"Nothing Has Been Fixed" - Citi's Five Reasons Why This Sucker Is Going Down

Tyler Durden's picture

As a result of the dramatic surge in the S&P500 from its February lows, which erased the worst ever start to a year, and nearly regained the all time highs in the US stock market on a combination of a central bank scramble to reflate, the "Shanghai Accord", and the most violent short squeeze in history, coupled with a historic credit injection by China which as we first reported amounted to a record $1 trillion in just the first three months of the year...

 

... economists have shelved discussions about the threat of a US recession.

That is a mistake.

According to Citi, the Q1 2016 stabilization in Chinese, EM and global growth looks fragile and is likely to be temporary. In other words, nothing has been fixed. In fact, Citi goes on to say precisely that:

In particular, none of the structural headwinds that seem to have plagued the global economy in recent years (a mix of excessive indebtedness, deteriorating demographics, rising political uncertainty as well as the end of the China growth miracle and the commodity supercycle) have been resolved.

Looking forward, these are the four key risks that keep Citi up at night "in the near term."

  • The Chinese stabilization could be even more short-lived than we currently expect. As noted above, the duration of China’s old-style investment-led fiscal stimulus and credit binge may prove rather short, as Chinese policymakers pivot back and forth between supporting growth and supporting reform and rebalancing. In the light of the evident imbalances and excesses in the Chinese economy, the Chinese stimulus may also prove to be less effective in sustaining aggregate demand – even in the short run – than hoped for.
  • One contributor to the potential stabilization in China’s and EM activity has been the weaker US dollar and receding expectations of a US rate hike. But these may well prove temporary. In particular, financial markets probably currently underprice the risk of Fed rate hikes over the next year or two (our US team currently expects one more hike in 2016, probably in September, but the next hike could also happen in June or, more likely, July). It remains to be seen whether EM financial conditions and the tentative stabilization in EM economic activity would prove resilient to renewed Fed tightening and dollar strength.
  • A US downturn could threaten. The recent weakness in the US data, continued cautious behavior of US consumers, and the lack of "animal spirits" to raise investment spending leave questions as to whether there may be further economic weakness to come.
  • Political risks in Europe are high and rising. The UK’s upcoming EU referendum (June 23) remains a key uncertainty for the coming months and we believe Brexit, if it happens, would be a major negative in economic and political terms for the UK and EU as a whole. We still put the probability that the UK votes to leave the EU at 30-40% – i.e. not our base case but by no means a trivial risk – but there are some reasons to think that the risk may be even higher. And Brexit is by no means the only source of political uncertainty and risk in Europe, with new elections due in Spain, high support for non-mainstream parties in many countries including Austria, France, Italy, the Netherlands, Sweden, Denmark, Hungary, Poland and Slovakia, and rising non-mainstream support even in Germany.

But what may be the biggest concern to Citi is that the credibility - and ability - of central banks, to effectively prop up the system is now openly in question:

The recent IMF-World Bank Spring Meetings made clear that the perceived reduction in global recession risk was greeted with a major sigh of relief from policymakers around the world. This is in at least part because it may not be straightforward to come up with an appropriate policy response in the event of a major downturn. Of course, there are still various options for stimulus in most economies. On the monetary side, the ECB highlighted that a pivot towards more domestically-oriented easing (including credit easing implemented through purchases of corporate bonds and subsidized (negative interest rate) loans to banks) is possible; the BoJ has shown that purchases of equity ETFs and REITs are among the tools of policymakers; and for both the BoJ and ECB, there is probably some more room to lower policy rates (including offering (more) negative interest rates on loans to banks) and to increase purchases of public assets. Yet it is almost universally acknowledged that the incremental boost to demand from monetary stimulus is diminishing and the side-effects (including political side-effects) may be rising.

