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Bob Janjuah Asks "Is A Flash Crash Imminent?"
Bob's back with his latest take on current market conditions.
Bob's World - Is a flash crash imminent?
This is a follow-up to my last note from early May, and will not focus on Greece. Rather, I want to review my early May views against actual outcomes, and to look ahead into Q3/early Q4.
A review
1 – In terms of fundamentals, my May note focused on some familiar themes which remain the central concerns for markets. These were that global growth would continue to disappoint, with “FX wars” taking centre stage again; that sustainable core inflation (very different from much more transient asset price inflation – in some cases at dangerous levels (e.g. Chinese equities) – pumped up by extremely loose global policy settings) is nowhere in sight, with the latest disappointing payroll report from the US showing hourly earnings growth remaining very low and the participation rate now back at multi-decade lows, matching levels last seen in the 1970s, which was one of the worst periods for growth and markets in US post-war history; and lastly, the sustainability or otherwise of the eurozone/Greece, which of course is currently centre stage.
2 – In terms of markets themselves, my expectations for Q2 as set out in my last note were for increased levels of volatility, some risk-off in credit and equities, a cessation of the sell-off in global core rates/bond yields, and a weaker dollar. My stop losses to protect against being wrong were set at a “2175 weekly close” for the S&P500 and consecutive weekly closes on the 10yr UST above 2.4%. The actual outcomes over the past two months have been very much in line with these expectations. Volatility levels are higher across the board, as seen easily for example in the VIX and MOVE indices. Credit spreads are well off their tights – as a proxy measure, the iTraxx Crossover index is 60bp off its early May levels of sub-280bp. Global equities are lower over the past two months as per the MSCI World index (4.5% from its Q2 peak to its Q2 trough), with the Eurostoxx index well over 10% off its Q2 peak and with Chinese equity markets off by 30%! In fact, the only major equity market that has not fallen as much as I had expected (I was looking for a 10% to 15% fall from Q2 highs to Q2/early Q3 lows) is the US, where the peak to trough fall has been around 4%. While my stop loss has not even been close to being threatened I’d still class this as a miss amongst hits. However, this “miss” also leaves me much more concerned about the health of risk markets deep into Q3/early Q4 (see below). In terms of core bond yields, the sell-off in yields has indeed stopped and partially reversed over Q2. In this context my stop loss, focused on the 10yr UST and which was set at consecutive weekly closes above 2.4%, has so far proved to be extremely helpful. And lastly, over Q2 the USD has fallen from a Q2 high of 100 on the DXY index down to 93, pretty close to my 90 target, before a partial recovery.
Looking ahead
1 – I do not expect the global fundamental themes to change. With the current very worrying situation in Greece and China, it would be foolish to focus too much on what may or may not happen in the very short term, but I am confident in my view that by the end of Q3/early Q4 we will still be worried about weakness in global growth and about the lack of sustainable core global inflation – if anything, the deflationary wave that is currently engulfing China, and which has been given a major boost by both the collapse in equity markets and by China’s unwillingness (for now) to weaken its currency, will soon wash up all over the world, particularly in the US. In this regard, note that the price of crude has fallen by over 15% from its Q2 high to current levels. In terms of the sustainability of the eurozone/Greece, it looks like the next three months will be crucial, but NEVER underestimate the willingness of eurozone leaders, the EU and the Eurogroup to “fudge” a way through – we are well over five years into this “fudge” era, despite being told many times that things were “fixed”, and I think the sustainability of the eurozone/Greece may well be a core global theme for at least another five years. Overall, all things globally point to looser monetary policy for longer as the only lever that is perceived to work is the FX devaluation route. And, of course, for now, the USD and the RMB are on everyone’s “other side”.
2 – A quick word on the Fed: my view is unchanged. The Fed does not need to hike for some time yet. I think a hike in Q3 would be a major policy error and would occur because the Fed has made some pre-determined decision to reload its monetary policy ammo before it’s too late. In other words, I think the Fed is caught between a rock and a hard place. Let’s see but based on what is in front of us right now, any hikes by the Fed would add significant risk to markets, risk assets in particular. For USTs, if the Fed does hike, I think its hiking cycle would likely be 2 x 25bp and done, which to me would make 2s20 and/or 5s30s curve flatteners very attractive.
