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Morons At The Precipice
Excerpted from Doug Noland's Credit Bubble Bulletin,
Global markets have found themselves again at the precipice. My sense is that everyone’s numb – literally dazed and confused from prolonged Monetary Disorder and the resulting perverted market backdrop. Repeatedly, “The Precipice” has signaled easy-money buying and trading opportunities. Again and again, selling, shorting and hedging at “The Precipice” guaranteed you were to soon look (and feel) like an absolute moron – for some, progressively poorer dunces the Bubble was pushing yet another step closer to serious dilemmas (financial, professional, personal and otherwise). A focus on risk became irrational. Fixation on seeking potential market rewards turned all-encompassing.
All of this will prove a challenge to explain to future generations. Keynes: “Worldly wisdom teaches that it is better for the reputation to fail conventionally than to succeed unconventionally.” And paraphrasing the great Charles Kindleberger: Nothing causes as much angst as to see your neighbor (associate or competitor) get rich. In short, Bubbles are all powerful.
Going back to those darks days in late-2008, global policymakers have been determined to not let the markets down. Along the way they made things too easy. “Do whatever it takes!” “Shock and Awe!” “Ready to push back against a market tightening of financial conditions.” “Do what we must to raise inflation as quickly as possible.” Historic market excess and distortions were incentivized and, predictably, things ran amuck. “QE infinity.” Seven years of zero rates, massive monetary inflation and incessant market backstopping have desensitized and anesthetized. Rational thought ultimately succumbed to “perpetual money machine” quackery. And now all of this greatly increases vulnerability to destabilizing market dislocations, as senses are restored and nerves awakened.
It was a week of ominous developments among multiple key flashpoints.
Let’s start with commodities and EM, where the accelerating downward spiral is now rapidly reaching the status of “unmitigated disaster.” In a destabilizing crisis of confidence, panic outflows saw the South African rand sink 10% to an all-time low. Local South African bond Yields jumped 140 bps in two sessions to about 9% (from WSJ). The Turkish lira dropped another 3%, as Turkey’s equities were slammed for 5%. The Russian ruble dropped 3.4%. The Brazilian real declined 3.2%. Despite repeated central bank interventions, the Mexican peso sank 4.4% this week to a record low. Also hurt by collapsing crude, the Colombian peso dropped 4% to a new low.
Crude (WTI) sank 12% this week to the lowest level since the 2008 crisis. The Bloomberg Commodities Index sank to fresh 16-year lows. Natural gas dropped 9%, to lows since 2012. Iron ore was down 4% this week to a record low (going back to 2009). Iron ore prices have collapsed almost 50% this year. Crude prices are down about 35%. For highly leveraged operators throughout the commodities arena, the situation has quickly turned desperate. In the financial realm, the yen jumped 1.7% and the euro gained another 1% against the dollar this week, pressuring the leveraged “carry trade” crowd.
It has rather quickly become equally desperate for financial operators holding risky corporate debt in a marketplace that has turned illiquid and increasingly dislocated. For the first time since the 2008 crisis, a public mutual fund (Third Avenue) this week halted redemptions. A Credit hedge fund (Stone Lion Capital) also halted redemptions. The concept of “Moneyness of Risk Assets” has been integral to my “global government finance Bubble” thesis. Monetary policy coupled with aggressive risk intermediation (certainly including fund structures and derivatives) created the market perception that high-yield corporate debt could be held with minimal risk (price and liquidity). With the Credit cycle turning, this misperception is being exposed. Junk bond fund redemptions jumped to $3.5 billion this week. The halcyon notion of turning illiquid securities into perceived liquid instruments is coming home to roost. Credit spreads widened significantly this week. Ominous as well, bank stocks sank 6.2%, and the Broker/Dealers were slammed 7.5%.
A Friday Bloomberg article (Sridhar Natarajan, Miles Weiss and Charles Stein) included a pertinent quote: “‘A lot of this looks like late 2007 or early 2008,’ when the credit crunch began to take root, said [Berwyn Income Fund’s George] Cipolloni… ‘But instead of housing and mortgages, it’s energy and materials leading the decline.’”
Cipolloni is on the right track, though this week looked more like later in 2008. And it’s important to contrast the current backdrop to that of the mortgage finance Bubble. I would argue that Credit issues in “energy and materials” are akin to subprime at the “periphery”– as opposed to mortgage Credit generally. Few in 2008 appreciated the degree of mispricing that pervaded mortgage Credit and derivatives, and the near-catastrophic consequences (to market liquidity and the flow of finance throughout the asset markets and real economy) that would materialize with the bursting of the Bubble. Today, market mispricing is systemic and global – virtually all securities classes at home and abroad.
