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Yesterday's "Dip" Was A Warning... To Get Out Of The Casino
Submitted by David Stockman via Contra Corner blog,
Shortly after yesterday’s open, the S&P 500 was down nearly 2% and off its recent all-time high by 3.5%. But soon the robo-machines and day traders were buying the “dip” having apparently once again gotten the “all-clear” signal.
Don’t believe it for a second! The global financial system is literally booby-trapped with accidents waiting to happen owing to six consecutive years of massive money printing by nearly every central bank in the world.
Over that span, the collective balance sheet of the major central banks has soared by nearly $11 trillion, meaning that honest price discovery has been virtually destroyed. This massive “bid” for existing financial assets based on credit confected from thin air drove long-term bond yields to rock bottom levels not seen in 600 years since the Black Plague; and pinned money market costs at zero—-for 73 months running.
What is the consequence of this drastic financial repression along the entire yield curve? The answer is bond prices which keep rising regardless of credit risk, inflation or taxes; and rampant carry trade speculation that can’t get out of its own way because central banks have made the financial gamblers’ cost of goods—the “funding” cost of their trades—-essentially zero.
Needless to say, this is all too good to be true because it has generated humungous funding mismatches. That is, on the warranted word of central bankers—-who are petrified of a Wall Street hissy fit in any event—-speculators have funded long-term debt and equity securities with overnight money which must be rolled every day. This “works”, of course, until the carry-traders are hammered by a sudden, powerful and unexpected shock owing to either a sharp drop in the price of their “long” asset or spike in the carry cost of their overnight funding.
Thus, the true evil of central bank “wealth effects” pegging of risk asset prices (i.e. the Greenspan/Bernanke/Yellen “put”) is not merely the undeserved windfalls which accrue to the financial asset owning households at the very top of the income ladder. An equally baleful effect is that it suppresses fear of risk and eventually drives it from the casino entirely.
This destruction of fear is commonly measured by the VIX index, but that’s only the tip of the iceberg. Where the amnesia really shows up is in the carry trades—-most of which materialize in the options and futures markets, and which are fabricated or “bespoke” in the meth labs of Wall Street trading houses.
Notwithstanding a few short, sharp stock market corrections in recent months, the six-year central bank suppression of fear remains largely in tact. Looked at in terms of the trading charts since the March 2009 bottom, the buy-the-dips crowd remains supremely confident that the bull is still running up hill.

Accordingly, beneath the parabolic run pictured above, there has set-in a monumental spree of speculation and leveraged gambling that makes Wall Street’s pre-crisis plunge into toxic mortgage deals look like a Sunday School picnic.
Just last week, for example, after the Swiss National Bank’s surprise abandonment of the 120 peg, the CHF soared by 40%. Literally within minutes they were carrying currency traders off the field on their shields because they had been leveraged 50:1.
It might be asked who in their right mind would fund currency cowboys on 2% margin? The answer, of course, is nearly every major dealer in the casino! But that’s just the herd at work.
The truly scary part is the reason for this collective recklessness. Currencies move by inches, not yards and never miles at a time, the Wall Street apologists declaimed. And, besides, the SNB had double-promised that it would never, ever remove the peg.
So fast money traders borrowing short in CHF and speculating long in Italian 10-year bonds thought they were shooting fish in a barrel. Mario Draghi had guaranteed that he would buy their bonds yielding 1.95% at the time at ever rising prices; and on the funding side, the SNB had pledged that speculators could borrow virtually zero carry costs up to 95 cents on the dollar for so long as they pleased. Pocketing a 190 basis point spread plus capital gains on virtually no capital invested, speculators were truly laughing all the way to the bank
So last Thursday’s CHF massacre happened because it was not supposed to happen! That is, financial markets are no longer honest, rational, stable or independent; they are merely gambling hall subsidiaries of the central banks where most of the punters still believe that the latter will not permit risk asset prices to fall for more than a day or two or funding costs to rise unexpectedly.
