Bank of America

"Essentially central banks, by unfairly inflating asset prices have compressed risk like a spring to unfairly tight levels. Unfortunately, the market is aware the price of risk is not correct, but they can’t fight it, and everyone is forced to crowd into the same trade. By manipulating markets they have also reduced investors’ inherent conviction by rendering fundamentals less relevant."

More and more countries are jumping on the gold bandwagon...

Because we squandered our opportunity to correct our own problems, our problems shall be our legacy. It’s wretched how dumb we are in our greed to have everything right now in the cheapest way possible and how willing we are to force the debts of that consumption upon our grandchildren and to pretend that won’t hurt them. We live in economic denial.

Banks have finally woken up to the risk their billions in C&I loans issued to fund "financial engineering" are exposed to. The reaction: an unprecedented surge in loan collateralization, with the percent of total loans secured by collateral soaring by nearly 50% in the past quarter to a record 55.9%, the highest ever!

There has been a "continued shunning of fixed income" with over $25 Bn of outflows from bond funds in three weeks, of which $6.4 Bn took place in the past week, resulting in outflows in 6 of past 7 weeks.However, the biggest outflow risk is not to Junk but to investment grade, that main funding source for trillions in corporate stock buybacks: it was the IG space that took another beating with largest outflows ($3.5bn) in 17 weeks!

• Global Stocks Take Breather After Oil-Fueled Rally (WSJ)
• Junk Investors Evade the Trade (WSJ)
• How the Third Avenue Fund Melted Down (WSJ)
• Oil Traders Set to Pounce as U.S. Prepares to Lift Export Ban (BBG)
• JPMorgan Says Japan Inc. Must Prepare for Yen Below 100 a Dollar (BBG)

And so Wall Street has set its sights on the next junk bond fund casualty, a name which is well-known to most equity market participants: none other than Waddell and Reed (WDR), the fund which rose to infamy in the aftermath of the May 2010 Flash Crash, after it was initially blamed by the SEC as the culprit behind the Dow's 1000 point crash...

“To the intelligent man or woman, life appears infinitely mysterious, but the stupid have an answer for everything.” ~Edward Abbey

"Since the risk of Quantitative Failure brings with it the risk of more extreme policies/politics in 2016, the natural hedges are gold & volatility. Gold in particular will be interesting to watch in coming months. The Fed’s determination to raise rates means gold prices should fall. If in contrast gold rises with Fed hikes that’s a clear sign of a “policy mistake” and investors anticipating the need for more inflationary policies next year."

As new investor liquidity evaporates and as billions are redeemed first from the junk bond universe, then investment grade and then loans, the debt crisis which was unleashed in anticipation of the Fed's rate hike, is about to get much worse, and lead to even more prominent hedge fund "gates" and liquidations.

"A flip to fiscal stimulus is the most likely catalyst for a Great Rotation out of “deflation plays” into “inflation plays”, undoubtedly the biggest investment decision of 2016. Sadly it took the New Deal and WW2 to end the dominance of “growth” over “value” in the 1930s."

According to Bank of America's credit and debit card spending data, core retail sales (those excluding autos which are mostly non-revolving credit funded) just dropped by 0.2% in November, the first annual decline since the financial crisis!

Government interference by both central banks and regulators (the latter are desperately fighting the “last crisis”, bolting the barn door long after the horse has escaped, thereby putting into place the preconditions for the next crisis) has created an ever more fragile situation in both the global economy and the financial markets. As the below charts and data show, price distortions and dislocations have been moving from one market segment to the next and they keep growing, which indicates to us that there is considerable danger that a really big dislocation will eventually happen.