Market Crash

If you have been waiting for the market to send you “warning signals”, then you can stop waiting because it is happening right in front of your eyes.

Ironic, because it is precisely CNBC's constant cheerleading of what little viewers it had left that pushed the market to such nosebleed levels that on August 24 it suffered its second flash crash in just five years. It is even more ironic, because instead of a rational, objective coverage of the newsflow, the constant stream of cherry-picked, double seasonally adjusted good news is precisely why viewers had left the Comcast cable station in droves realizing the disconnect between the economy and stocks is simply too gargantuan to stomach, and that they are being lied to.  As a result, it wasn't until the much dreaded market crash that viewers finally came back. At least some of them.

While it is already common knowledge that China has thrown virtually everything at the market in order to halt the ongoing market crash, including arresting "malicious sellers", journalists, and suspicious hedge fund managers, blaming HFTs for daring to sell in addition to buy, and even making trading index futures practically impossible, perhaps the most interesting revelation showcasing China's desperation came from CNBC today which reported that the government recently invited none other than Mr. ETF himself, BlackRock CEO Larry Fink to "discuss the market situation there", or said otherwise: how to manipulate the market better.

Bank profitability will remain under pressure for some time to come in light of the new capital regulations currently in the works. This will make it more difficult for banks to generate new capital internally, so they will have to tap the capital markets and dilute their shareholders further. It is no wonder that bank stocks remain way below the valuations they once commanded (we actually wouldn’t touch these stocks with a ten-foot pole). From a wider economic perspective, the new capital regulations are rendering banks moderately safer for depositors (as long as the markets don’t lose faith in government debt that is), but they also contribute to their ongoing “zombification”. Bank lending is going to remain subdued. This wouldn’t represent a big problem, if not for the fact that it is likely to provoke even more government activism.

Last week’s volatility to the downside was entirely predictable, as the first leg down during this ongoing market crash reached the correction stage of 11%. The technical bounce was a given, as the 30 year old HFT MBAs on Wall Street have been trained like rats to BTFD. In their lemming like minds, it has worked for the last six years of this Federal Reserve created “bull market”, so why wouldn’t it work now. Last week was their first lesson in why it doesn’t work during bear markets, and we’ve entered a bear market. John Hussman seems amused at the shallowness of the arguments by Wall Street shills and CNBC cheerleaders about the future of the stock market in his weekly letter. After this modest pullback from all-time highs, the S&P 500 is still overvalued by 92%...

As an investor, you have enough to be concerned about just taking into account factors like inflation, deflation, Fed policy and the overall state of the economy. Now you have another major threat looming – financial warfare, enabled by cyberattacks and force multipliers. What can you do to preserve wealth when these cyberfinancial wars break out? The key is to have some portion of your total assets invested in nondigital assets that cannot be hacked, wiped out or disrupted by financial warfare. The time to take defensive action by acquiring some non-digital assets is now.

Even before China reopened from its 5-day holiday, regulators were pitching Chinese stocks as cheap (37.3x P/E) and less-margined (+108% YoY) and promised to "safeguard stability" in a "variety of forms" seemingly pouting cold water on The FT's recent report (and the malicious instigator of China's market crash). All of this is quite ironic, given China's chief central bankers admitted "the chinese bubble has burst." As stocks open, CSI-300 (China's S&P 500) has confirmed a 'Death Cross' which in 2008 was followed by a further 60% decline. More troubling, however, is the incessant rise in interbank rates as despite CNY530bn of liquidity injected in the last 3 weeks, overnight rates have doubled. China credit risk jumps to 2-year highs and AsiaPac stocks are generally lower at the open (as US futures dumped'n'pumped) not helped by Japanese weakness on BoJ tapering concerns. PBOC strengthened the Yuan fix for the 4th day in a row - the most since Sept 2010.

"there is a sense that policy is being priced to “fail” rather than succeed... why should equities always rise in value? Why should debt holders be expected to afford their debt burden? There are plenty of alternative viable equilibria with SPX half its value, longevity liabilities in default and debt deflation in abundance. In those equilibria traditional QE ceases to work and the only road back to what we think is the current desired equilibrium is via true helicopter money via fiscal stimulus where there are no independent central banks.

Mario Draghi has no more magic bullets left...

"Time will tell who is right. But remember that we live in an era where computer trading dominates the American stock market. The "robots" that are making a lot of trading calls aren't sitting around pondering China's economy. They are paying attention to whether stocks fall below key levels. What are those levels? No one knows exactly. But these two metrics are worth watching. If these thresholds are crossed, both computer and human traders will consider it a game-changer point."

Large pools of gold in indebted nations will be vulnerable. Pool accounts, digital gold bullion vaulting providers and depositories in the UK and the US might have their companies and assets nationalized and have their clients gold and silver bullion confiscated.

The volatile sell-off in global equities from Thursday August 20th through Tuesday August 24th, alongside a relatively muted diversification benefit from fixed income, led many risk parity funds to suffer a sudden and sharp drawdown over the four-day period. The performance drawdown and subsequent spike in the volatility of risk parity funds likely triggered a significant deleveraging in their assets.

By monetizing more than the entire Japanese budget deficit, the BOJ is running of out willing sellers. Without those, Japan's QE, just like that of the ECB, will grind to a halt. Better yet, this creates a vicious loop, because with every passing month, the inevitable D-Day when the BOJ has no more TSYs on the offer gets closer, which in turn will force those who bought stocks to sell in anticipation of the end of QE, and to seek the safety of bonds themsleves, in effect precipitating the next inevitable Japanese stock market crash.

Is September 2015 going to be one of the most important months in modern American history?