Black Swan

Hot on the heels of British military threats of a coup, the potential for a truly 'red' black swan of an event has reared its ugly head in China, just as Xi tours America. As Reuters reports, bitterness is growing within China's armed forces to President Xi Jinping's decision to cut troop numbers by 300,000, and, according to a source and commentaries in the military's newspaper, considerable effort will be needed to overcome opposition to the order with PLA official sources warning "people are worried, it's been too sudden."

Greece went to the polls on Sunday with a choice that really wasn't a choice and even as Alexis Tsipras looks set to prevail the most shocking electoral outcome is this: neo-Nazi Golden Dawn is set to come in third and garnered the most support of any party among Greece's unemployed.

CBOE's SKEW index  - which measure traders' perceived risk of a major decline - in recent days has seen several readings in the 140?s, an extremely elevated level from a historical basis. The thing is, these readings are occurring amid circumstances unlike those during any other historical extreme reading – except for one.  10 of the 11 occurrences prior to 2015 could reasonably be considered non-contrarian warnings of at least sub-par returns to follow. You might say that these recent signs of extreme options distortion are themselves distorted.

If you have been waiting for the market to send you “warning signals”, then you can stop waiting because it is happening right in front of your eyes.

When it comes to crisis, SocGen notes that there is an abundance of case studies; and against the backdrop of the uncertainty shock delivered by China and the subsequent market tumult, market participants have been looking to the history books for clues as to what could happen next. While individual crises create their own risks, SocGen warns, the overriding risk  is that markets are taking less comfort today from the idea that central banks may step in with further QE-style liquidity injections to save the world.

Last week, the world was introduced to what Deutsche Bank has branded "quantitative tightening" or, in layman’s terms, "reverse QE." We - as well as Citi and SocGen - have endeavored to speculate on what hundreds of billions (if not trillions) in EM FX reserve liquidation may mean for UST yields, but if you’re looking for other ways to trade QT, Deutsche Bank has an idea.

While the market's attention overnight was focused on China's crumbling manufacturing and service PMI, data which was already hinted in the flash PMI reports earlier in August, the real stunner came not from China but from South Korea, which last night reported an unprecedented 14.7% collapse in exports, far worse than the -5.9% consensus estimate, and more than 4 times worse than July's 3.4%. The number is critical because not only do exports account for about half of South Korea's GDP but because it also happens to be the first major exporting country to report monthly trade data. That makes it the perfect barometer of global trade flows, or as the case may be, the canary in the global trade coalmine. It also confirms what we reported just one week ago when we said that "Global Trade Is In Freefall."

You can't say Nassim Taleb didn't warn you: the outspoken academic-philosopher, best known for his prediction that six sigma "fat tail", or black swan, events happen much more frequently than they should statistically (perhaps a main reason why there is no longer a market but a centrally-planned cesspool of academic intervention) just had a black swan land smack in the middle of the Universa hedge fund founded by ardent Ron Paul supporter Mark Spitznagel, and affiliated with Nassim Taleb. The result: a $1 billion payday, translating into a 20% YTD return, in a week when the VIX exploded from the teens to over 50, and which most other hedge funds would love to forget.

"The head of a Chinese exchange that trades minor metals was captured by angry investors in a dawn raid and turned over to Shanghai police, as the investors attempted to force the authorities to investigate why their funds have been frozen."

Members of Syriza's Left Coalition, led by Panagiotis Lafazanis who once plotted to storm the Greek mint, seize the country’s reserves, and arrest central bank governor Yannis Stournaras, have broken away and formed their own political party which they say will support Grexit and stand firm in the face of German "blackmail."

Between micromanaging the economy, equities, the yuan, and public opinion, there's no question that China has its hands full these days. But with everyone's attention now focused sqaurely on Beijing's plunge protection team and the PBoC's "controlled" yuan devaluation, the market may be ignoring the biggest risk of all...

The Dow's volatility is dead... long live The Dow's volatility.

Certain market realities were starkly exposed this week as a result of the China currency moves, Bloomberg’s Richard Breslow writes. As Keynes is supposed to have said, “When the facts change, I change my opinion. What do you do, Sir?” Yet markets have been lulled into relying on the belief that this is no longer the case, and even if it is, any change will be stage managed for the comfort of institutional money managers. Gone are the days when you had to guess at the Fed’s policy by interpreting weekly money-market operations. But that can’t be done in any practical sense.

In a key ruling that may have implications far beyond Austria's borders, the country's constitutional court has struck down a bail-in that would have imposed losses totaling some €800 million on junior Heta bondholders.