Something strange is going on in China.
Once again oil is not even the biggest story today. It’s plenty big enough by itself to bring down large swaths of the economy, but in the background there’s an even bigger tale a-waiting. Not entirely unconnected, but by no means the exact same story either. It’s like them tsunami waves as they come rolling in. It’s exactly like that. That is, in the wake of the oil tsunami, which is a long way away from having finished washing down our shores, there’s the demise of emerging markets. And we're not talking Putin, he’ll be fine, as he showed again yesterday in his big press-op. It’s the other, smaller, emerging countries that will blow up in spectacular fashion, and then spread their mayhem around. And make no mistake: to be a contender for bigger story than oil going into 2015, you have to be major league large. This one is.
"Most investors go about their job trying to identify ‘winners’. But more often than not, investing is about avoiding losers. Like successful gamblers at the racing track, an investor’s starting point should be to eliminate the assets that do not stand a chance, and then spread the rest of one’s capital amongst the remainder." So as the year draws to a close, it may be helpful if we recap the main questions confronting investors and the themes we strongly believe in, region by region.
Blind faith in policymakers remains a bad trade that’s still widely held. Pressure builds everywhere we look. Not as a consequence of the Fed’s ineptitude (which is a constant in the equation, not a variable), but through the blind faith markets continuing to place bets on the very low probability outcome – that everything will turn out well this time around. And so the pressure keeps rising. Managers are under pressure to perform and missing more targets, levering up on hope. Without further delay we present our slightly unconventional annual list. Instead of the usual what you should do, we prefer the more helpful (for us at least) what we probably wouldn’t do. Five fresh new contenders for what could become some very bad trades in the coming year.
The current illusion of recovery is a result mainly of windfalls to the financial asset owning upper strata, the explosion of transfer payments funded with borrowed public money and another supply-side bubble - this time in the energy sector and its suppliers and infrastructure. But that’s not real growth or wealth. Indeed, the desultory truth about the latter is better revealed by the fact that the American economy is not even maintaining its 20th century level of breadwinner jobs. And the real state of affairs is further testified to by the lamentable trend in real median household incomes. That figure - not distorted by the bubble at the top of the income ladder - is still lower than it was two decades ago. So much for the Keynesian rap. Yet that’s about all that underpins the latest Wall Street rip.
We are sure it's nothing - since stock markets in China and The US are soaring - but deep, deep down in the heart of the real economies, there is a problem. The Baltic Dry Index has fallen for 21 straight days, tumbling around 40% since Thanksgiving Day. This is the biggest collapse in the 'trade' indicator (which we should ignore unless it is rising) since records began 28 years ago...
Thanks to the massive surge of speculative trading account openings, Chinese stocks are up 28% in the last month and a stunning 52% since China unleashed 'QE-Lite'. This has sent the total market capitalization of China's stocks soaring relative to the rest of the BRICS. In fact, Chinese stocks are now worth 55% more than Brazil, Russia, India, and South Africa combined... the most ever.
Having become convinced that the North Koreans are responsible for hacking the Japanese company Sony (with the apparent help of China or some Chinese folks... though not Russia or ISIS yet), President Obama will hold a press conference to - we are sure - show us the proof, explain how bad the movie was anyway, discuss the "costs" to be imposed, and point out that the terrorists did not win...
The Interview Is "Desperately Unfunny", "Will Flop" If Not Cancelled According To Leaked Sony EmailsSubmitted by Tyler Durden on 12/19/2014 10:47 -0500
The conspiracy theories surrounding the story of The Interview's cancelation in the aftermath of the North Korean "hacking" just keep getting stranger by the day (and will, in 6-9, months lead to the blockbuster drama: "How 'The Interview' Got Cancelled"). Because where it gets downright bizarre, however, is that as Reuters also reported earlier citing leaked emails of international Sony Pictures executive, the infamous movie in question "is "desperately unfunny" and would have flopped overseas if it had not been canceled." Wait a minute, it sounds almost as if the evil North Korean "hackers" did Sony... a favor?
"It’s hard to say what the right price is for a commodity like oil . . . and thus when the price is too high or too low. Was it too high at $100-plus, an unsustainable blip? History says no: it was there for 43 consecutive months through this past August. And if it wasn’t too high then, isn’t it laughably low today? The answer is that you just can’t say. Ditto for whether the response of the price of oil to the changes in fundamentals has been appropriate, excessive or insufficient. And if you can’t be confident about what the right price is, then you can’t be definite about financial decisions regarding oil." - Howard Marks
- Icahn, Paulson Suffer Large Losses as Energy-Related Bets Sour (WSJ)
- Oil Investors Keep Betting Wrong on When Market Will Bottom (BBG)
- U.S. to sell final $1.25 billion shares of Ally Financial from bailout (Reuters)
- Ally Financial Gets Subpoena Related to Subprime Automotive Finance (WSJ)
- Russia's parliament rushes through bill boosting banking capital (Reuters)
- How a Memo Cost Big Banks $37 Billion (WSJ)
- ECB considers making weaker euro zone states bear more quantitative easing risk (Reuters)
- How the U.S. Could Retaliate Against North Korea (BBG)
Yesterday's epic market surge, the biggest Dow surge since December 2011 on the back of the most violent short squeeze in three years, highlighted just why being caught wrong side in an illiquid market can be terminal to one's asset management career (especially if on margin), and thus why hedge funds are so leery of dipping more than their toe in especially on the short side, resulting in a 6th consecutive year of underperformance relative to the confidence-boosting policy tool that is the S&P. And with today's session the last Friday before Christmas week, compounded by a quadruple witching option expiration, expect even less liquidity and even more violent moves as a few E-mini oddlots take out the entire stack on either the bid or ask side. Keep an eye on the USDJPY which, now that equities have decided to ignore both HY and energy prices, is the only driver for risk left: this means the usual pre-US open upward momentum ignition rigging will be rife to set a positive tone ahead of today's session.
Frenzied Chinese Stock Buyers Soak Up So Much Liquidity, Central Bank Forced To Intervene, Prevent SeizureSubmitted by Tyler Durden on 12/18/2014 22:18 -0500
China's seven-day repurchase rate, a gauge of interbank funding availability in the banking system, surged 139 basis points, to a 10-month high of 5.28% in Shanghai, the biggest since Jan. 20. The reason for the sudden cash crunch, according to Bloomberg, is that subscriptions for the biggest new share sales of the year lock up funds. Twelve initial public offerings from today through Dec. 25 will draw orders of as much as 3 trillion yuan ($483 billion), Shenyin & Wanguo Securities Co. estimated. In other words, the scramble to allocate capital into China's surest way of making money, IPOs, has led to a drying out of general liquidity in the entire market. This in turn forced the PBOC to intervene and inject short-term money loans to commercial lenders in order to prevent the kind of interbank liquidity lock up that emerged in China in June 2013 in the aftermath of the first Taper Tantrum (and which before all is said and done, will likely take place again) and which sent global capital markets around the globe reeling before China resumed its massive liquidity injections which are at the heart of China's debt-fuelled bubble in the first place.
Around the world, unsustainable policies from the 20th century are beginning to fail in earnest. What will the future geopolitical landscape look like in their aftermath?
The oil price drop is a big problem - not just for Russia, or for the other over-levered emerging market currencies that stand to be traumatized by a rising dollar, but ultimately even for the US itself