And whether it is commodities, EM or U.S. corporate debt, this was the type of week that spurs contagion. Especially with panicked fund redemptions, problems at the “periphery” can quickly move toward the “core” as risk aversion takes hold and financial conditions tighten more generally. And when players (especially those leveraged) can’t sell what they want, they begin selling what they can. There was also a rush to hedge, a backdrop conducive to market weakness begetting selling, more hedging and more “delta hedging” (selling to offset risk from derivative protection sold).
My plan for the week was to focus on the new Z.1 “flow of funds” report released Thursday. It is important data that confirm the bursting Bubble thesis. Credit growth slowed markedly, confirming that financial conditions tightened meaningfully during the third quarter.
Total Non-Financial Debt expanded at a 2.0% rate during Q3, the slowest debt expansion since Q2 2011. Q3 debt growth slowed sharply from Q2’s 4.6% and compares to Q3 2014’s 4.5%. Importantly, the Credit slowdown was broad-based. Household debt growth slowed to 1.5% from Q2’s 4.2%, to the weakest expansion since Q4 2013. Home Mortgage growth slowed from Q3’s 2.4% to 1.6%, while Consumer Credit slowed from 8.5% to 7.2%. Federal government debt growth slowed from 2.4% to Q3’s 0.2%.
Yet the most remarkable Credit slowdown unfolded during Q3 in Corporate borrowings. Corporate debt growth slowed to a 4.3% pace, about half Q2’s 8.8% (strongest since Q3 2013’s 10.1%). In dollar terms, Total Business Borrowings slowed to a seasonally-adjusted and annualized rate (SAAR) of $586bn, down from Q2’s $1.025 TN.
Total Non-Financial Debt growth slowed markedly to SAAR $871bn, the weakest Credit expansion since Q4 2009 (SAAR $686bn) and down from Q2’s SAAR $1.989 TN and Q3 2014’s $1.907 TN. It’s worth noting that the rate of Credit expansion during the quarter was less than half the $2.0 TN bogey that I have posited is required to sustain the Bubble and unsound economic expansion.
Importantly, the Credit slowdown exacerbates already acute system vulnerability to a securities market downturn. With debt market tumult and dislocation building, there will surely be further slowing in Corporate Credit. After the late-nineties boom, Corporate Credit slowed sharply in 2001 and 2002 - and was barely positive in 2003. After peaking at more than $1.1 TN in 2007, Corporate Credit growth was cut in half in 2008, before contracting $455 billion in 2009. Corporate Credit has a strong proclivity for boom and bust dynamics.
The downturn now enveloping Corporate Credit portends a contraction in corporate profits and an abrupt slowdown of income growth. A significant tightening in corporate Credit also has negative ramifications for stock buybacks, M&A and financial engineering more generally. Such a backdrop is negative for stock prices, and Q3 provided a glimpse of the feedback loop of tightened Corporate finance, weaker stock prices, declining household perceived wealth and economic vulnerability.
...
Analysts generally responded positively to China’s apparent move to a more “flexible” currency regime. It appears more of a clever devaluation ploy. Apparently now moving away from a clearly defined currency peg to the dollar, the Bank of China can more easily obfuscate its intentions and keep currency speculators in check. But this new “regime” is problematic for Chinese issuers of dollar-denominated debt, as well as “carry trade” leverage that has flooded into Chinese high-yielding securities and instruments. Previous Chinese attempts to commence devaluation proved problematic. The current backdrop is fraught with much greater risks.
And I will be part of the crowd trying to anticipate the policymaker response to unstable global markets. Draghi has already disappointed the markets. The Fed does not want to follow the ECB’s lead. The markets expect the Fed to bump up rates 25 bps. I anticipate they will follow through this time around, but it would not be surprising if they don’t. But I’ve contended for some time now that global market instability is much more about the bursting Bubble than Fed tightening – more about China and EM than U.S. monetary policy. I’ll assume a dovish Fed might spur some fleeting bullishness, but it would also further destabilize currency trading.
At this point, I don’t expect (de-risking and de-leveraging) markets to respond much to rates. They will be increasingly desperate for more QE. I fully expect the Fed to eventually reinstate QE in response to financial crisis. In the meantime, I suspect central bankers won't have answers for what ails global markets.
