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What's Happening in Commodities is Just the Tip of the Derivatives Iceberg
The markets staged a weak bounce yesterday off the 126-day moving average (DMA). This has been “the line in the sand” for stocks for over the last two years.
However, regardless of this blip in market action, we’ve just staged one of the worst beginnings of a new year in recent memory.
For starters, in 2014, the single longest losing streak for stocks was three days. During that entire year, stocks never went down for more than three trading sessions without a bounce.
We’ve already had a five-day losing streak in 2015.
Moreover, as Bespoke Investment Group notes, the S&P 500 has not had a 1%+ loss on the first or second day of trading since 2008 (a year that featured a recession and collapse in stocks). And the last time the S&P 500 fell over 1.5% on the first or second trading day was 2001 (year that featured a recession and collapse in stocks).
We’ve had BOTH thus far in 2015.
All of these are very bad signs for stocks. However, the bigger news in the markets doesn’t concern stocks so much as it does leverage in the global economy.
Globally there are over $9 trillion worth of borrowed US Dollars in the financial system. When you borrow in US Dollars, you are effectively SHORTING the US Dollar.
Which means that when the US Dollar rallies, your returns implode regardless of where you invested the borrowed money (another currency, stocks, oil, infrastructure projects, derivatives).
Take a look at commodities. Globally, there are over $22 TRILLION worth of derivatives trades involving commodities. ALL of these were at risk of blowing up if the US Dollar rallied.
Unfortunately, starting in mid-2014, it did in a big way.
This move in the US Dollar imploded those derivatives trades. If you want an explanation for why commodities are crashing (aside from the fact the global economy is slowing) this is it.
Here is a chart of the inverted US Dollar (meaning when the Dollar rallies, the black line falls) and commodities (the blue line). Note that the commodity collapse tracked the US Dollar rally almost tick-for-tick.
This is just the start of a worldwide implosion. Globally there are over $555 TRILLION in derivatives trades based on interest rates. What’s happening in commodities now is literally just the tip of the iceberg.
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Derivatives are very often private contracts between parties that no one else knows the terms of, so to claim that ALL commodity derivatives are at risk if the dollar rallies shows just how incredibly uninformed the writer of this article is.
zh must be desperate for content to let these losers promote their newsletter here
as long as the fascist zionist oligarchy has control over a military industrial complex that has the capacity to blow up and destroy every other potential adversary in the world, and if you just happen to be chasing currencies to stuff into your mattress who you gona call huh? hello... hello... is their anybody in there...hello
better than having it run by seals...
why not call it what it is, the whole freaking world is run by the Jews
I wonder if GOD could not be convinced to send them to wander the wilderness for another 40-or preferably 400 years.
Net neutral two parties one loses one wins
Confidence, being a Derivitive of Bullshit,,,when it fails, things get ugly.
Target store leaving canada market after
lost 2.1 billion US dollars.
Canadians are too cheap for an "upscale" store like Target ... give them some more "Dollar Trees".
Oh and don't worry on interest rates, Bank of England has an answer to help them..they are going to monitor Twitter and Facebook now to help them determine what interest rates should be. You can't make this up, was news on FinExtra this week. Forget LIBOR, we'll use social networks now (grin).
Why is ANY of this a problem? Don't you recognize that stocks and commodities can go UP or DOWN?
This is all splendid.
I'm short commodities. winning!
I'm long USD. winning!
I'm short foreign currencies. winning!
There are two sides to each trade. Not everyone is losing money.
If the USD is so incredibly strong why hasn't gold dropped below $1000?
Gold and Silver are trading magnificently in light of the dollar's strong performance ... When the dollar weakens, Au, Ag go to the moon
When you sell gold you get USD and its in demand
Good question, Green. Could be because the buck is only stronger than the next best horse in the glue factory.
At present USD is the tallest midget in the circus indeed. We started this year with fireworks and my best guess is there is more to come.
You are either a Troll, or New to ZH if you would ask that question. Go thru the ZH index of old articles on Gold manipulation, you will get an education. You also would never ask such a dumb question ever again.
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20,000 Ebola cases later…
Why isnt Israel in court and before a firing squad for their UGLY GENOCIDE and APARTHEID????
What utter bullshit.
Why would ALL derivatives trades blow out if the $ rallies? For every long, theres a short!
Not only that, but if commodities are all priced in $s and the dollar rallies, of course the price would come off.
Run, hide, the sky is falling in! Buy my subscription based tip sheet!!
I don't know why they let you publish on ZH. Do you pay for those articles?
You are spot on @tradermonkey. Anything produced in a local ccy but priced in USD is going to go down in USD terms if the USD goes up against that local ccy. This is just simple arithmetic. You are right to ask why ZH allows this kind of crap to be published here but then again I found EVERYTHING here to be pretty idiotic. This was one of their better articles.
You forget- People, Institutions and Banks loose money. their money and others money and money they don't have.
And when the system is rigged, the markets are rigged and the Governments is complicit- There's no hope.
I think you have to give credit for the curve-fitting with a 126 Moving Average. That's the first instance of 126 days I've ever seen for a MA. We've all seen 20, 50 and 100 and 200 and Fibs, 5,8, 13, 21.
So one mark for originality with cooking the numbers. The other point of discussion is using the CRB for a commodity index. What of GSCI or BCOM? GSCI is more loaded, er, weighted, with energy so it would show extra plunginess against the inverted buck, or kcub as it is called by the cognoscenti.
A plot of the buck against the Shanghai Composite would show????
A very large amount of QE went overseas as cheap dollars and has to be paid back as expensive dollars and defaults will bonce back to the American market. If banks start crashing questions will be asked...
Yep and if anything was noticeable in 2014 was the FED halting QE when all of a sudden other economies are nlow feeling it necessary to use QE to fund the dollar crunch.
If anything the expected flow is reversing before ... the FED restarts its QE program.
The global economy is in the s%^t comprising all global nations. The level of derivatives if anything was just a convenient place to hide a load of debt from a failed economic system that refuses to add up to what neither the Neocons or Socialists quote.
From an EW perspective...
DOW
http://www.globaldeflationnews.com/dow-jones-industrial-averageelliott-w...
S&P 500
http://www.globaldeflationnews.com/sp-500-indexelliott-wave-update-for-w...
USD
http://www.globaldeflationnews.com/u-s-dollar-indexelliott-wave-update-f...
so bullish then?
Until its not....
Interesting article,, thanks.
U don't happen to have a chart in your little kit bag that would show those lines, say, in June of this year? March? February?
How about Friday's?
An hour from now?
A minute?
Crystal balls are in short supply and Wall St is fighting reality. I don't see a straight fall for awhile, we'll see a fight and retreat strategy till they have nothing left to fight with.
As lomg as there is a keyboard and a fat finger there will be NO collapse. What keeps the fed from just printing moar and moar shi its only digits on a screen. We servants dont seem to care as long as we can see kardashians ass and beyonce bounce we be ok master
So you're saying I should be buying fresh US Treasuries with both hands and when that wave crests then cash out to gold and enter the bunker.
If oil is really going to get hammered here that's great news for refiners of ore.
The denominator is still recovery and if that has a good first quarter then that's great news for refined product.
Are icebergs Jewish?
Is a bear in the woods Catholic?
Go bare in the woods if you are catholic? Huh?
is the pope jewish?
willa catholic in the woods find a bare boy...
I don't know, but I am convinced the whole superhero world is run by Jews: Spiderman. Superman. Batman.
And we are all aware of the superpowers of Goldman.