom are forced to cover as your buying turns the tide, and the market is soon in full recovery mode.
This is such an obvious (and immensely profitable) play, I'm surprised we haven't seen it more often. Complacent melt-ups aren't just boring - they're not very profitable.
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Simple. Close the "markets" and banks indefinitely until buyers return. One sided markets don't die. They turn into zombies.
Fight the printer....and screw the Fed at the same time?
Zimbabwe had the best performing stock market on the planet. In nominal terms.
The """market"" was manipulated upwards on very low volume by the algos to sucker in the muppets.
Which means THERE REALLY ISN'T THAT MUCH MONEY PUT INTO THE """MARKET""" BY THE BIG BANKS SO THEY DON'T HAVE MUCH TO LOSE ON THE DOWNSIDE NOW
The Big Banks have taken enormous short positions so they can slaughter the muppets.
And there's very little political consequences now that Obozo is hated by everybody anyway.
So look the fuck out belooooooooowwwwwwww!
Wrong CS.
there are so many hedges that will buy cover the big dips.
Get on board....no crash this year
Close futures markets and stop the NY FED's reverse repo and securities lending program (and other programs we probably aren't aware of), as well as QE, and you have yourself a market that may be subject to price discovery based on supply and demand.
I wouldn't be surprised to see no bids and the market correct by at least 30% in a hurry, which would only take us back to levels 2 years ago. If all the BS is cut, then the floor is much lower.
This article asks the right question: When will the crash be more profitable for them?
It's a very simple algorithm: When the majority of the money is on red, black shows up. When the majority of the money is on black, red shows up. When the money is split too evenly, 0 or 00 makes an appearance.
To justify increasing debt, the real estate that backs that debt needs increasingly higher valuations. Stock prices need to be "justified" by either dividend yield or capital gains. When will either go down? Why? TPTB do fine making money with phony valuations. Real "wealth creation" requires work. Work is hard. And risky.
First all the real estate and stocks have to be dumped onto the muppets. Do you know what your pension fund is doing? Or a lesser PTB suddenly realises that he's been chosen to join the muppets. What is his next move?
Shadow Stats suggested by the end of this year. I haven't read Shadow Stats recently. What was his justification? Are we still on track?
Your logic makes sense, but overlooks a crucial variable: there is too much money pouring into the system. It is an ocean of money that has to get put to work. People sell only when they need to liquidate, or when their money has a better use elsewhere. There is obviously no need to liquidate when the liquidity tide is surging. And in this environment, where stocks, bonds, collectibles, and real estate are all exploding upwards, there is no "better use elsewhere." The only answer is, keep buying everything.
As much as I enjoy Charles' writing, you are right there are a couple of items he overlooked:
1). We have a massive game played by the corporations....management gets stock options.....company buys back stock making $$$ for the option holders. We are seeing levels of stock buy backs that are beyond historic.
2). There is the good old Plunge Protection Team waiting in the wings should we ever again see a radical down day in the market. Any sort of a bear vs bull risk vs reward needs to account for the limits that will be applied should an actual bear market begin to happen.
But WHEN?
somewhere between now and 2020...
I've given up on shorting anything in this market. We'll see is what the rabbit said.
But WHEN?
No one knows....that's what makes this so much fun.
Just wing it....everyone else does.
They ain't got the guts.
There will be a quiet, encrypted, conversation between the CEO's of Wall Street's finest to agree a timeframe for getting short then pulling the plug. Does that manipulation surprise anyone? The only constraining factor is that they will not want to be seen overtly as pissing off the Fed, after the Trillions they have been given from Taxpayers. That wouldn't appear decent.
So, instead, it will all be staged through Proxies and Algos via offshore vehicles. Bonuses locked in and secure, fuck all others.
What a wonderful world.......
The easy money will be on the bear side when the FED pulls the plug and not before and nothing else matters. Wall St. and a few other 'interested parties' will get advance notice.
The easy money is in the advance notice, not in the direction of the market.
It wouldn't piss off the Fed. A lot of that money would pour into the "safety" of USTs and then some alphabet soup agency would have the reason it needed to mandate that a higher percentage of retirement accounts be in USTs, quite possibly MyRAs when the stampede slowed.
Simplest and risk free solution, don't play the rigged game. Convert to physical assets in the form of PM's, don't pay attention to the paper price displayed. Though to be fair I keep watching the price, hoping that Yellen pushes it down further.
Sweet, bring it on! This event would also cause the welcome side effect of sending PMs to the moon.
Dreams. Sweet, sweet dreams. The day will come when your PM's will be forcibly "purchased" from you at $35/oz, or the Zimbabwe equivalent. Count on it.
"PMs"? What PMs? I know not of what you speak, good sir.
What are all those little dirt piles in my backyard? Big, big mole problem. Can't do a thing about it.
Ban boats.....and all watersports....you'll save a fortune.
