Salient

Oil price collapse: Have the central bankers painted themselves into a corner?

In 1949 Einstein published an essay on economics and education that is brimming with ignorance. According to Einstein, "The economic anarchy of capitalist society [is] the real source of evil." Now yet another popular and renowned physicist, namely Stephen Hawkins, has jumped into the debate, seemingly attacking capitalism. According to the Huffington Post, "Stephen Hawking Says We Should Really Be Scared Of Capitalism, Not Robots." While undoubtedly a genius in his field, this is probably also the field he should stick with. There is no reason to worry while at least vestiges of a free market exist. The only real problem is government intervention in the market process.

How many of us are bored to tears with the Fed’s Hamlet act on raising rates, and yet have been staring at this debate for so long that we have convinced ourselves that we have a meaningful view on what will transpire, even though it’s a decision where we have zero investing edge and unknowable risk/reward odds. The hardest thing in the world for talented people is to avoid turning a low edge and odds opportunity into an unreasonably high conviction bet simply because we want it so badly and have analyzed the situation so smartly. In both poker and investing, we brutally overestimate the edge and odds associated with merely ordinary opportunities once we’ve been forced by circumstances to sit on our hands for a while. Investment discipline suffers under the weight of dullness and low conviction in at least four distinct ways here in the Golden Age of the Central Banker...

A federal shutdown due to a funding lapse looks no less likely than it did two weeks ago, and Goldman Sachs believes the probability is nearly 50%. The Senate is expected to begin voting later this week on a funding extension, but the House looks unlikely to act until shortly before the September 30 deadline. The following attempts to answer the main questions surrounding the shutdown, debt limit deadlines, and ramifications...

We’re all Dr. Evil today, thinking that one million dollars is a lot of money, or that one second is a short period of time, or that we are individually smart or capable in a systemically interesting way. We use our small-number brains to make sense of an increasingly large-number investment world, and as a result both our market fears and our market dreams are increasingly out of touch with reality.

Thousands of investors with stop-loss orders on their ETFs saw those positions crushed in the first 30 minutes of trading last Monday, August 24th. Seeing a price blow right through your stop is perhaps the worst experience in all of investing because it seems like such a betrayal. “Hey, isn’t this what a smart investor is supposed to do? What do you mean there was no liquidity at my stop? What do you mean I got filled $5 below my stop? Wait… now the price is back above my stop! Is this for real?” Welcome to the Big Leagues of Investing Pain.

The $80 billion Bridgewater All Weather Fund, a risk-parity model managed by hedge fund titan Ray Dalio, was down 4.2% in August, according to Reuters citing two people familiar with the fund's performance. This leaves the fund down 3.76% for 2015 as the frameworks for these funds are forced mechanically to reposition as correlations and volatilities across asset classes break down. Just as we saw in the summer of 2013's Taper Tantrum, the last 2 weeks have seen 4 to 5 sigma swings in daily returns and 'generic' risk-parity funds have suffered the biggest 3-month losses since the financial crisis.

"... we estimate that only about half (or slightly more than half) of total technical selling was completed to-date (mostly completed by VT funds, half by CTAs, and a smaller fraction by RPs). We estimate that a further ~$100bn of selling remains to be completed over the next 1-3 weeks. As a result, we expect elevated volatility and downside price risk to persist."

What we’ve been experiencing in markets is the plain and simple fear that always accompanies a broken story. The human reaction to a broken story is an emotional response akin to a sudden loss of faith. It’s a muted form of what Stephen King defined as Terror … the sudden realization that the helpful moorings you took for granted are actually not supporting you at all, but are at best absent and at worst have been replaced by invisible forces with ill intent. The antidote to Terror? Call the boogeyman by his proper name. It’s the end of the China growth story, one of the most powerful investment Narratives of the past 20 years. And that’s very painful, as the end of something big and powerful always is.

HFT critics are crowing over the ITG confession. You see! HFT is front running, plain and simple! Told you! And HFT defenders are largely silent because... well, you can’t defend the indefensible. However, if history is any guide at all, the existence of a clearly identifiable small-v villain will forestall the unmasking of what we believe is a Big Bad... the subterranean influence, bordering on control, of human investment behaviors by firms controlling advanced inference machines.

Pervasive “occupancy fraud in lending” – purposely misidentifying “investment” properties as “second/vacation” for the purpose of obtaining prime, “owner-occupied”, low-down payment mortgages vs expensive “investment” property loans — is back in a big way and driving housing demand, based on NAR’s “2015 Investment and Vacation Home Buyers Survey”. It comes on the heels of a multi-year cycle of increasingly “bad” appraisals – a widespread problem — by the Appraisal Management Companies (AMC) that in Bubble 2.0 are similarly conflicted, as independent residential appraisers were during Bubble 1.0 . Both appraisal and occupancy fraud are primary features to a speculative, house-price bubble. This is an identical replay of 2005 to 2007 that nobody recognizes, expects, or is even looking for, which will present an opportunity at some point.

... FIGHTING ISIS (Wall Street Journal and Time Magazine Confirm What Zero Hedge Has Been Saying)

Monetary policy divergence manifests itself first in currencies, because currencies aren’t an asset class at all, but a political construction that represents and symbolizes monetary policy. Then the divergence manifests itself in those asset classes, like commodities, that have no internal dynamics or cash flows and are thus only slightly removed in their construction and meaning from however they’re priced in this currency or that. From there the divergence spreads like a cancer (or like a cure for cancer, depending on your perspective) into commodity-sensitive real-world companies and national economies. Eventually – and this is the Big Point – the divergence spreads into everything, everywhere.

Straight-forward discussion of next week's economic data and events, and why it is important for the dollar.  

Here we now call market deflation by the sobriquet “volatility”, as in “major market indices suffered from volatility today, down almost one-half of one percent”, where a down day is treated as something akin to the common cold, a temporary illness with symptoms that we can shrug off with an aspirin or two. You can’t be in favor of volatility, surely. It’s a bad thing, almost on a par with littering. No, we want good things and good words, like “wealth effect” and “accommodation” and “stability” and “price appreciation”. As President Snow says in reference to The Hunger Games version of a political utility, “may the odds be always in your favor”. Who doesn’t want that?