Market Crash

Back in the summer of 2010, when the SEC was still desperate to (laughably) scapegoat the May 6 Flash Crash on Waddell and Reed, in an attempt to telegraph to the public that it was in control of the HFT takeover of the stock market (an attempt which has since failed miserably as days in which there are no occult trading phenomena have become the outlier and have resulted in the wholesale dereliction of stock trading by retail investors), we first presented and endorsed the Nanex proposal that the flash crash was an "on demand" (either on purpose or by mistake) event, one which occurred as a result of massive quote stuffing which prevented regular way trading from occuring and resulting in a 1000 DJIA point plunge in minutes  (the audio track to which is still a must hear for anyone who harbor any doubt the market is "safe"). It turns out that in the nearly 3 years since that fateful market crash, not only has nothing been done to repair the market (ostensibly broken beyond repair and only another wholesale crash, this time without DKed trades, and bailed out banks, could possible do something to change the status quo) but the Denial of Service (DoS) attacks that HFT algos launch, for whatever reason, have become a daily occurrence as the following demonstrations from Nanex confirm beyond a shadow of a doubt.

Readers of Zero Hedge know well that one of the most abhorred (by us) accounting gimmicks employed by banks each and every quarter over the past 3 years to boost their bottom line, is to engage in loan-loss reserve releases: a process which has absolutely no associated cash flow benefit, but merely boosts EPS for GAAP purposes. In some cases, like this quarter's absolutely farcical JPM earnings release, the abuse is beyond the pale, as the offending bank releases reserves even as it reports surging non-performing loans: two processes which in a normal world can not coexist. Yet quarter after quarter banks keep on doing this, and in fact a big part of Q3's to date EPS outperformance is courtesy of financial company "earnings", of which, in turn, loan losses amount to about 50% of the entire blended financials bottom line. Yet while we can rage and warn, nothing usually happens until there is a market crash due to the gross manipulation of reality that such an activity entails. Luckily, this time someone with more clout in the legacy establishment has now stood up to warn about the mounting dangers associated with the relentless abuse of loan-loss reserve releases: none other than the US Comptroller of the Currency.

"The price action over the past few weeks in the wake of the markets getting more from the Fed than they could have ever expected heading into an election is a clue that the times indeed could be a changing. The 1987 paradigm underwent a similar period of choppy trade before melting down. Of course, crashes by their nature are a rare breed and the probability of one occurring is astronomically low. That said, should the S&P 500 fail to hold the 1400 level over the next few days (especially on a closing basis) we wouldn’t wait around too long in anticipation that the modern day version of LOR will save the day. The chart makes it clear that quantitative easing has diminishing returns. Soon they could be negative."

This past Friday, on the 25th anniversary of Black Monday, Bill Gross warned that in the current centrally-planned market "central bank puts" are the modern day equivalent of "portfolio insurance", and he is right. By sending complacency to record levels, and essentially forcing investors to no longer worry, hedge and generally ignore tail risk, the central planners, in their futile attempts to reflate stocks at all costs, are guaranteeing that the market will experience just the type of fat tail event they promise will never occur. As for the catalyst that will make sure of it is none other than our old friend: high frequency trading. Because while central planning is the mechanism by which investing is dragged away from mean reversion, price clearing and fair value discovery, it is HFT that is Bernanke's analogue in the millisecond trading world (as all those who had stop limit orders (that did not get DKed) on May 6, 2010 very well remember). Because when the next Black ___day does happen, it will be due to central planning, but it will be enacted courtesy of HFT (which will never go away until the next and probably final market crash: too much exchange revenue depends on the perpetuation of this parasitic liquidity drain). Which is why it is only appropriate to warn readers that when it comes to system market fragility, the frequency and magnitude of "wild price spike" events (to put it simply) are now both rising at an exponential rate, and fast approaching Flash Crash levels.

Caution is the word of the day.

Blowout quarter, or do US bank numbers just blow?

In April of 2009 we warned very explicitly that reliance on the fake "liquidity" (which was never liquidity per se but merely volume and churn) by the HFT algos that stuff quotes, frontrun each other, spoof, layer, and generally make a mockery out of the thing fomerly known as the market (which is now more than anything a policy vehicle for central planners but that's a different story) would result in tears. A year later the first flash crash happened, and ever since then more and more people have finally realized how our 3+ year long crusade against HFT (which sadly is now a minor distraction against the far greater evil which is central bank dominance of capital markets) was spot on, confirmed by the recent segments (here, here and here) on CNBC which effectively confirmed the markets are not only a joke, but without any real depth, i.e. fake. What is amusing is that people still don't understand why the exchanges, and the regulators (coopted by the exchanges) allow HFT to continue. Here is the answer: in 2011 the CME made 31.5% of all its revenues from HFT, the ICE: 25.1%, the NYSE: 21.4%, the Nasdaq: 17.1%, the CBOE: 22.4%, and so on.