The reason that the casino has become so stupendously dangerous, therefore, is that the whole financial house of cards—including vastly over-valued asset prices of every kind and insanely extended leverage like the CHF currency speculations—all depend on maintenance of confidence in central bank competence and omnipotence.
But it’s not so—not by a long shot. Last week’s CHF episode rang the bell. And as the cascades of collateral damage begin to flow in, it will become harder and harder to hide the truth—-even from the heedless gamblers in the casino.
The next layer of leverage behind the currency speculators in the CHF trade was comprised of households all over central and eastern Europe who took out mortgages denominated in Swiss francs owing to dirt cheap interest rates. Suddenly, the amount they owe is soaring in local currency, and banks and government throughout the region are scrambling to forestall a disaster.
In the case of Poland, for instance, outstanding CHF mortgages total $36 billion or nearly 8% of GDP. On a US scale basis, that would be the equivalent of $1.5 trillion in home mortgages that suddenly soared in repayment costs.
Not surprisingly, the allegedly “conservative” government of Poland has insisted that zloty-based homeowners will be protected from the CHF flare-up, but that the government will not bear the cost. That is, the banks are going to be hammered by state regulators just like they were in Hungary awhile back.
One thing leads to another and ultimately to a daisy chain of wreckage when honest “price discovery” is destroyed by the central banks. Even now several Austrian, Italian and other European banks, which plunged into the CHF lending business, are on the rocks.
It is only a matter of time before one “surprise” after another turns up owing to the speculative mania of the last six years. And it is virtually certain that the central bankers who have presided over this fiasco will be caught as flat-footed as they were during the sub-prime fiasco.
In a nearby re-post from the New York Times this morning (Wake-Up Call To Yellen: Here’s How To Buy A BMW On Food Stamps—–Soaring Auto Junk Loans), we suggested that Janet Yellen needed a wake-up call. The NYT obsessively “fact checks” everything—so here’s the real deal. The auto junk paper market is so out of hand that an unemployed NYC food stamp recipient recently got a $30,770 loan to buy her daughter a BWM 328xi so that she could drive to work…..in style, apparently.
This beneficent mom told no lender or dealer a lie. As related by the NYT:
Ms. Payne went with her daughter to a dealership that arranges loans for Santander and other auto lenders to buy the car. She said an employee at the dealership in Great Neck, N.Y., assured her that, even though she was on food stamps, she could afford the loan. At the time, Ms. Payne said she thought she was co-signing the loan with her daughter.
“I looked him in the eye and said, ‘I don’t have any income,’ ” said Ms. Payne.
Needless to say, Santander Consumer USA is a pure artifact of financial engineering deeply subsidized and coddled by the Fed. As a former LBO and now IPO, it is overwhelmingly funded with securitized auto paper. That is, it is able to fund BMW loans to mom’s on food stamps because it can bury them in massive baskets of loans that are then sliced and diced by Wall Street, and sold to investors desperate for “yield”.
If that sounds familiar—it is. Yellen did not see it coming last time, nor did the buy-the-dip bulls who claimed that the market was “cheap” at its peak in October 2007.
The S&P was then trading at 20X reported LTM earnings. That’s where it is today, as well.
But there is one huge difference. This time the casino gamblers have been playing with free money for 73 months running.
Accordingly, the joint is an accident waiting to happen. Forget the dip. Get out of dodge.
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Go ahead and BTFD you mooks!
The beauty of being part of the herd is you are never wrong, even when you are.
Yep, I know several people that are dead-right on many things.
I know several 60-something dudes who constantly look at their smartphones, checking the dow.
They are all in at the sock casino & they hate, HATE the idea of stacking physical.
How can peeps be so blind? When this bitch goes down, they'll still get their $2200/ month in SS benefits, oh yes. Promises promises, right?
But after a couple debt-erasing dollar devaluations, that check will get a pizza, a 6-pack & a porno.
So I guess there still is a happy ending :) .
Nahhh.
We're not done raping little fags like you just yet.
Now bend over !