 

If monetary options are limited, the obvious alternatives would be stronger fiscal or quasi-fiscal support or, indeed, the much-heralded ‘three-pronged strategy’ of combining monetary and fiscal stimulus with structural reforms. But even though, at least in the advanced economies, fiscal policy is slowly and gradually turning less procyclical and more supportive of economic activity, hurdles (legal, ideological, political or reflecting (lack of) fiscal space) to timely and sizable fiscal stimulus remain relatively high in most economies. Meanwhile, prospects of structural reform remain rather limited across both DMs and EMs. The limited likelihood of effective policy stimulus in the event of a downturn therefore adds to the potential fragility of the recent more positive developments in financial markets and real activity, if sentiment (business, consumer or financial market) were to turn more pessimistic again and /or if one or more of the adverse contingencies listed above were to materialize.

Which is ironic, because now that asset prices and thus the market is the only real mandate of the Fed, the moment there is an uncontrolled drop in the S&P500 or any other global market, is when the global central bank put will finally be put to the test, and if Citi is right, it will be exposed as the bluff it was all along.

Which incidentally explains why the SF Fed's John Williams just two days ago explained what he thinks may be the biggest systemic risk factor: dropping asset prices. From Reuters:

San Francisco Federal Reserve President John Williams reiterated Monday his view that the U.S. economy is ready for higher interest rates, but flagged the risk of broad-based declines in asset prices as a result

 

Speaking at a panel on systemic risk at the Milken Institute Global Conference, Williams said the biggest systemic financial risk currently is the possibility that "broad sets of assets are going to see big movements downward" as interest rates rise. "That's an area that I think is a potential risk."

Ignoring the insanity that the Fed now has to warn that a market selloff is a "systemic risk", it also exposes not only the weakest link in the modern financial system, namely artificially inflated prices, but by definition confirms that just like in China where having a bearish opinion is now officially prohibited, it reveals that the market is only where it is due to constant and unrelenting central bank intervention, something "conspiracy theory" fringe blogs have been saying for nearly a decade.

For those wondering how to trade this, we unfortunately have no advice: because if one is buying puts on expectations of the Fed losing control, we have bad news: the market will simply be shut down and all capital flows will be halted indefinitely before true price discovery is allowed. As such those hoping to be paid when all central bank control is lost will be disappointed. It is also why none other than JPM warned last Thursday that the best option is not to bet on financial assets, either long or short, but to move into physical assets among which, JPMorgan listed, gold.

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Two Theives and a Liar's picture

You know the world is off it's moorings when JPM sez:

GOLD Bitchez!

The Saint's picture
The Saint (not verified) WTFRLY May 4, 2016 3:05 PM

"....the market will simply be shut down and all capital flows will be halted indefinitely before true price discovery is allowed."

Really?  If U.S. stock markets are halted because of decline the government would lose ALL CREDIBILITY and that would be the end of America.  Seriously!

Pabloallen's picture

would lose ALL CREDIBILITY and that would be the end of America.

 

 

Ummmmmm...Past that already.........

Garbatrage's picture

"This Sucker Is Going Down"

Good.

N0TaREALmerican's picture
N0TaREALmerican (not verified) Harnar May 4, 2016 2:12 PM

We've been waiting a real-long-time.  It could be longer still.

ClydeCrashcup's picture

Good things come to those who wait.

Pabloallen's picture

I dont have anymore time, hang these fuckers and lets get the civil war over !!!!!

 

 

CIVIL WAR 2016

malek's picture

You seem to have missed the point that Citi stated the Chinese Sucker is going down

(so -cough- nothing to see at our own doorstep, move on!)

MASTER OF UNIVERSE's picture

More like they ran out of fresh bullshit and decided that gold sounded better than condos, new housing starts, oil, and gas. Frankly, what do they have left to sell clients on? In brief, fiat, oil, bonds, housing, condos, oil, fracking for gas, tech, nuclear power, windmills, solar panels, and lithium batteries, will not cut the mustard anymore. The obvious end is GOLD Bitches, but paper outmatches physical 30 to 1 just like Investment Bank leverage. And JPMorgan Chase is leveraged to the tits, eh.

 

It's no wonder Dimon & Blankfein have cancer.

pequiste's picture

Correction Master:

Dimon and Blankfein ARE cancer.

Scuba Steve's picture

Almost gives you the feelin the inside money knows QE is coming, eh?

N0TaREALmerican's picture
N0TaREALmerican (not verified) May 4, 2016 1:50 PM

They haven't even TRIED helocopter money yet.   Come-on...   They should at least try it.

