"The Global Negative Feedback Loop" - Why Investors Are Fleeing Capital Markets

Tyler Durden's picture

The following comprehensive analysis of current market risks and concerns, represents one of the better summary assessments by both Brean Capital's Russ Certo as well as Bloomberg's market analysis team, of not only why there seems to be an increasingly more tangible sense of gloom covering global capital markets, but also why investors are increasingly withdrawing from risk, leaving central banks to duke it out among themselves.

Traders Pull ‘Singed Fingertips’ From Markets as Risks Escalate

Investors are fleeing and volumes are falling due to extreme valuations amid global uncertainties related to monetary policy and political decisions made in wake of the 2007-2009 financial crisis. It’s a flight that’s creating a negative feedback loop.

  • "First it’s China, then Japan, then the ECB. When you singe the fingertips of speculators, they don’t like to play anymore," says Brean Capital managing director Russ Certo
  • Major banks worldwide are paring trading operations as part of a push to cut costs amid rising regulatory requirements
    • Investors "are stewards of other people’s money and they don’t want to allocate capital to a pyramid scheme": Certo
  • Speculators in China have retreated as fast as they advanced as trading volumes across nation’s three biggest exchanges are now less than half of what they were at April 22 peak
  • Volume of shares changing hands on FTSE 100 Index -21% since Feb.; total volume on U.S. stock exchanges 7.1m May 12 vs 12.5m Jan. 20
  • CME Group’s recent monthly trading volume shows m/m declines across interest rate, FX, equity futures and options
    • FX futures -6.2% y/y, ~699k contracts/day, -16.2% m/m; FX options -22.5% y/y, ~70k contracts/day, -7.7% m/m
    • Rate futures +8.3% y/y, 4.2m contracts/day, -14.2% m/m; options +6.3% y/y, 1.33m contracts/day, -11% m/m
    • Equity index futures +31%, ~2.15m contracts/day, -16.5% m/m; equity index options +20.9% y/y, ~544k contracts/day, +0.5% m/m


  • Primary risk is that global financial markets are more vulnerable to policy shocks as many assets are reaching extreme valuations; stock indexes near all-time highs and sovereign bond yields near record lows
  • Market participants are losing confidence, especially during unexpected central bank decisions like when the BOJ failed to expand monetary stimulus April 27
  • Fed: Risk Fed convinces markets it will hike in face of fragile global economic environment or hikes before market prices move; first development would increasingly weigh on risk assets, while second would create a negative shock
  • ECB: Risk QE program continue to be ineffective as O/N current account holdings, excess liquidity are near record highs
  • BOJ: Risk BOJ loses control of an appreciating JPY, still unable to generate growth or inflation and burdened with Abe’s fiscal policies that continue to be ineffective
  • Ongoing risk Basel III, sovereign regulatory rules continue forcing commercial banks to hold more high quality liquid assets (HQLA), exacerbating global liquidity shortage


  • Brexit
  • Uncertainty overshadowing Brexit’s impact on markets, GBP or economic policy; Treasury analysis of short-term Brexit impact will be published this month
    • Average of half of respondents in Belgium, France, Germany, Hungary, Italy, Poland, Spain and Sweden believe their own country should hold a referendum on staying in the EU, according to a poll by Ipsos Mori published May 9
    • ICM poll shows 40% of Britons would vote to remain in EU, 41% to leave; last week’s poll showed 44% stay, 45% leave
    • GBP pricing out Brexit risks may be premature; some analysts say the pound’s gain reflects greater certainty the electorate will back the “Remain” camp, though others warn this may reflect a misreading of recent opinion polls
    • Core CEE may be most vulnerable to Brexit risk as Poland largest net recipient of EU funds while U.K. 3rd largest net contributor


  • Rising risk EU nations are unable to stem the flow of migrants creating rising nationalistic fervor and domestic civil strife
  • Increased risk European peripheral finances become problematic amid increasing political uncertainty, rising nonperforming loans and slowing economic growth
  • Italy: Fails to meet its debt-reduction goal, economy growing less than govt estimates; bank asset quality continues to deteriorate and Atlante fund proves to be ineffective, fund size EU4.25b, gross NPLs EU360b end-2015
  • Greece: Risk Greeks prove unable to meet terms of debt relief agreement, forces another series of renegotiations
  • Spain: Risk June 26 election creates another stalemate; also risk an anti-establishment coalition is created, unseats Prime Minister Rajoy