During a flash crash the selling pressure will overwhelm the ETFs like SPY and my thesis is the number of shares of the ETFs will likely fall sharply during the crash. The number of SPY shares rises and falls according to demand and are created or destroyed by SPDR buying or selling the underlying S&P 500 components. (If I'm wrong about any of this please someone tell me, I'm putting out real <fiat> money based on my reasoning). In the past few months there seems to have been a lot of this happening as witnessed by the volatility of the illiquid 'low beta' components which have been making very rapid intraday moves.
I'm assuming the selloff of SPY will crash the low betas and make them hit the sticky floor of -20% well before anything else.
I'm assuming this time around the flash crash will have a harder time recovering because the new limit down rule changes since the last crash will actually make a rebound harder.
I'm aware that stabilization attempts from the boys and girls on the ninth floor may actually make the low betas rise as the pour money into SPY so I also have some small index puts but they're much more expensive. I could buy calls just in case but I'm a permabear and I only buy calls on gold and silver. Feel free to shoot holes into my plan if I'm missing something obvious. I have tough skin when I'm just an anonymous poster on a paranoid conspiracy blog.
I've been buying cheap crash positions since October by buying put options far out of the money on low beta components. Each month they expire and I lose a couple hundred bucks <fiat> but my estimates are that if/when the crash comes they will pay out about 1000:1 and I can afford the couple hundred. Mostly I just wait but on a few days like yesterday (and today) I'll put I put in sell orders calculated to trigger just before the stock limits down. Some days are crashier than others and today is on the high side.
And most people I know remains as docile as Hindu cows.
These idiots will buy as long as the Fed keeps PPTing it and buying dealers trash paper under the table.....ask Brussels what their balance is.
So in order to obtain yield, to stay afloat and ahead of inflation (in the things we need), what is the 60-something supposed to do? Not many options are there? Pretty easy to understand why they're checking their phones ain't it? ;-)
"what is the 60-something supposed to do? Not many options are there? "
Indeed.
No easy answer since the fed has stolen income via zirp & steady inflation.
Yet, bank CDs returning 1% are a lot better right now than a 30 - 40 - 50% haircut.
return OF capital vs. return ON capital is what I would focus on at 65 yo (plus hating metals)
inflation is chewing on everything regardless of what you do.
Yet, bank CDs returning 1% are a lot better right now than a 30 - 40 - 50% haircut.
Unconscionable what has been done to our seniors. If there's anything that gets me irate and wanting to seek the justice that Hangemhigh opines, it is the raping of our citizens by the gov/fin sector; at both ends of the spectrum (i.e. stealing the young's future and the senior's end).
(plus hating metals)
Of course I assume you mean having metals; and if so, on that we agree, absolutely.
zuuma ~ I'm only tempted to junk you because you alluded that you PAY for your porno [which happens to be the only aspect of the FREE SHIT ARMY that I wholeheartedly endorse].
I was referring to seniors who hate the idea of buying precious metals - & thus refuse to consider it.
leaving only the option of CDs
poorly written.
must.
have.
coffee...
60-something here.
I was short Boeing yesterday so cashed in.
I am short Suncor today and cashing in again.
I'm too old to work anymore. Besides, I'm a little guy .....and I can't afford an eye fone
If they're 60+ it's somewhat forgivable, because the stock market and the investing world actually behaved by fundamentals in their lifetime. If they're under 40, they're just stupid.
"When this bitch goes down, they'll still get their $2200/ month in SS benefits, oh yes. Promises promises, right?"
"How long can you live on the yard sale money?"
Sounds like a best seller
When will people understand , we don't need industry or manufacturing or even job's in the new America we just need the stock market . Obamer has managed to get 98 million people not to have to work just stay at home and shop and 47 million on free stuf all because of the stock market and wall street . He has to be the most sucsecfull CEO ever . Soon we will all be able to gve up our jobs and leave it to the stock market and wall street to fund our early retirment's .
The NEW AMERICA is nearly compleate.
BTFD!
J(ew)Yellen will gift her fellow tribe members MOAR NIRP/ZIRP & back door QE4EVER.
