dark pools

My overriding theme and the central drama for the coming year is that unexpected events can take on greater importance as the Federal Reserve ends its near-decade-long Zero Interest Rate Policy. Consensus premises and forecasts will likely fall flat, in a rather spectacular manner. The low-conviction and directionless market that we saw in 2015 could become a no-conviction and very-much-directed market (i.e. one that's directed lower) in 2016. There will be no peace on earth in 2016, and our markets could lose a cushion of protection as valuations contract. (Just as "malinvestment" represented a key theme this year, we expect a compression of price-to-earnings ratios to serve as a big market driver in 2016.) In other words, we don't think 2016 will be fun.

America's equity markets are broken. Individuals and institutions make transactions in rigged markets favoring short-term players. The root cause of the problem is that stocks trade on numerous venues, including 11 traditional exchanges and dozens of so-called dark pools that allow buyers and sellers to work out of the public eye. This market fragmentation allows high-frequency traders and exchanges to profit at the expense of long-term investors. Mr. Lewis was right.

The institutional academic system is broken. We need less systemic, traditional education that only provides knowledge of low utility and more alternative education that provides the right high-utility knowledge to thrive during today's global currency wars.

• China's central bank cuts rates for sixth time since November (Reuters)
• Global stocks hit two-month high on dovish Draghi message (Reuters)
• $6.5 Billion in Energy Writedowns and We're Just Getting Started (BBG)
• Alphabet, formerly Google, sets share buyback, shares jump (Reuters)
• Hurricane Patricia, Stronger Than Katrina, Nears Mexico (BBG)
• TVA Cleared to Start First New U.S. Nuclear Power Plant in Nearly 20 Years (WSJ)

If we don't prepare for the coming high tide, we may all drift out to sea.

You'd have to be in full denial mode not to see that it's getting ugly out there in global markets: currencies are melting down, trade and shipping are tanking, commodities are swooning and global stock markets are increasingly on central-bank life support.

We all know the global economy is slowing, so why would stocks soar from here? The basic answer is simple: The Fed has no choice, because this game is now for all the marbles.

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.

Dear Investors, The last few weeks have exposed that our equity markets are not as liquid as we have long claimed mainly due to market fragmentation and the lack of diverse liquidity pools...

It doesn’t make sense to you. And it shouldn’t to anyone. Unless – they first go directly to the ‘house bar and media entertainment center’ that is always open and always free with spiked Kool-Aid™. It works better and is cheaper than actual liquor. It’s not actually a drink per se. It’s just hoopla and endless propaganda for the masses. That’s why it’s free and encouraged. It keeps everyone happy within the walls and enhances the experience, while simultaneously acting as one non-stop running commercial to entice anyone foolish to think they too can get rich quick. All legal by the way. The laws were adapted to fit the criteria.

The market has already delivered its verdict swiftly in the face of the global equity market correction– reducing substantially the probability of a rate hike in September, and pricing in a full rate hike only by March next year. We assign a higher probability than the market for a lift off in September but acknowledge that the risk has shifted towards later, a slower pace and a lower terminal rate. For now, we hold on to the put on EDU5 that we initiated two weeks ago. "Data dependency” over the next couple of weeks might really mean “equity market dependency”. If the equity market drops 10%, the Fed will most likely not hike, no matter what the payrolls data is.

The relief rally from the market drop that resulted over fears of a Fed rate hike, has pushed financial conditions back to a level which allows the Fed to hike again, which in turn means the market can drop again having risen enough to allow the Fed to do what it has done.

• Virginia TV journalists killed by suspect with 'powder keg' of anger (Reuters)
• Policeman shot to death and three women stabbed, one fatally, in Louisiana (Reuters)
• China Intervened Today to Shore Up Stocks Ahead of Military Parade (Reuters)
• Margin Calls Bite Investors, Banks (WSJ)
• "Computer glitch" is preventing dozens of mutual funds, ETFs from promptly pricing their securities (WSJ)
• Oil prices rise more than 4 percent as equities rally (Reuters)
• Oil Industry Needs Half a Trillion Dollars to Endure Price Slump (BBG)

Central bankers are watching Marx's dictum all that is solid melts into air play out in global stock markets with a terror informed by the scalding memories of 2008's global financial meltdown.  The herd must be turned away from selling by any means available, and at this point, that means coordinated buying by all the world's Plunge Protection Teams.

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.