  • Risk China may allow a harder landing than expected; China’s Communist Party mouthpiece, the People’s Daily, said China should put deleveraging ahead of short-term economic growth
    • China may lose control of deleveraging, which would increase risks of increased financial market volatility and/or economic hard landing
    • China may either lose control of capital outflows or be forced to allow CNY to depreciate more quickly; imports from Hong Kong surged 204%, indicated significant capital outflows
    • Risk China FX reserve selling continues; reserves rose $11b to $3.316t, though most may have been related to valuation changes to drop of USD
    • Intensity of futures trading on Chinese commodities exchanges is making some of the world’s most liquid markets look leisurely; iron ore in free fall as trading frenzy ebbs
    • Chinese companies in metals and mining or coal operations industries must repay 239.6b yuan ($36.9b) of notes in the three months through June, the biggest quarterly amount on record, according to data compiled by Bloomberg


  • Low prices may further pressure U.S. oil firms and cause more defaults that cascade into credit problems for smaller banks, private equity firms/hedge funds; this raises potential for downward pressure on other assets sold to cover losses
  • OPEC may fail to revive limits on crude output at its June meeting after the failure of talks to freeze production last month, resulting in renewed oil price weakness
    • New Saudi boss seen chasing record output to defend market share vs higher-cost shale
    • Oil price decline may force Saudis to continue selling reserves to protect FX peg, which increases speculation that the peg may fail; reserve assets are $587b from $745b in Aug. 2014
    • Russian economy, which is already enduring the longest recession in two decades, may come under more protracted stress, as oil represents the country’s chief export earner
  • EM sovereigns may face increasing pressure as public energy companies have been some of the most profligate borrowers


  • Political uncertainties aside, there’s risk that U.S. growth may slow further, causing risk asset prices to fall, which would then transmit back to more economic weakness and create downward spiral
    • With more than two-thirds of S&P 500 companies having reported earnings this season, outcome has failed to suggest a speedy recovery from what’s shaping up to be a fourth straight quarterly decline
    • S&P 500 reported earnings share through May 6 shows 1Q earnings down 7.9%; companies have churned out more than $2t of share repurchases since 2009, though grew less than 4% in 2015
    • There have been 40 corporate defaults in the U.S. as of end-April, fastest pace since 2009; there have been 53 global defaults this year vs 67 in 2009
    • Puerto Rico Governor Padilla warned bond investors face a cascade of defaults starting in July unless Congress passes legislation; concurrent concern is municipal funds like Oppenheimer that allocated 43% of its Maryland portfolio to Puerto Rican securities

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LykeMe's picture
LykeMe (not verified) May 15, 2016 5:36 PM

They're beginning to understand the true reality. America's sick and it's contagious.


johngaltfla's picture

And another article from the MSM financial press refusing to address the cyclical nature of markets. Central Banks can postpone the day of reckoning but they have no clue what to do when it arrives on the calendar and they go full Kevin Bacon on us proclaiming "everything is fine, remain calm"...

Shemp 4 Victory's picture

Brean Capital's Russ Certo as well as Bloomberg's market analysis team need to learn about feedback loops. Negative and positive feedback have nothing to do with good or bad outcomes. A negative feedback loop tends toward a stable equilibrium and is self-correcting, thus is resistant to change. A positive feedback loop is self-reinforcing and tends toward instability, thus leading to sometimes drastic change.

Arnold's picture

Look at this list:


Chase is having public problems

The Morgue is having public problems.

Deutschebank is having a public meltdown.

Goldman shit the bed last quarter and will again this quarter.


There is a shit ton of information we will never hear about, the inner problems.


Those are BIG Primary dealers.

Your assets under 'management' may be 'gated' at any time, to use hedge fund terms.

johngaltfla's picture

The only reason GS started offering savings accounts was because they needed cash and fast to have a bail-in on large deposits. It wasn't because they are warm and wonderful. Only a moron parks money at the big dozen demon banks.

Arnold's picture

Gate the Fed?



Additions and removals tab.


I guess they have survived catastrophic Banking failure before.

BeanusCountus's picture

Simpler than that. No one has faith in a person that looks like a penis.

Squid-puppets a-go-go's picture

'singe the fingers of speculators' - you think?