"Mark-Its" will rip higher by 2.5% to 3.5% across the board after her Jewishness speaks (in Greenspanian non-sensical prose) today.
Anyone in banking knows the Fed never stopped buying, they just became better liars. Go ahead buy some equities and see where you stand after feb 19th. Heck you don't need to buy any equities, when your bank fails they will give you failed bank stock for your deposit, courtesy Dodd Frank OLA sec. 2
2011-14 was a milking and theft. Sorry no one lives here anymore.
Until the herd runs off a cliff during a stampede.
Next stop Dow 20,000 ALL ABOARD!!!!!!!!!! We Need MOARRRRRR!!!!
And keep brining me my Dark Eyes and "orange juice" free drinks!!!!! <burp> Merikastan #1
I am NOT a MOOK !!! Hulk, November 17th, 1973...
Exactly, like people don't know what a Put Option is? lulz!
The "markets" are still at all time highs and the stealth QE and ZIRP (free money to bankers and financiers) is still going strong.
The Fedspeak is meaningless.
Yes, follow headbanger's advice. Fucking mooks (haven't heard that term since I left queens).
yawn ...someting new?
you must buy the dip. if you don't then you are a fucking idiot.
Also one a them terrorists too!
Murka....fuck yea! Buyin the dip to save the motherfuckin day now!
I just need one more spike to afford Obamacare......come on.....don't let me down now.
A lot of people will get caught in this BTFD game
Saw your comment earlier about NoVa. You down to meet over some beers?
MEET yes, I am down
let me know
Meh...depends on the Fed. The EU popping the QEasy cork will keep things ramped a bit provided it isnt derailed by a greek default. Fed words/ actions will be the primary mover, economics be damned. Mostly we will probably see wild swings up and down, with maybe a slight downward trend when averaged out over the next few months. Barring WW3 or similar event, I think it will be a rather boring next few months. Next recession is due any time though...probably get rolling in the fall with fully obvious by spring 2016.... Just in time for the elections.
Prety soon BTFD will be a manditory part of the new ammended Partiot Act.
this and buying at least one apple gadget
sure Yellen says today her patience knows an extended whiners ce so Bulls can brad and set a record by friday. the picnic is a free lunch that won't end till it ends
Moar IBM shares please!
Keep dollar and carry trade on
Quite honestly, I don't know what to believe anymore. BTFD of STFATH?
It seems more and more like a clash between religions. Who to believe? The Keynesian Church, or the Austrian Church?
Timing is very difficult, and ZH has more than once proved to completely miss the target when crying "wolf!"
Make your own call by thinking it out for yourself...
"don't follow leaders, watch your parking meters" - BD
STFOOTG is a sure bet.
Stay The Fuck Out Of The G...?
Maybe STFOOTGM? Stay The Fuck Out Of The Goddamned Market
Or how about BTFBA: Buy The Fucking Boating Accident
Either way, we're not insiders, and we know that nothing lasts for ever. If you pull out too late, it will be like sticking your junk into a mass of spiinning and whirring metal.
Central planner’s standing in a narrow hall of Whirling Knives.
:P
May that become reality one day, and not just a song.
I wish I had a swiss franc everytime ZH is posting an article that says go out now, bull market over, get out of the casino, yesterday was the beginning of the end. Could buy me a third 911 by now. Maybe a nice white one.
As someone once said, the quickest profits can be made right before the train runs you over.
PS- to be technically accurate, the chart should be wider than taller. (In this case, to the same proportions.) By squeezing the chart narrow as shown, it makes moves up and down that much more dramatic. (fwiw, the chart on source site is 1:1 proportion, not much better.)
PSS- The Baltic Dry Index is only 40 points away from beating its 5-year low at the time of this post.
http://www.bloomberg.com/quote/BDIY:IND/chart
When it becomes necessary to have an understanding of complex investment techniques, to protect ones portfolio and obtain a moderate yield, then it is way past time to go; for the average bear. And we are well past that point. Unfortunately, and until a new savings mechanism is implemented, the pain that will be meted out will be substantial for most and unbearable for some (look out for nail guns and jumpers); but it is what it is. ;-)
Look, there is light at the of the tunnel, or a inbound train approaching us.