And negative interest rates..    A lousy -.5% !!   Come-on...    They should at least try -3 or 4 percent.  

These guys are just giving up.

bada boom's picture

So their blaming China? Really?

E.F. Mutton's picture

First rule of Bankster Club is: It's never their fault.

adr's picture

Actually they know it's their fault, they just won't ever admit it.

N0TaREALmerican's picture
N0TaREALmerican (not verified) adr May 4, 2016 2:12 PM

I'm not sure they do.    If this "classical economics" is actually a religious-like OCD, then the belief in the infallibility of the Deity (the models) would mean they know they are absolutely right.   

Dr. Engali's picture

"because if one is buying puts on expectations of the Fed losing control, we have bad news: the market will simply be shut down and all capital flows will be halted indefinitely before true price discovery is allowed."

 

Which is exactly what I've been saying since day one.

Pumpkin's picture

"the market will simply be shut down and all capital flows will be halted indefinitely before true price discovery is allowed."

 

Actually this has already happened.  About 7 years ago.

 


Latitude25's picture

Try breaking up tbtf like citi.

Theonewhoknows's picture
Theonewhoknows (not verified) Latitude25 May 4, 2016 2:05 PM

Too many people would need to die for it to happen. It's like auditing the FED (forget about removing it) http://independenttrader.org/global-structure-of-ownership-result-of-4-year-long-research.html

GunnerySgtHartman's picture

Break up ALL the moneycenter banks!

adr's picture

So what you are saying is that nothing is real but if the fantasy is exposed for what it is, values go to zero?

So the choices are, zillions of dollars for the 1% if we let the fantasy continue, or zero dollars for the 1% if reality appears.

I think they'll choose fantasy. Lloyd Blankfein doesn't know how to actually work for a living.

buttmint's picture

The Big Short

 

Glad to know Obamey saved the world!

SmittyinLA's picture

Keep the Yellen, epoxy her feet to the floor and stop the presses then watch the fireworks while the tribe goes up in flames like the Abengoa death ray

GunnerySgtHartman's picture

"Pay no attention to that recession behind the curtain!"

MASTER OF UNIVERSE's picture

"Pay no attention to that little recession behind the curtain."

slaughterer's picture

As long as volume stays low, they will keep this turd afloat.  

debtor of last resort's picture

The day will come that i pass out because all blood went into my doom boner.

frankly scarlet's picture

Citi's turn to flog the limited hangout?

Why do bankers get up in the morning? To create debt.

How do bankers manage this? By counterfeiting OUR money.

How has Fiat, just like the last gold standard, been run into the ground? By bankers issuing too large a QUANITITY of money.

Why do bankers continually issue too much money? Because that makes for increased profits for them in the short term.

Why are they just thinking short term? They're not. They know the this excess of money will collapse their system every 40 to 60 years and they will have shift back to the last money system, but that with each shift their strangle hold of control over all human structuring on this planet will be increased with each shift until finally the entire human structure will be irrevocably under their full control.

 

Then what will happen?  I don't know what their ultimate plans are but we are about to find out and my guess going by bankers past performances is it won't be a very pretty situation for most of humanity.

withglee's picture

Why do bankers get up in the morning? To create debt.

Bankers don't create debt. Debt is a promise to complete a trade. Only traders create trading promises. Show a single instance that a bank creates debt when it is not acting as a trader rather than a banker.

Kefeer's picture

When they build a bank.

bnbdnb's picture

China's at fault on the way down. Its never to be proclaimed as the driver on the way up....

Farmer Joe in Brooklyn's picture

They won't pull the plug until down 40-50% or more. 

Pick a spot to get out and immediately take out your money when it gets there. 

I think having a down 25-30% threshold on puts is reasonable. Once they freeze trading and capital, social unrest is close behind.

Darth Rayne's picture

Well, obviously this sucker is going down but not yet. The end is NOT nigh. Newbies, learn to think like a zero hedge master. https://davidwatkinson.blogspot.co.uk This ends in hyperinflation and we aren't there yet!

withglee's picture

"none of the structural headwinds that seem to have plagued the global economy in recent years (a mix of excessive indebtedness, deteriorating demographics, rising political uncertainty as well as the end of the China growth miracle and the commodity supercycle) have been resolved."