We live in a market environment where the planets keystone commodity, oil, fell 80% in price on a 5% drop in global demand

we're playing with peoples lives here, dickheads, not just with their spare change

HRH of Aquitaine's picture
HRH of Aquitaine (not verified) May 15, 2016 5:44 PM

Confidence games, or Ponzi schemes, always fail in the end. This one is about to go tits up. Good. Let it fail. Fucking unethical assholes.

HedgeAccordingly's picture

Many in USA and world are Broke. Depressed. No hope. No goals. Depressed again. Huge debt. Ruined credit score. Closed bank accounts. Payday lenders. Food stamps. EBT cards. All hope lost for many many people while many many of the rich are simply richer x20 post 2008 due to asset inflation, not from business or revenue growth. Wars are already being fought over this, this is not the future. This is now.


HRH of Aquitaine's picture
HRH of Aquitaine (not verified) HedgeAccordingly May 15, 2016 6:07 PM

HA: spot on. You nailed it. Either understand how the little people are living or you won't have a fucking clue about reality.

buzzsaw99's picture

...concurrent concern is municipal funds like Oppenheimer that allocated 43% of its Maryland portfolio to Puerto Rican securities.

whether they get bailed out or not that is some funny shit right there.

Master Toms Dog's picture

Good thing it's not positive feedback or I'd be worried about system stability.

But hey, I'm just a dog.

bonin006's picture

It sounds like you understand the fundamentals of feedback better than whoever titled this article.

Master Toms Dog's picture

Thanks!  Humans use negative feedback all the time; steering a vehicle, balancing on two legs, even pet discipline.  This simple concept could be, I don't know ... mentioned ... in school.

Seeing Red's picture

If this "simple concept" isn't mentioned in the Bible, it either isn't true, could be better explained with mysticism, or isn't something you need to know about.  Especially if you're a dog.

I posted this (funny to non-zealots) link once before but I'm in a mood (sorry).  Feel free to ignore this post (might be trolling today).


Atomizer's picture

NIRP loop run into the gound. How does it feel Janet Yellen? You have a position as a dyke running the Federal Reserve into the ground. Tell us how it feel based on such sucess. 

Suck up the Yelp gay directory. Get the chance to express taking it up pooh shoot. Fucking faggots. 

Best Tranny bars in Long Beach, CA - Yelp


Master Toms Dog's picture

Don't know if you're hoping they get "trounced", but isn't it less work to just let the massively overdue earthquake do its job?

Here is Dr. Lucy Jones on Conan (May 11):


Atomizer's picture

Didn't advertise your business, you did on Yelp. Fucking socialist dick sucking bastards. Discussing pieces of DNA shit. 

Seeing Red's picture

You're entitled to your opinion (freedom of speech).  And they're entitled to it as well ... even if you don't like what they're saying.

robnume's picture

"Bloomberg's market analysis team..." Is this the same Bloomberg who recently attempted to "deep six" ZH, Tyler? And you're still using Bloomberg as a news source? What's up with that? I, myself, like full transparency, which i'm not getting much of these days.

Arnold's picture

You must admit that Bloomie is a dominate source of the arcane we love to analyze.

Tylers are smart enough to peruse and use all  sources to satisfy this crowd. even if they throw up a bit in their mouth.

RMolineaux's picture

The author contradicts himself by saying there is "excess liquidity," and then, two sentences later, says there is a "liquidity shortage."

Flying Wombat's picture

Multiple Collapse Triggers Everywhere - V the Guerilla Economist


ThrowAwayYourTV's picture

When ever I have extra money I put it into land. Just raw, wooded land. Some place where I can ride my atv around and see a rock and say to myself, "Thats my rock."

F*&@ the market. One day the rock is there and the next day it isnt there. At least I know that I have a place to go besides out the 14th story window when the shtf.


SkunkyBeer's picture

The entire premise of this article is questionable. What flight? If "investors are fleeing capital markets", then why are the three major US indices all within 1% or 2% of their all-time highs?

To me, investors "fleeing" looks like S&P=800, not S&P=2046 (closing this past Friday May 13).

navy62802's picture

Buy gold. Buy food and other supplies essential for survival ... and stockpile them. Then withdraw cash and store it. Finally, sit back and watch the mayhem as it unfolds over the next few years. Not a difficult formula.