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....what me first
Zerohedge @ Fukushima
....that is all
The morons never learn from history. Clearly it must be foggy at the Fed. Deer at the headlights?
"The morons never learn from history."
For the most part Wall Street is NOT made of Morons. They "pray" on Morons, by using OPM (Other Peoples Money) that nets them very large fees on paper profits, but stick the morons with the losses. They also can get away with treason and virtually any crime too.
And when you ask them they will just answer that you allowed them to do it.
When the masses go hungry as a result of the shock to the supply chains caused by Credit Freeze II then perhaps they will not be allowed any longer.
Bring on the collapse.
Damn. I want the price of Oil to decline so low that it is no longer cost effective to drill for it, pump it, transport it, store it, or refine it.
Let the crops wither and rot in the fields for the want of fuel.
Allow the Cattle to go undelivered for want of fuel.
Now that will be a change that we can depend upon...being set up right now by those Wall Street Oligarchs.
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Morons at the precipice? Surely there are no morons in banking or on Wall Street. You must be joking.
Only Morons would even think of relying on Central Banks for the answers.......
That would be JPM, GS, RBS, CiTi and about 96.3% of the sheeple.
Thanks, that helps explain my discontent......
I wonder if the people losing money on high yield bonds are different people that made the mortgage backed securities decisions or are they the same ?
My old friend Max Keiser has for years, for years before 2008, tried to expose this whole fraud and scam that has become banking and markets. I leave it for people to judge who was right in the long run, "Mad" Max Keiser or all the main stream pundits and central bankers.
The idea that central banks should back stop banks, and support equity share prices at the expense of market forces, can only mean disaster is building.
The IMF claims the power to make all well again, after the entire world banking and market system goes down. People cling to the promise that the IMF can and will step in. Print SDR's and recapitalize all of the markets and banks, thus allowing investors to go long on another face ripping upside.
I argued with a family member who is on the side of the Fed, and who profited massively from the 2008 Bull Run, the manipulated fraud of a market. He says "print money" all will be well. He is not alone. He is mainstream!
One of the main problems is the study of economics and their dictate of the Keynesian school, one of whom Paul Krygman is a mouthpiece for.
These "well educated" Ivy League types think because they can fractionally reserve a balance sheet and have equations demonstating supply/demand techniques that everything they say is the law, so we get the theory that "decreasing the value of a currency increases the amount of exports, increasing GDP" and other idiot fallacious illogical statements.
Of course the bankers want to print. They make money when that happens. But the eonomists, they do it to maintain at the top of their Ivory Tower. They make money indirectly, but more than anything they are in it to maintain the power they have at their Universities.
And when all else fails they send you off to war. We are there now.
"They will be increasingly desperate for more QE. "
QE3 was $85 billion/month.
QE4 will have to be much more.
LOL, maybe the insane PhD money printers at the the Fed can eventually make to $500 billion/month to make Wall Street happy. At some point this asset inflating game comes down to price discovery because global wage arbitration keeps lowering income for the small people.
The Fed's game is impoverishing the small people.
We just need more bubbles in the economy. Where are Alan Greenspan and Ben Bernanke when we need them the most? Give us moar bubbles! Then everything will be fine and everyone will be rich. Remember, a rising bubble lifts all peasants!
The crazy part of fractional reserve lending is that when the Fed buys $85B worth of securities then that $85B gets lent out on a 10 - 1 ratio. So that $85B becomes around $850B on the bnaks books. Thus the $1.5 Quadrillion worth of derivatives.
Is QE4 war ?
there is a goat in the picture
how many muslims clicked on this article because of the goat?
Ever heard of the latest quirk? F**k that goat, Got no TLC at the CIASIS farm.
Meh. Goats are so yesterday. Your muslim friends have long since graduated from wanting goats to assault rifles and bombs. Goats just aren't very useful for killing infidels.
well in islam goats arent to kill someone. in islam, man have more contact with animals than with woman and the basic of islamic law is to encourage activity and interaction between male-human and animal.
the principal in islam is to try out if it is possible to cross and man and a goat - with success
afganistan for example is a poor country. but woman do not like poor man and afgan man can not afford woman. they just have to reproduce with goats.
other countries like turkey prefer donkeys instead of goats and we all witnessed the success of crossing turkish man with donkeys. basically all turks now have someone in their family who is at least half-donkey and the leader of turkeystan is a half-donkey too.
the arabs prefer camels to breed with. as great muslims they have crossed their genetics with great camels. this is why their faces looks so strange and having sex with camels seems to have great impcat on the behavour of arabs. for some reason they started to wear their wifes traditional white dresses
lulz, have a green :)
Their favorite phrase, "that really gets my goat". or, "I can't, I'm on the lamb". and, "I'm feeling kinda sheepish".