3 – Lastly, in terms of my outlook for markets into end Q3/early Q4, I think a considerable risk is building of some form of mini crash. Of course, anything can happen in the very short term. But over the course of Q3 and into Q4, I think we may see a significant short, sharp but large (15% to 20%) correction. I note with extreme interest that when I talk to clients they are very keen to ignore the risks of Greece contagion both in terms of global markets and particularly about what recent events (and what is to follow) will mean for private sector confidence across Europe. I also note that a significant majority of people I talk to in markets are impressed that US equities have held up so well (so far), and so are long and looking to add; and pretty much the same majority are unimpressed with the weak (so far) rally in core govvie, and therefore are short/looking to get short. My concern is not just that markets are mis-pricing Greece contagion, mis-pricing deflation, mis-pricing street liquidity and mis-pricing the (now negative) trend in corporate (US) revenues and earnings (Q2 earnings season is upon us and may well show year-over-year earnings down 5%/5%+). My concerns are also that markets are way too optimistic about global growth (especially the US), about China, about the ability of policymakers to do anything new and/or effective to alter things meaningfully to the upside, and in particular I think market participants are increasingly positioned for risk-on perfection. I do not think it will take much in the form of data disappointments (macro-economic and/or earnings) and “suddenly elevated” concerns with policymakers to trigger a significant weakening in risk assets.
4 – In terms of targets, I would first like to reiterate my stop losses – they are unchanged from my last note. I was tempted to lower my equity stop loss to a “2135 weekly close” for the S&P 500, and to lower my 10yr UST yield stop loss to 2.4% on a weekly close (as opposed to consecutive weekly closes), but I suspect that July may be a very jumpy market, so I will persist with my May stop loss levels for the rest of Q3/early Q4. In terms of actual targets, for now I keep my “low 1900s/1800s” target for the S&P500 with more weakness over the quarter globally. And I still target sub-2% for 10yr UST yields.
To finish, I would repeat that I am not making a call on the next week or next month but rather on the next three months. In this context, my stop loss levels will afford critical protection to my call if I am badly wrong in my expectations around the fundamentals and around policy responses in particular. I will revert if the facts change materially and either of my stop losses are triggered; otherwise, I will be patient deep into September.
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The underlying basis of economic growth is dying...the flow of new population growth and central bankers are all in to hide the simple fact a terribly flawed system is now fully exposed as broken...the link helps to add context why free-markets no longer exist and why economic growth in this time is just a silly pipe dream.
http://econimica.blogspot.com/2015/07/global-us-population-growth-and.html
Bullish
It's a good thing the US is still at war...or things would be really bad.
Flash crash?
Nahhhhh...
Moar like a massive, horrible, crushing, implosion into a black hole singularity..
Helmets optional...
If you go out in your garden and pull a few weeds, look at the flowers, watch the butterflies and hummingbirds, take a drive to trail with a waterfall, taking in all the beauty all around us we just may miss this flash crash and lose everything. The End.
Actually I've been thinking moar about a massive comet impact to avoid it.
Perhaps the markets HAVE priced in the fact that printing presses are all warmed up around the world ready to print MOAR money!!!!
Did anyone notice, that those recent, multiple, terror attacks were coordinated around the world and all targets struck WERE ENEMIES OF THE USA?
France, Tunisia, Kuwait, and China...all targets struck were not "USA Friendly"...
How nice of those "terrorists" to stick it to our "enemies".
HMMMMM guys, there seems to be a reverse monkey hammer on gold now. You may want to focus your attention on that, rather than this Tom/Dick/Harry.
What is the average standard of living for most people again? When it comes to the price of any resource required for a decent standard of living there is no deflation, period. Even without population growth, those 7+ billion are still expensive you stupid fuck.
I think the market has been so protected by software, you will never see a true crash again. People will just stop trading on it.
Let's not forget this is the same guy that called oil at $30 in Jan.
Translation: something will happen somewhere, sometime and it may be good or bad.......
Say that often enough, it might just happen one day.
Someone will get obvious about exiting and start the stampede. This shit with China is no longer a "secret".
Don't know when but it's not like all the reasons aren't there for all to see.
Robert Schiller at LSE June 1, 2015:
"Irrational Exuberance: as relevant as ever"
video/audio
http://www.lse.ac.uk/newsAndMedia/videoAndAudio/channels/publicLecturesA...
