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In this missive, we are just going to focus on the “WTF!” moment of this past week. In order to do this properly, I need to start with last week’s missive where we asked the question “Did Something Just Break?” In that article we addressed very specific concerns about interest rates and the problem they were going to cause.

“Speaking of rates, each time rates have climbed towards 3%, the market has stumbled.”

Chart updated through Friday.

“If you note in the chart above, a short-term ‘warning signal’ has been triggered which suggests that if rates remain above 3%, stocks are going to continue to struggle. The last time this occurred was in May when rates popped above 3%, stocks struggled and bonds outperformed.”

We also updated the pathway analysis for the highest probability outcomes over the next couple of months.

Chart updated through Friday – pathways remain unchanged

While the majority of the pathway’s accounted for a continued corrective, consolidation, process through the end of the year. It was Pathway #3 which came to fruition.

“Pathway #3: The issue of rising interest combines with a break in the economic data, or another credit-related event, and sends the market heading back to test supports at 2800 and 2750. This would likely coincide with a more severe contraction in the economic data which is not an immediate threat. Nonetheless, we should always consider the risk of an unexpected, exogenous, event. (10%)”

The recent sell-off coincides with the rising concerns of higher rates coupled with deterioration in economic growth heading into 2019. To wit:

“As such, our best initial take is that yesterday’s repricing of US growth was an overdue gut-check following last week’s monetary and oil supply shocks.”

…click on the above link to read the rest of the article…

Meet The Finance Professor Exposing Rigged Markets One Academic Paper At A Time

October 14, 2018

Meet The Finance Professor Exposing Rigged Markets One Academic Paper At A Time

Finance professor John Griffin, along with his doctoral student companion, Amin Shams, were the two academics that drew market-moving conclusions about bitcoin last year, while the digital currency was trading around $20,000. After sifting through 2 terabytes of trading data, they alleged that bitcoin was being manipulated by someone using the cryptocurrency Tether to purchase it. Tether remains a relatively little-known crypto, which is pegged to one US dollar. Part of its appeal is that it can “stand in” for dollars when necessary, according to Bloomberg.

Griffin and Shams authored a paper in June, with the results of their findings ultimately catalyzing many digital assets to move lower, despite the fact that the CEO of Tether publicly denied that its currency was used to prop up bitcoin.

Griffin works at the University of Texas at Austin, and has become quite an unpopular figure on Wall Street for similar work he has done in the past on ratings companies, the VIX and investment banks. In most of his findings, he claims that these well-known financial instruments and players are, in one way or another, rigged. And the professor seems to enjoy exposing precisely that: rigged, manipulated markets and shady players.

“I not only want to understand the world, but make it better,” he told Bloomberg.

Griffin’s work has become popular reading within the DOJ and the Commodity Futures Trading Commission, according to Bloomberg. These regulators – many of them low on resources, time and staff – welcome any additional help they can get (the SEC’s budget has forced it into a hiring freeze and the CFTC budget was cut by Congress in March of this year).

…click on the above link to read the rest of the article…

Has “It” Finally Arrived?

October 13, 2018

Shutterstock

Has “It” Finally Arrived?

Is this week’s 6% market drop the start of the Big One?

With the recent plunge in the S&P 500 of over 5%, has the long-anticipated (and long-overdue) market correction finally begun?

It’s hard to say for certain. But the systemic cracks we’ve been closely monitoring definitely got an awful lot wider this week.

After nearly a decade of endless market boosting, manipulation and regulatory neglect, all of the trading professionals I personally know are watching with held breath at this stage. The central banks have distorted the processes of price discovery and market structure for so many years now, that it’s difficult to know yet whether their grip on the markets has indeed failed.

But what we know for certain is that bubbles always burst. Inevitably. Each is built upon a fallacy; and when that finally becomes apparent to enough people, the mania ends.

And today, there are currently massive bubbles in stocks, bonds and real estate. Every one courtesy of the central banks (as we have written about in great detail here at PeakProsperity.com over the years).

And with no Plan B in place to gracefully exit the corner they have painted themselves — and thereby the global economy — into, the only option available to them is to double-down on the pretense that we’d all be screwed without their stewardship. They have to do this I suppose. To admit the truth would throw the world into panic and themselves out of a job.

Who knows what they think privately? But in public, they give us real gems like these:

Williams Says Fed Rate Hikes Helping Curb Financial Risk-Taking

U.S. interest-rate increases will help reduce risk-taking in financial markets, Federal Reserve Bank of New York President John Williams said.