The longer this binge on debt continues, the bigger the shit storm will be when the world takes an enormous, stinking dump preceeding the "Great Reconciliation".
That's a shitty thing to say.
Does anyone seriously belive that the ECB, Fed, and other counterparts, don't completely understand what they have done to the world via ZIRP, NIRP and QE? And how many former Goldman employees are now at the Fed or in the Obama administration?
It started with Operation Twist under Bernanke. Each attempt became violently worse. No way to back out until they declare Global Governance.
Or, get run out of office by guns overtaking a Treasonous US Government operating outside the United States of America Constitutional Laws.
“For nearly four years you have had an Administration which instead of twirling its thumbs has rolled up its sleeves. We will keep our sleeves rolled up. We had to struggle with the old enemies of peace--business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering. They had begun to consider the Government of the United States as a mere appendage to their own affairs. We know now that Government by organized money is just as dangerous as Government by organized mob.”
? Franklin D. Roosevelt
This:
"A focus on risk became irrational..Seven years of zero rates, massive monetary inflation and incessant market backstopping have desensitized and anesthetized. Rational thought ultimately succumbed to “perpetual money machine” quackery."
How may morons does it take to raise an interest rate? Rats, I forgot the rest of the joke.
The Fed's done a hell of a job clapping for Tinkerbell. Too bad Tinkerball died years ago.
Since Bretton Woods, the US has had a currency it didn't really deserve. Now we're headed for a currency we can't really afford.
But don't blame the morons. It wasn't their idea to go to the edge of the precipice, they were led there.
Glad to see Mr. Noland on here. He has been spot-on for years with his analysis, though underestimating with everyone else the brazen ability of the Fed to so massively print.
Paul Krugman is still working his European Union wet dream. This fuckstick is a washout in high spin cycle.
Paul Krugman: Fascists like Trump only possible because Republican leadership is “inbred and out of touch”
Paul, you should stop fu.king your poor cat and read more of Friedrick Hayek.
These are not moroons but participants in a very well crafted script of a play we are all acting out:
Hebrews 4:3 For we who have believed do enter into that rest; even as he hath said, As I sware in my wrath, They shall not enter into my rest: although the works were finished from the foundation of the world.
As with any play there is the villain involved in a climactic end:
Revelation 13:1 And he stood upon the sand of the sea. And I saw a beast coming up out of the sea, having ten horns, and seven heads, and on his horns ten diadems, and upon his heads names of blasphemy.
And our Savior to bring the villains end:
Revelation 19:11-16 And I saw the heaven opened; and behold, a white horse, and he that sat thereon called Faithful and True; and in righteousness he doth judge and make war. (12) And his eyes are a flame of fire, and upon his head are many diadems; and he hath a name written which no one knoweth but he himself. (13) And he is arrayed in a garment sprinkled with blood: and his name is called The Word of God. (14) And the armies which are in heaven followed him upon white horses, clothed in fine linen, white and pure. (15) And out of his mouth proceedeth a sharp sword, that with it he should smite the nations: and he shall rule them with a rod of iron: and he treadeth the winepress of the fierceness of the wrath of God, the Almighty. (16) And he hath on his garment and on his thigh a name written, KINGS OF KINGS, AND LORD OF LORDS.
When morons are on the precipice it's easy to push them over the edge when they see an avalanche heading toward them at '60 miles per hour'. 'Ace' Greenberg opined after Bear Stearns melted into the ether that even he did not know what to do when an avalanche traveling at 60 miles per hour was heading towards him. [see Breaking the Bank FRONTLINE] Frankly, these morons don't know what to do either. And YES, 'Ace' Greenberg was a moron too.
"Morons at the precipice" will suffice to sum up this entire era of US history both economically and otherwise.... Politics, economics, markets, entertainment, foreign policy, culture.
If you need a laugh here is a bunch of MSM excelling at the personification of "morons on the precipice".
http://www.sott.net/article/308308-2015s-best-news-bloopers-from-around-the-world
For those of you that follow S&P500 and others.. https://sasafuturestrading.wordpress.com/
Bye