BTFD
Bitcoin last price: $253
Why get out???? Bail-outs for everyone.
Ms. Payne, no she diiin't. People know right from wrong period. Unless she is mentally undone she knows you can't make a payment unless you have money to make said payment, noone can convince you otherwise. Even during the mortgage lending build up people were eager participants in a getting rich quick scheme. It was by design, but so is 3 Card Montie.
stoopid me shorted the DAX today, at +0.5%, just to see how it drops to -0.9% at ramps back to 0.5% as i'm sleeping.
keep calm and BTFD.
Only in Finance you can be wrong for years upon years and people still listen to you. FU Stockman.
"It's different this time"
I'm no chartist but there is an interesting intersection of gold, dollar and oil last seen in September 2008. Have no idea how to read it other than noticing its time frame several times just before massive corrections. But the Fed has so polluted the waters whose to say anything means anything these days.
The US will not tank before Europe or Japan. Anyone selling short the US markets before Europe and Japan tank needs to have a lot of pucker power.
Buy gold right now particularly the 3X JNUG or JUGT.
JUGT just autocorrects to JUGS
When I was a young man, politically aware, and Stockman was in government, I thought the guy was a dangerous asshole and an enemy.
How we ended up on the same side, I don't know.
...bull still running up hill? Hmmmm, I'm ready for the excrement avalanche soon to be falling down it....
One thing people often forget is how central banks use their balance sheets, their assets and cash. They use it to facilitate loans by using fractional reserve lending, which means they have that $11 trillion leveraged 9 -1, meeting the World Bank's demand of needing $100 trillion in circulation by 2015 (they made the call at Davos 2012 by Robert Zoellick).
Looking at some old VIX data, the index broke the 30 mark on 8/16/07, fell again (the Dow was at a high of 14,093.08 on October 12, 2007), broke the 30 barrier on 11/12/07, fell again, broke the 30 mark on 1/22/2008. VIX then dropped to 16.03 by May, 2008, in September it broke the 30 mark and remained 30 or higher (reached a max of 80.06 on 10/27/2008) until May of 2009.
So even after market highs there can be mid level volatility rising and falling between 16-30 or so on the index. ~18,000 could be considered a reasonable top given all the recent action with the VIX. Not saying you can time the exit, but I think we will have to see a break and maintainence above 30 before the blood is really in the streets.
WTF happened to Bloomberg?
i love the logic of market news. the DOW goes up 300 on Euro QE announcement, but can Draghi announce $100 trillion every day? no, so the market comes back, and is now only 600 points below the alltime high. meanwhile TIP is near new highs (the deflation bear isn't evident there) maybe the drop in oil prices will cause economic growth and inflation (which is a problem for the FED), not inflation, but real economic growth. suddenly assets have to be diverted from mindless speculation in currency pairs and share BUYBACKS (apple) into new products and shudddderrrr! more competition. the trouble with apple products is that they are mindless gadgets which dont improve your quality of life, or your productivity (much like a BMW, which is just a computer with tires)
consumers in the industrialized nations have two of everything, the third world consumer has nothing, and the process of economic egalitarianism isnt working. wheres that rice farmer going to drive his BMW? the whole thing comes to a crashing (pun) halt, people in YEMEN need subprime auto loans and big sand tires. the playing field is getting more level, the chinese make 3D printed buildings and much cheaper. eventually they pop the asset bubble, the increase in productivity is deflationary, and the west stands to lose big time, because they have the largest asset bubble. eventually we have tariffs and trade wars, which is how the depression played out of the fiscal side, and nothing the FED can do about that.
I'm out. Just speculating in cases of beef stew, cases of ammo, and PMs for now.
Traders who lay off risks or arbitrage against market imperfections have arguably been necessary for free functioning markets.
That markets have been dysfunctional evident in the collapse of price discovery, many trader have morped into addicts of carry trades. Let them be.
The game goes on because there are still plenty of muppets who are asking for more. CBs have their backs ?