Volatility

Another day, another "crackdown" by the CFTC on an "evil spoofing mastermind."

"This positioning squeeze should have now run its course. Both positioning analysis based on our proprietary flows and the CFTC data suggest that the market is now short USD and long risk for the yea. A further increase in risk appetite will depend on central bank action, starting with the ECB this week."

Despite the intense pain they are suffering in the low price Crudedome, both the Russian and Saudi governments profess for public consumption that they are committed to their volume and market share policies. This observer believes the two countries cannot long withstand the pain they have brought upon themselves - and this article only scratches the surface of the negative impact of low crude prices on their economies. They have, in effect, turned no pain no gain into intense pain no gain and set in motion the possibility neither will exit the low price Crudedome under its own power.

While the big TBTF banks managed to hide much of their ugly balance sheet exposure, and prevent it from hitting the income statement in Q3 as reported previously, while covering up prop trading losses as well as they possibly could, the banks without trillions in deposits were less able to do so: first it was Jefferies, then Goldman posted its worst quarter in years, and now here comes the bank also known as Margin Stanley, which moments ago reported Q3 EPS of $0.34, which even if adjusted for various "one-time" items, at $0.48, not only missed consensus of $0.63 wildly, but it also missed the lowest range of the estimate range ($0.53-$0.70).

AsiaPac stocks were generally lower heading into the all-important Chinese macro data (S&P -6pts, Japan -0.7%, China -0.2%) as JPY erased Friday's ramp and crude dropped back below $47. The PBOC left the Onshore Yuan fix practically unchanged (following Friday's significant devaluation). Then the data hit... China GDP beat expectations (printing 6.9% YoY vs 6.8% exp) but is still the lowest growth since Q1 2009. Industrial Production missed (printing 5.7% YoY vs 6.0% exp). Retail Sales beat (10.9% YoY vs 10.8% exp). The initial reaction was kneejerk buying in USDJPY and stocks but that is fading as "good news" will relieve The Fed's angst over growth...

Q: Why do you still expect the FOMC to hike rates in December?

A: Because the FOMC leadership has said that a rate hike by the end of the year is likely if the economy and markets evolve broadly as expected. Our near-term forecast is similar to theirs, so our baseline is also that they hike.

Gold price suppression! The amount of ink spilled on this topic could fill a supertanker.  Goldbugs the world over believe in the suppression story as an article of faith, and indeed, the evidence that “something is happening” appears incontrovertible.

The 2007-2008 financial crash was not a black swan. That is a collective lie propagated by policy makers so they don’t cry themselves to sleep at night. Many different people predicted and profited from the 2008 crisis. It was about the fear of failing banks and crashing markets... but the true horror was the impending collapse of the entire fiat money system that never came to be. That was the true black swan. 

Since we first exposed (and explained) the Black-sh Swan-link nature of the options market's Skew Index, the mainstream media has lept to various conclusions (from ignore it, like everything else, to 'wow'). However, what is crucial to comprehend is that the soaring Skew is occurring at the same time as a collapsing VIX. However, what we have seen over the last two days is somewhat unprecedented - VIX has continued to collapse into option expiration (and we know the pattern that occurs after opex) as SKEW has soared to new all-time record highs.

• McDonald’s Close to Deciding Whether to Change Structure of U.S. Real Estate (WSJ)
• Stocks Rise as Stimulus Bets Spur $4.1 Trillion Gain; Oil Climbs (BBG)
• Wall Street bonuses likely to plunge as trading revenue drops (Reuters)
• Syrian army launches Aleppo offensive with Iranian support (Reuters)
• Malaysia’s Najib Razak Played Key Role at Troubled 1MDB Investment Fund (WSJ)
• VW Loses Market Share in Europe as Diesel-Motor Recalls Loom (BBG)

News That Matters

Central banks are fearful and unwilling to normalize but artificially high valuations across asset classes cannot be sustained indefinitely absent fundamental global growth. Central banks are in a prison of their own design and we are trapped with them. The next great crash will occur when we collectively realize that the institutions that we trusted to remove risk are actually the source of it. The truth is that global central banks cannot remove extraordinary monetary accommodation without risking a complete collapse of the system, but the longer they wait the more they risk their own credibility, and the worse that inevitable collapse will be. In the Prisoner’s Dilemma, global central banks have set up the greatest volatility trade in history.

You’re doing yourself a disservice if you don't have a basic working knowledge of what, say, a volatility surface means. We're not saying that we all have to become volatility traders to survive in the market jungle today, any more than we all have to become game theorists to avoid being the sucker at the Fed’s communication policy table. And if you want to remove yourself as much as possible from the machines, then find a niche in the public markets where dark strategies have little sway. Muni bonds, say, or MLPs. The machines will find you eventually, but for now you’re safe. But if you’re a traditional investor whose sandbox includes big markets like the S&P 500, then you’re only disadvantaging yourself by ignoring this stuff. Ignorance is not bliss...

Brazil's economic recession is likely to be deeper and longer than Fitch's earlier expectations and its performance has diverged materially from those of its rating peers. Medium-term prospects also look weak compared to peers and most other large emerging markets. Fitch forecasts that Brazil's economy will contract by 3% and 1%, respectively in 2015 and 2016 before recording modest growth in 2017, with risks skewed largely to the downside.