One of the key stories of 2011 was the revelation, courtesy of MF Global, that no asset in the financial system is "as is", and instead is merely a copy of a copy of a copy- rehypothecated up to an infinite number of times (if domiciled in the UK) for one simple reason: there are not enough money-good, credible assets in existence, even if there are more than enough 'secured' liabilities that claim said assets as collateral. And while the status quo is marching on, the Ponzi is rising, and new liabilities are created, all is well; however, the second the system experiences a violent deleveraging and the liabilities have to be matched to their respective assets as they are unwound, all hell breaks loose once the reality sets in that each asset has been diluted exponentially. Naturally, among such assets are not only paper representations of securities, mostly stock and bond certificates held by the DTC's Cede & Co., but physical assets, such as bars of gold held by paper ETFs such as GLD and SLV. In fact, the speculation that the physical precious metals in circulation have been massively diluted has been a major topic of debate among the precious metal communities, and is the reason for the success of such physical-based gold and silver investment vehicles as those of Eric Sprott. Of course, the "other side" has been quite adamant that this is in no way realistic and every ounce of precious metals is accounted for. While that remains to be disproven in the next, and final, central-planner driven market crash, we now know that it is not only precious metals that are on the vaporization chopping block: when it comes to China, such simple assets as simple steel held in inventories, apparently do not exist.

Central bank demand internationally continues and demand for gold in the increasingly volatile Middle East remains robust as seen in data from the Istanbul Gold Exchange. It showed that Turkey’s gold imports were 11.3 metric tons last month alone. Silver imports were 6.7 tons, the data show. Much of these imports may be destined for Iran where imports have surged an astonishing 2,700% in just one year – from $21 million to $6.2 billion. In the first seven months of this year, Turkey's exports to Iran have also skyrocketed to $8 billion, up from $2 billion in the same period last year. And it is widely believed that the major portion of the increase, which is $6 billion, stems from the export of gold. There is speculation that the Iranian central bank is buying gold and that they may be accepting gold in payment for oil and gas in order to bypass western sanctions.  Turkey is paying for the oil and natural gas it is importing from Iran in gold, Turkish opposition deputies have claimed, drawing attention to the enormous increase in Turkey's gold exports to Iran in 2012.  “Gold is being used as an instrument for payment. Under the guise of exportation, gold is being sent to Iran in exchange for oil,” Sinan Aygün, a deputy from the Republican People's Party (CHP), has told Turkish daily Today's Zaman.

With a price hovering around $1,600 an ounce and the prospect of "additional monetary accommodation" hinted to in the latest meeting of the FOMC, gold is once again becoming a hot topic of discussion. Krugman, praising 'The Atlantic's recent blustering anti-Gold-standard riff, points to gold's volatility, its relationship with interest rates (and general levels of asset prices - which we discussed here), and the number of 'financial panics' that occurred during gold-standards. These criticisms, while containing empirical data, are grossly deceptive.  The information provided doesn’t support Krugman’s assertions whatsoever.  Instead of utilizing sound economic theory as an interpreter of the data, Krugman and his Keynesian colleagues use it to prove their claims.  Their methodological positivism has lead them to fallacious conclusions which just so happen to support their favored policies of state domination over money.  The reality is that not only has gold held its value over time, those panics which Krugman refers to occurred because of government intervention; not the gold standard. Keynes himself was contemptuous of the middle class throughout his professional career.  This is perhaps why he held such disdain for gold.

The outcome of the next round of monetary policy will be similar to those in recent history mentioned in this paper... "Perceived inflation will go through the roof.  We’re talking about near 0% interest rates around the developed world (near-term rates in Germany hit 0% in the auction at the end of May and are expected to go negative).  Oh yeah, and massive inflation.  I think gold will have no trouble hitting $3,000/oz in the medium-term and I see copper tripling over the next decade.  This is, of course, until we hit the next bubble sometime around 2018 and start over again.  The trend remains: since the stock market crash of 1987, through the dotcom bubble, and into the real-estate & stock market bubbles of 2007, each euphoric high and ensuing crash have been more extreme than the last.  These extremes are fueled by the easing that is meant to cure us.  The policy that we are facing within the coming months/years will, as the trend dictates, trump them all, and so inevitably will its hangover."

Here come the facts!!! Warning, if you get your feelings hurt over hearing the truth, simply move on. You may have a couple of quarters lefft.

How far is the Fed from reaching the bottom of its ammunition box? Well, both Mario Draghi and Ben Bernanke said no to yet more monetary stimulus recently. Wall Street unsurprisingly was disappointed. Wall Street expected more stimulus, as institutional investors are analyzing monetary policy from their own perspective rather than the central bank's viewpoint – understandable, but a big mistake. Wall Street's Conundrum: with the S&P 500 up less than 7% in 2012, the year is almost over, and the investment firms have little to show for it.

When observing the trends in the housing market, one has two choices: i) listen to the bulls who keep repeating that "housing has bottomed", a common refrain which has been repeated every single year for the past four, or ii) look at the facts. We touched briefly on the facts earlier today when we presented the latest housing starts data:construction of single family residences remains 46 percent below the long-term trend; the more volatile multifamily houses is 15 percent below trend and demand for new homes 47 percent below. This is indicative of reluctance by households to make long-term investments due to fear of another downturn in housing prices. Bloomberg summarizes this succinctly: "This historically weak demand for new homes is inhibiting the recovery of demand for construction workers as well, about 2.3 million of whom remain without work." But the best visual representation of the housing "non-bottom" comes courtesy of the following chart of homes in negative or near-negative equity, which via Bloomberg Brief, is soared in Q4, and is now back to Q1 2010 level at over 13.5 million. What this means is that the foreclosure backlog and the shadow inventory of houses on the market could be as large as 13.5 million in the future, which translates into one simple word: supply.

When it comes to building wealth, muddying the difference between perception and reality is the key manipulation tool that banksters use to goad people into wrong choices.