…click on the above link to read the rest of the article…

The Stock Market Just Crashed In Italy, And Argentina Has Panic-Raised Interest Rates To 65 Percent

September 28, 2018

The Stock Market Just Crashed In Italy, And Argentina Has Panic-Raised Interest Rates To 65 Percent

In the 9th largest economy in the world, the financial markets are crashing, and in the 21st largest economy in the world the central bank just raised interest rates to 65 percent to support a currency that is completely imploding. While the mainstream media in the United States continues to be obsessed with all things Kavanaugh, an international financial crisis threatens to spiral out of control. Stock prices are falling and currencies are collapsing all over the planet, but because the U.S. has been largely unaffected so far the mainstream media is mostly choosing to ignore what is happening. But the truth is that this is serious. The financial crisis in Italy threatens to literally tear the EU apart, and South America has become an economic horror show. The situation in Brazil continues to get worse, the central bank of Argentina has just raised interest rates to 65 percent, and in Venezuela starving people are literally eating cats and dogs in order to survive. How bad do things have to get before people will start paying attention?

On Friday, Italian stocks had their worst day in more than two years, and it was the big financial stocks that were on the cutting edge of the carnage…

Shares in Italian banks .FTIT8300, whose big sovereign bond portfolios makes them sensitive to political risk, bore the brunt of selling pressure, sinking 7.3 percent as government bonds sold off and the focus turned to rating agencies.

Along with the main Italian stock index .FTMIB, the banks had their worst day since the June 2016 Brexit vote triggered a selloff across markets.

Italian bonds got hit extremely hard too. The following comes from Business Insider…

…click on the above link to read the rest of the article…

Why Are So Many People Talking About The Potential For A Stock Market Crash In October?

September 26, 2018

Why Are So Many People Talking About The Potential For A Stock Market Crash In October?

It is that time of the year again. Every year, people start talking about a possible stock market crash in October, because everyone remembers the historic crashes that took place in October 1987 and October 2008. Could we witness a similar stock market crash in October 2018? Without a doubt, the market is primed for another crash. Stock valuations have been in crazytown territory for a very long time, and financial chaos has already begun to erupt in emerging markets all over the globe. When the stock market does collapse, it won’t exactly be a surprise. And a lot of people out there are pointing to October for historical reasons. I did not know this, but it turns out that the month with the most market volatility since the Dow was first established has been the month of October…

The difference is quite significant, as judged by a measure of volatility known as the standard deviation: For all Octobers since 1896, when the Dow Jones Industrial Average was created, the standard deviation of the Dow’s daily changes has been 1.44%. That compares to 1.05% for all months other than October.

Like me, you are probably tempted to think that the reason why October’s number is so high is because of what happened in 1987 and 2008.

But even if you pull out those two months, October is still the most volatile…

You might think that this difference is caused by a few outliers, such as the 1987 crash (which, of course, occurred in October) or 2008 (the Dow suffered several thousand-point plunges that month as it reacted to the snowballing financial crisis). But you would be wrong: The standard deviation of daily Dow changes is much higher in October than other months even if we eliminate 1987 and 2008 from the sample.

…click on the above link to read the rest of the article…

Joe Saluzzi: The Markets Are Still Way Too Vulnerable To A Sudden Liquidity Disappearance

September 25, 2018

Joe Saluzzi: The Markets Are Still Way Too Vulnerable To A Sudden Liquidity Disappearance

HFTs remain a major issue

Joe Saluzzi, co-founder of Themis Trading LLC, outspoken exchange expert, and author of the excellent exposé Broken Markets, returns to give us an update on the state of high frequence trading — otherwise known as HFT.

In the past, Saluzzi has been a vocal critic of the dominant and parasitic role HFT algorithims play in today’s financial markets, siphoning off profits at the expense of the “dumb money” (i.e. retail investors) while undermining the integrity and stability of exchanges. Front running, spoofing, flash crashes — HFTs are the culprits behind them.

Saluzzi actually has some positive developments to note: namely that the obscene profits the HFTs used to make (i.e., steal) are moderating as the arms race in the industry has escalated and the players are increasingly competing with each other. Also, the SEC appears to be moving much faster now towards putting some material constraints in place.

But the unfair advantages that HFTs enjoy, as well as their threat to market stability, are still very real. If we don’t continue to fight to bring them under control, we risk a vicious downdraft during the next big market crisis should the algos instantly exit in a panic:

If the HFT algos get spooked and stop trading, then you got a major problem.

In times like this when there’s no storm out there, it’s time to fix the house now to make sure that when the storm comes the house doesn’t get knocked down. So how do you fix the house? By getting rid of the conflicts of interest, maybe adding more obligations for market makers, looking at those off-exchange venues which are considered ‘dark pools’ and learning what’s going on there, looking at all different types of the issues that continue to haunt us — most of which don’t become visible until they don’t pop up at the end.

…click on the above link to read the rest of the article…

Is The Oil Burden A Rising Problem?