I don't know about exuberance, but irrational certainly applies.....
But other than that,
Everything's fine!
The rigging will continue.
Wait..who's Bob?
And Bob's Your Uncle.
A guy who's been around a lot longer than you.
Worthless fearmongering speculation. Didn't bother to read it. There is ALWAYS a chance of a flash crash. Could be in one of the stocks YOU own, but there is no such thing as a concurrent flash crash in equities, bonds and currencies. The money will simply flow from one place to another like a tide.
What I'm really interested in, is if the people will ever wake up instead of struggling with stockholm syndrome their whole lives. And that's virtually impossible since they use OUR (taxpayers money) to brainwash and condition the masses.
Sweet deal, huh? We pay for our own brainwashing and destruction.
Janjuah's Right. Markets are trading off of Central Bank propaganda rather than fundamentals...
We are witnessing for the first time on a broad and global scale how machines price risk.
I think some PhD could have a field day with this subject.
Soon we will be witnessing who cries loudest when machine risk appraisal fails exponentially.
As history has shown time and time again, TRUST can evaporate overnight, regardless of the current machine/system.
That is what the machines do, they manufacture false confidence and trust, when nothing has changed in the underlying.
WB7 I'm really surprised at you. The Titanic is UNSINKABLE you fool!
Is that you up there on the stern rail? Can you see me waving?
Heresay I say. What? Machines fail? Why, that is the most ... wait, I think I see a chartreuse swan!
Machines do not "price risk"...people write code, that drives the machines, that "price risk".
"It's the programmers stupid!"
As history has shown time and time again, TRUST can evaporate overnight, regardless of the current machine/system.
'Is a flash crash imminent?'
Imminent means within 6 hours so I would say 'Highly Unlikely'
http://weather.mailasail.com/Franks-Weather/Marine-Weather-Forecast-Terms
Janjuah: "The markets are all wearing economic beer goggles and they're going to regret it when they wake up in the morning ."
Bob, the key to avoiding the hangover is to stay drunk. You keep the beer goggles on all the time and it doesn't matter how ugly your girlfriend is.
Tequila goggles, bitchezz!
A lot of smart market watchers seem to be predicting a mid-September pin-meets-bubble moment. What was Armstrong's date?
Sept 23 I believe.
Bob, you have to contact the FED software developers to know what markets are going to do.
What are called 'markets' here are actually just propaganda billboards, bought and paid for by the CB's.
I hope he answers 'no' to his question. Otherwise he's going to be disappointed.
They have utter faith in Keynesianism and "global warming".
But, but, was it not Justin Wolfers who told us that "markets can be used to aggregate disperse information into efficient forecasts of uncertain future events." I mean, really ..........
If there is a real crash, market ‘Restore Points’ will be used.
“Let’s restore back from February 9th and rerun the simulation again.”
no crash just a bunch of red pill poppers living in a blue pill world.
I used to think this can't go on forever, reality has to win out eventually but for the most part it seems to me that instead of that reality taking hold we just keep right on drifting aimlessly further and further away from it.
at this point are the "markets" here in the western world at least, really anything more than propaganda meant to do nothing more then keep the confidence scam running? pointless numbers flashing across the screen signifying nothing to anybody except those make sure the house keeps on winning?
"tell a big enough lie, tell it enough times and eventually it becomes the truth."
at what point does manipulation and propaganda simply replace reality? will the masses kept poor but not quite starving and endlessly distracted ever realize, ever shake themselves out of their socially engineered stupor to realize that they, we are all being stolen from, lied to and murdered? worse perhaps still that by our sheep like complacency we are allowing our treasure, the product of our labor to be used to commit mass murder around the world?
there will be no crash, no day of reckoning because there are still far to many blue pill addicts who are perfectly happy to live in this fabricated, matrix society, to many who look at the table scraps thrown to them off the table and see nothing less than a full on thriving economic recovery. and as we all know any scam requires the compliance of it's victims to keep running.
this is the boot stomping on the human face but to most it's safety, security, SNAP payments and protecting us from the evils of the world such as the Confederate battle flag or Vladimir Putin. it's celebrating the big victories like gay marriage and continued subsidized healthcare for all.
but a market crash? it will never happen because the Newspeak, doublethink reality says so.