Mole problem? I have a metal detector and can fix that. I'll get your address from your IP #.
I read all of these "boating accident 12 feet below in my backyard" stories, but the actual reality is if the guv sees fit to ban private ownership of PM, then what you have is a very large lump of contraband that nobody will want to touch or trade.
Its like finding 20 kilos of cocaine. Most mortals cant consume it, and you have no freaking idea how to sell it, let alone explaining how you got so much cash...
It shouldnt' be fundamentally different from any other black market.
Karlus, you lack imagination.
Wrong, this is not 1933. Any federal agent who is stupid enough to go door to door confiscating gold will receive a complimentary lead facial. Count on THAT. Also, after the reset PM holders won't trade them for anything paper, especially dollars! But hey, good luck with your stawks, bonds, and fiat- you are going to need it.
The day will come when past excessive monetary stimulus will be The Major Negative Focus. And it will make Volcker's Saturday Night Massacre Look Like Child's Play.
It will happen when consensus expectations view monetary stimulus as a negative factor. When? Once we are exiting the Liquidity Trap. When will that be? Probably once market participants conclude that the central banks have already gone all in. To wit: Imagine a repeat of Lehman, et al, now. There are no more actions the banks can take. Reserves are choking a banking system with no lenders, rates in most countries have turned negative not just in real terms but in many, in nominal terms. CBs are buying junk. What else can they do? Effectively, naught. All it will take is a shift in consensus expectations. Which will happen. Until then, Party on Dude.
PS There is no bell that will ring to let you know it's going to happen Indeed, no bell goes off once it starts. Greed simply turns to fear. And the 1% "git scared, too"
you have missed one possibility where real rates are positive while nominal rates are negative ;)
one should think untraditional , ordinary models no longer work ;)
i expect banks to start lending money with nominal negative rates (form of purchase discounts stretched down in time) to buy overpriced goods
The no-interest loans for cars and beds would qualify. Especially if there is no cash-back option.
BTFD
The melt-up depends not just on trading bots hammering the market in the desired direction with massive buy orders--it depends on a supply of nervous Bears to cover their shorts by buying stocks. This buying triggers others' trading bots to buy into the rally.
...
Eradicating the Bears has all been jolly good sport, but it has also reduced the shorts who can be forced to cover, which means the market is left with only the managers' manipulations and the other institutional trading bots that follow trends.
Your senario analysis does not account for one key player in the "market".
The author relies on the deux ex machina of the trend-following bots to make this scenario work. The big-time managers are fretting- yeah, a lot of money could be made on the high side of the boat, but what if the response is another deluge of Fed-liquidity that buries the bear under an avalanche of free money? I'd keep one hairy eyeball on Yellen and those in the back of my head on the bond market and still hesitate to follow the recipie laid out here.
I'd say the trigger will be interest rates. Any advance idea of how that card gets played will make someone rich. Very rich.
You dont think Janet would tell these guys ahead what was getting ready to happen?
The Dems want calm recovery into 2016. The only reason they would purposefully wreck it was if it looked like they would lose the Senate or the Preezy polls in 2016 look bad for Obama's 3rd term ;)
absent limitations (of how much fed can shit) all bets are off
They are just squeezing the tbond longs right now. Cannot do much more of that. Maybe just a little more. Thanks for the "cheap" tbonds dudes!
In your dreams.
Shouldn't there be an interest rate factor for that chart? And where is the 2008 "tell" on that chart?
"This is such an obvious (and immensely profitable) play, I'm surprised we haven't seen it more often. "
Probably is some fine print against it in the free money from the FED deal.
Quick.....get our shoeshine boy on the phone!
What kind of "invisible hand" is going nuts as we approach quadruple witching and driving yields like a shot to the moon in the last 10 days. much like in May 2013? An "invisible hand" that goes nuts in futures markets at 8:50AM, 9AM and 9:29AM perhaps? An "invisible hand" that "chose" to ignore the dreadful jobs report and decided to completely ignore the strong $13 billion 30 year bond auction price and yield of 3.25% (high yield!) and immediately drove the yield afterwards to 3.30% in after hours?
Big banks and the NY FED - what a merry combination of pranksters.
If I thought professional money managers actually moved the market anymore I would agree with you. The ones I talk to are as confused as everyone else. The market has become a policy "tool" nothing more
Sure, someday. For now even the greedy mofo banksters know not to bite the hand that feeds them.
Remember (as ZH posted) ... per CME: Quote stuffing is supposed to end Monday!
As long as these central banks are allowed to swap currencies to support all ponzi bond markets nothing will go down. The underlying real economies will continue to spiral downward.
Doesn't this assume that the "insiders" causing the crash, have more tools at thier disposal then the plung protection team. Doubtful. I do think a crash is coming but I don't think it will be engineered.
Trading places.
http://en.wikipedia.org/wiki/Trading_Places
.