Volatility

News That Matters

The violence in two of the world's conflict hot spots escalated materially over the weekend after a Houthi rocket attack in Marib killed 45 UAE soldiers, prompting the delpoyment of an additional 1,000 Qatari troops and triggering stepped up Saudi airstrikes. Meanwhile, in Turkey, roadside bombings blamed on the PKK mean Ankara will look to plunge the country deeper into civil war ahead of elections in November. 

Last week’s volatility to the downside was entirely predictable, as the first leg down during this ongoing market crash reached the correction stage of 11%. The technical bounce was a given, as the 30 year old HFT MBAs on Wall Street have been trained like rats to BTFD. In their lemming like minds, it has worked for the last six years of this Federal Reserve created “bull market”, so why wouldn’t it work now. Last week was their first lesson in why it doesn’t work during bear markets, and we’ve entered a bear market. John Hussman seems amused at the shallowness of the arguments by Wall Street shills and CNBC cheerleaders about the future of the stock market in his weekly letter. After this modest pullback from all-time highs, the S&P 500 is still overvalued by 92%...

Logically, the massive liquidation of USD assets by China and other emerging market central banks should put upward pressure on UST yields and will, all else equal, work at cross purposes with DM central bank QE. But all else is never really equal...

Chinese stocks opened with a bang, and as we previously noted soared higher at the open after China's long 4-day holiday weekend, which however subsequently slowly (but very surely) fizzled, eating away at the hope that the 3-day drop in the Shanghai Composite would finally come to an end following comments from PBOC governor Zhou that the recent rout in Chinese stocks is almost over, and result in a relief rally in Europe and the US. Alas, all that was promptly swept away at the end of trading in China when the Shanghai Composite tumbled at close of trading to confirm just how unpleasant a "death cross" is coupled with loss of central bank control, and to push the Shanghai Composite down 2.5% for the day and 3.4% for the year.

News That Matters

The world is in the waning days of a historic multi-decade experiment in unfettered finance. International finance has for too long been effectively operating without constraints on either the quantity or the quality of Credit issued. From the perspective of unsound finance on a globalized basis, this period has been unique. History, however, is replete with isolated episodes of booms fueled by bouts of unsound money and Credit – monetary fiascos inevitably ending in disaster. We see discomforting confirmation that the current historic global monetary fiasco’s disaster phase is now unfolding.

The centrally-planned house of cards is finally starting to shake uncontrollably.

September is here. As expected, market volatility is increasing. The Great Zombie War is intensifying. And investors are getting scared. Now they even want to do away with the State’s own scrip... You see where this is going, don’t you? If the feds are able to ban cash, they will have you completely under their control. You will invest when they want you to invest. You will buy when and what they want you to buy. You will be forced to keep your money in a bank – a bank controlled, of course, by the feds.

Keys in the week ahead:  equity markets--still look lower; China--volatility likely to continue; Fed--market says no Sept hike

The destruction of honest financial markets by the Fed and other central banks has created a class of hedge fund hot shots that are truly hard to take. At length, both the epic bond bubble and the monumental stock bubble so recklessly fueled by the Fed and the other central banks after September 2008 will burst in response to the deflationary tidal wave now cresting. Needless to say, that eventuality will be the death knell for the risk parity trade. It will cause the volatility seeking algos to eat their own portfolios alive. Leon Cooperman and his momo chasing compatriots will soon be praying for an event as mild as October 1987.

We are our own worst enemies...

The EIA released a report this week that showed that there would be little effect on gasoline prices if the U.S. government lifted the ban on crude oil exports. In fact, gasoline prices could even fall because refined product prices are linked to Brent much more than WTI, so more supplies on the international market would push down Brent prices. The report lends credence to the legislative campaign on Capitol Hill to scrap the ban, a movement that is picking up steam. On the other hand, although few noticed, the EIA report also said that the refining industry could lose $22 billion per year if the ban is removed. So far, many members of Congress have been reluctant to weigh in on this issue for exactly that reason: it pits drillers against refiners, both of which are powerful political players.

Divegence driver of the dollar was never predicated on a particular time frame for the Fed's lift-off.  Others are easing.  Trajectory is the key.  Here is my sense of the near-term dollar outlook, wiht a look at some other asset markets as well.  

Thousands of investors with stop-loss orders on their ETFs saw those positions crushed in the first 30 minutes of trading last Monday, August 24th. Seeing a price blow right through your stop is perhaps the worst experience in all of investing because it seems like such a betrayal. “Hey, isn’t this what a smart investor is supposed to do? What do you mean there was no liquidity at my stop? What do you mean I got filled $5 below my stop? Wait… now the price is back above my stop! Is this for real?” Welcome to the Big Leagues of Investing Pain.