Japan

Elections, elections, and more elections is the 'regime change' meme for 2016 but, as Bloomberg details, the key events of the year ahead vary from a California marijuana referendum to Brazil's Olympics, and from Davos to SCOTUS. No matter what, 2016 holds a lot of opportunity for volatility, and without The Fed's safety net, who knows what that means for markets...

Between these two banking systems alone, you’ve got the makings of a global financial crisis at least on par with 2008. 

If at first you don't succeed, try, try, keep trying again and again. That appears to be the mantra of Goldman's credit strategists.

"Last week, during which the S&P 500 rallied 2.8%, BofAML clients were net sellers of US stocks for the second week, in the amount of $0.7bn. (Globally, our colleagues who track EPFR flow data have noted flows out of the US but into Europe and Japan in recent weeks). Net sales were chiefly due to institutional clients last week, who have sold stocks for eight consecutive weeks. Buybacks by corporate clients decelerated vs. the prior week, and YTD are tracking over $40bn, below last year’s record $45bn." So the smart money was selling, companies were not buying back, and stocks rallied nearly 3%.

The movement toward deeper European integration appears to have halted, and gone into reverse, as the EU seems to be unraveling along ideological, national, tribal and historic lines. If these trends continue, and they seem to have accelerated in 2015, the idea of a United States of Europe dies, and with it the EU. And this raises a question about the most successful economic and political union in history - the USA.

While most hedge funds will be glad to close the books on a year in which they once again dramatically underperformed a market which hugged the flatline courtesy of just a few stocks (even as most stocks posted substantial declines) and where "hedge fund hotels" such as Valeant suffered dramatic implosions, a handful of traders generated impressive returns for their investors and made billions by going against the herd.

"We encourage the higherst leadership of the country to inform the people correctly without sugar coating the truth about Chinese invasion of our Exclusive Economis Zone. How can the people unite and pick up the cudgels and fight alongside of you if you hide the truth from us?"

"Security prices are not low. I wouldn’t say high, but full. So people are thinking cautiously but they’re acting bullish and they’re behaving in a pro-risk fashion. While investor behavior hasn’t sunk to the depths seen just before the crisis, in many ways I feel it has entered the zone of imprudence... The market is not an accommodating machine. It will not go where you want it to go just because you need it to go there."

One year ago, the two most crowded trades going into 2015 were being long the USD and short US Treasurys. While the former trade had questionable success, the latter most certainly did not work and while hedge-fund managers and other large speculators spent December 2014 setting the biggest bets against Treasuries in four years, fast-forwarding 12 months later we find that the smartest money in the room has fully abandoned those massive short Treasury bets.

It becomes ever more tempting to conclude that the timing of the Fed’s rate hike was really quite odd, even from the perspective of the planners...

The last trading week of 2015 begins on a historic precipice for stocks: as reported over the weekend, the U.S. stock market has not been lower for any year ending in a “5? since 1875. That streak is now in jeopardy, because following Thursday's shortened holiday session which ended with an abrupt selloff, the overnight session has seen continued weakness across global assets in everything from Chinese stocks which tumbled the most since November 27, to commodities (WTI  is down 2.5%) to European stocks (Stoxx 600 -0.4%), to US equity futures down 0.4% on what appears to be an overdue dose of Santa Rally buyers' remorse.

With recent JPY strength not helping, last week ended on a down-note for Japan as its jobless rate ticked up from 3.1% to 3.3% (the biggest rise since January) and Household spending collapsed. However, as the last week of the year begins, things have not improved as a double whammy of awfulness just hit the shores of Abe's nation with retail sales (worst since the tsunami) and industrial production ugly and missing across the board. We are sure, of course, that just one more dose of faith-based QE will fix this.

Market-based Credit is unstable. This remains the fundamental issue – the harsh reality – that no one dares confront. Long-term stability in a Capitalistic system requires sound money and Credit (hopelessly archaic, we admit). Over the years, we've tried to differentiate traditional finance from unfettered “New Age” finance. The former, bank lending-dominated Credit, was generally contained by various mechanisms (including the gold standard, effective currency regimes, bank capital and reserve requirements, etc.). This is in stark contrast to the current-day securities market-based global financial “system” uniquely operating without restraints on either the quantity or quality of Credit created. There’s no precedence for such a globalized monetary fiasco, though there are a number of historical episodes that provide valuable insight.

"If, as seems possible, the ECB will increase, in H1 2016, the scale of its monthly asset purchases from €60bn to, say, €75bn, and if these additional purchases are concentrated on public debt, the euro area will benefit from a ‘backdoor’ helicopter money drop –something long overdue."

We apologize, but 2015 had so many negatives that we’re having trouble seeing the positives. It’s like we’re on the Titanic, and it’s tilting at an 85-degree angle with its propellers way up in the air, and we’re dangling over the cold Atlantic trying to tell ourselves: “At least there’s no waiting for the shuffleboard courts!” Are we saying that 2015 was the worst year ever? Are we saying it was worse than, for example, 1347, the year when the Bubonic Plague killed a large part of humanity? Yes, we are saying that.