Today's dose of vile tinfoil hattery magick comes straight from the bank with the cool $55 trillion or so in derivatives, Deutsche Bank:
The fragility of this artificially manipulated financial system was exposed over the last couple of days of last week. It all ended with the S&P 500 falling -3.19% on Friday - its worst day since November 9th 2011.
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We've long felt that the only thing preventing another financial crisis has been extraordinary central bank liquidity and general interventions from the global authorities which we still expect to continue for a long while yet. So when policy changes, risks arise. The genesis of this recent sell-off has been the threat of the Fed raising rates next month, but China's confrontational move two weeks ago and the subsequent knock-on through EM have accelerated us towards something more serious. We always thought something would get in the way of the Fed raising rates in September and we're perhaps seeing this now. With 24 days to go until we find out, the probability of a hike has gone down to 34% from a 54% recent peak on August 9th. Having said we always thought something would come along to derail a Fed rate hike we probably should have gone underweight credit. However with trading liquidity poor and with a reasonably high desire to be long amongst investors there has to be a big move to justify the change in stance. Also with a strong possibility that the Fed will relent and that China could add more stimulus soon, there may be a small window to be short European credit. So at the moment this could be a dangerous time to sell. However if it wasn't for expected intervention and extraordinary central bank policy we would be very bearish as the global financial system remains an artificial construct reliant on the largesse of the authorities.
So 6 years after we first said what at the time was seen as heretical "tinfoil" conspiracy theory, now everyone admits it. Almost time to take a vacation maybe...