So the following have to be resolved. You're assigned to the task:

a mix of excessive indebtedness,

  • what is the current indebtedness?
  • At what level is indebtedness not excessive?
  • How do we know?

deteriorating demographics,

  • What are these demographics?
  • What have they deteriorated from?
  • What should the demographics be?
  • How do we know:?

rising political uncertainty

  • What is the uncertainty rising from?
  • How do we know when we are politically certain?
  • What control do we have over political certainty?

the end of the China growth miracle

  • Why is China's growth a miracle?
  • Why is it ending?
  • Was there life before this growth miracle?
  • If China goes away completely, what do we do?
  • If we go away completely, what does China do?

 the end of the commodity supercycle

  • How does the super cycle differ from the cycle?
  • Why does it cycle?
  • What controls the cycle?
  • When does a cycle become a super cycle?

It is also why none other than JPM warned last Thursday that the best option is not to bet on financial assets, either long or short, but to move into physical assets among which, JPMorgan listed, gold.

Where is all this gold supposed to come from? There is only 1oz per person on Earth ... and you and I have more than our fair share. What happens to those who cannot move into gold?

Does anyone else see how stupid and worthless these articles are? Why do you suppose they write them? Cui bono?


N0TaREALmerican's picture
N0TaREALmerican (not verified) May 4, 2016 2:50 PM

 

 

What happens to those who cannot move into gold?

They get fucked.

 

Does anyone else see how stupid and worthless these articles are?

Not the people that act first.

Pabloallen's picture

You dont get it.......  I take more than your gold......   Does gold travel at 3400 fps ?  Gold will have no value for a short while, some will still be collecting it though for after the clensing......

Insurrexion's picture

 

 

No SHIT.

This was predicted four months ago here by John Cunningham:

https://www.linkedin.com/pulse/global-credit-risk-john-m-cunningham?trk=...

 

Kefeer's picture

Read the entire article - right on 90%.  Maybe delayed on the other 10%.  Good read - thanks.

Overleveraged_and_Impatient's picture

I agree with everything except being disapopinted for a fed failure. I believe the S&P 500 is COMING DOWN HARD BABY. Gold, Silver, Bitcoin and S&P puts are my current investments.

Aireannpure's picture

Janet Jellin looks more and more shrewish. We all knew she is a rodent but not what kind.

Kefeer's picture

Too much bad news again; bullish.  More jawboning on the same issues going back and forth.  The banks and other financial institutions blaming another banking fortress - sounds like a banking problem to me.

Kefeer's picture

Dead in sin and trespasses because we refuse to repent.  God is faithful to what He says unlike us.  Therefore when He says He will not look upon sin favorable and all are sinners; you would be better if you were never born.

You would be better off wiping the toilets in the executive suites at Citi bank HQ.

gregga777's picture

There is less than one penny* in bank vault cash to the dollar of US broad true money supply. When the Feral government officials close the Con Street financial Casino scam and the banking gangster system you had better have already removed your fiat from the bank and converted it to money—gold, silver or even copper—and barter-able goods (brass & lead—bullets—non-perishable foods, etc.). If you are still in line when the bank runs out of cash: "You get nothing!"

* Feb 2016 US TMS-2: $12.47280 trillion; Mar 2016 bank vault cash: $59.303 billion. $59.303 billion / $12.47280 trillion = 0.00475 or $0.00475 vault cab per $1.00 TMS-2.

gregga777's picture

The world banking & financial systems, and especially the fiat currency systems, are designed to fail periodically! That is because all banking & financial systems processes use positive feedback. Positive feedback amplifies the current trend and is inherently unstable. For instance rising asset values allows a greater debt load because the underlying collateral is rising in value. But, when peak debt occurs asset values may stop rising and if they begin falling that trend becomes amplified. It's extremely unstable which is why engineering control systems use negative feedback. The people that designed the banking & financial systems consciously used positive feedback because it allows them to create boom & bust cycles to enrich themselves and their cronies. It's not a conspiracy, it's just the way that it is. Booms & busts will occur as long as the same criminal elites control the financial & banking systems.