Volatility

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The Fed may have noble mandates to help the real economy, but it will in the end always decide to do what’s best for Wall Street banks. And these banks could well make a huge killing off a rate hike. They can profit from trouble and volatility in emerging markets as well as domestic markets, provided they’re well-positioned. Given that they’ve had ample time, and it’s hard to answer the question who else is in a good position, we may have an idea which wind the wind will blow. Increasing credibility for the Fed and increasing profits for Wall Street banks. Might be a winning combination. And if Yellen is realistic about the potential for a recovery in the American economy, why would she not pick it?

That low oil prices are squeezing out oil sands producers is not breaking news. But in spite of a grim oil price outlook, production out of Calgary has continued to grow, defying both expectations and logic. The implications are serious, not just for the future of Canada’s energy industry and economy, but also North American energy relations.

Will she raise or will she not? As financial markets focus on whether we will see a Fed rate hike this week, investors may be in for a rude awakening.

• Contrarian CEOs tell the Fed: Go ahead, raise my rates (Reuters)
• Goldman Warns Markets Unprepared for Fed as Treasuries Seesaw (BBG)
• Investors Look Beyond Fed Meeting, See Low Rates (WSJ)
• Volatility seen lingering no matter what the Fed does (Reuters)
• What Rising Interest Rates Would Mean for You (BBG)
• China Stocks Jump in Last Hour of Trading on State Support Signs (BBG)
• No Escape for China Hedge Funds Overwhelmed by Stocks Crash (BBG)
• Hedge Fund Bridgewater Defends Its ‘Risk-Parity’ Strategy (WSJ)

Ffor whatever reason starting in the last hour of trading and continuing until the close, the Shanghai Composite - after trading largely unchanged - went from red on the day to up 4.9% after hitting 5.9% minutes before the close - the biggest one day surge since March 2009 - and nearly erasing the 6.1% drop from the past two days in just about 60 minutes of trading, providing a solid hour of laughter to bystanders and observers in the process.

Chinese equity markets are holding modest 'bounce' gains after two days of carnage. After 3 days of stronger fixes PBOC devalued the Yuan but the Ministry of Finance made it clear that "devaluation is not aimed at boosting exports," which makes us wonder, is it aimed at selling Treasuries? No additional direct liquidity injections but anxiety grows as China National Erzhong Group Co. may miss an interest payment later this month after one of its creditors filed a restructuring request, putting it at risk of becoming the second state-owned company to default in the nation’s onshore bond market.

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The world today sits upon a very precarious point. One thing that’s not a “guess” is the way nations or economies have dealt with economic turmoil. History is far too littered with varying forms of “war” as not only the response, but also as the direct consequence of failed economic policies. Either of their own making or brought about by another. It doesn’t matter whether self-inflicted or not. The end game is the same: Currency war, Trade war, Diplomatic war, right down to actual combative kinetic war.

Going into Thursday, everyone - and we do mean everyone - is scrambling to predict which asset classes are most susceptible to a Fed hike. Amid the rampant confusion, BofAML asked fund managers to weigh in. Here are the results.

It is quite likely - given current valuation levels, deterioration in earnings growth, and a slower economic environment - that forward returns will be substantially lower. In other words, the "risk-reward" ratio for being an aggressive investor at this point in the market/economic cycle suggests that the "house will likely win." It is Deja Vu all over again...

While equities do tend to be lower one-, two-, and three-months after a Fed rate hike, S&P 500 realized volatility and VIX levels have been fairly well contained. However, Goldman Sachs warns not to expect VIX to calm down and settle back into the low teens like it was from 2013 to mid-August 2015. New normal trend VIX levels should now be 4-5 points higher than the average level of 14 experienced in 2013-2014 given the current state of the economy.

Despite the attention-grabbing economic volatility that is dominating headlines, it's important to keep our eye on the energy story firmly in focus. This is especially true as the headlines we regularly read about Peak Oil being dead " are "manifestly false" according to petroleum geologist Jeffrey Brown. As concerning as the fact that global oil production has plateaued over the past decade, despite trillions invested in trying to goose it higher, are Brown's forecasting model for oil exports. His Export Land Model shows how rising internal consumption can swing (and has swung) countries from major exporters to permanent importers within a dizzyingly short period of time.

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