September 23, 2018

Is The Oil Burden A Rising Problem?

While markets become increasingly bullish, oil prices are close to a “warning zone” where the barrel could be one -if not the only- catalyst of a major slowdown.

In my book “Escape from the Central Bank Trap”, I explain the concept of the “Oil Burden”. It is the percentage of global GDP spent on buying oil. It is often said that when the oil burden reaches 5-6% of GDP it can be a cause of a global slowdown.

The mistake that many make is to think that the oil burden is a cause and not a symptom.

In the past, we have seen that a period of abrupt increases in oil prices was followed by a recession or a crisis. However, not because oil prices rose rapidly, but because the dramatic increase in commodities’ prices was caused by a bubble of credit and excess monetary stimuli.

In reality, the oil burden is perfectly manageable at 5% of GDP because the energy intensity of GDP growth is diminishing. We are less dependent on energy to create growth in the economy.

Global energy intensity (total energy consumption per unit of GDP) declined by 1.2% in 2017, slightly below its historical yet unstoppable trend (-1.5%/year on average between 2000 and 2017 and -1.8% in 2016). In fact, global energy intensity is down 54% since 1990.

So the problem is not the oil burden by itself but the cause of the price spike.

When oil prices rise abruptly we should be concerned, because they can cause a domino effect on the real economy. When the reason for the price increase is not fundamental, we have a major problem.

Why are oil prices rising abnormally in recent months?

…click on the above link to read the rest of the article…

Stock Prices Are Surging Because Corporations Are Spending More Money On Stock Buybacks Than Anything Else

September 21, 2018

Stock Prices Are Surging Because Corporations Are Spending More Money On Stock Buybacks Than Anything Else

The primary reason why stock prices have been soaring in recent months is because corporations have been buying back their own stock at an unprecedented pace. In fact, the pace of stock buybacks is nearly double what it was at this time last year. According to Goldman Sachs, S&P 500 companies spent 384 billion dollars buying back stock during the first half of 2018. That is an absolutely astounding number. And in many cases, corporations are going deep into debt in order to do this. Of course this is going to push up stock prices, but corporate America will not be able to inflate this bubble indefinitely. At some point a credit crunch will come, and the pace of stock buybacks will fall precipitously.

Prior to 1982, corporations were not permitted to go into the market and buy back stock.

The reason for this is obvious – stock buybacks are a really easy way for corporations to manipulate stock prices.

But these days it is expected that most large corporations will engage in this practice. Large stockholders love to see the price of the stock go up, and they are never going to complain when smaller shareholders are bought out and their share of the company is increased. And corporate executives love buybacks because so much of their compensation often involves stock options or bonuses related to key metrics such as earnings per share.

So in the end, stock buybacks are often all about greed. It is a way to funnel money to those at the very top of the pyramid, and those stock market gains are taxed at capital gains rates which are much lower than the rates on normal income.

…click on the above link to read the rest of the article…

The Whole System Is Rigged

September 1, 2018

The Whole System Is Rigged

From elections to media to the markets, it’s all controlled

As the dog days of summer wind down, it’s hard not to notice how the climate is suffering brutally right now across many areas of the globe.

Crop failures have hit hard across Europe. Australia is under an intense drought. Warm water representing ‘archived heat’ has penetrated deep into the arctic. Coral reefs are dying through mass bleachings. The stocks of ocean fisheries are in deep trouble. Insect and bird populations remain in a state of collapse.

It couldn’t be any more clear that our society’s demands for ever-more “growth” are taking an increasingly dangerous toll. “Growth” is now the enemy of life on the planet; yet there are precious few leaders willing to admit as much.

What we need is less pressure on vital ecological systems and precious remaining resources. But good luck finding a politician willing to admit that.

Though a refreshing exception is French environmental minister Nicolas Hulot who dramatically resigned his position last week, on live television, declaring “I don’t want to lie to myself anymore.” His view is that the government is not addressing the major environmental issues properly and he didn’t want his presence to give the false appearance that it was. Kudos to Nicolas, though I’m not sure that losing such a rare principled person in government is a step in the right direction.

Operating On Blind Faith

Most politicians appear to think that there are no big issues out there ecologically-speaking. Of course, very few of them spend any time outside or understand where their food even comes from. Most subsist on the blind faith that our planet will somehow always bounce back from the abuses we inflict on it, despite reams of mounting evidence that it’s hitting a mulitplying number of breaking and tipping points.

…click on the above link to read the rest of the article…

Disruptive Markets–What Sustainability Really Means For Business

August 26, 2018

Disruptive Markets–What Sustainability Really Means For Business

Many look around at today’s crises – climate change spinning out of control, inequality driving political instability and our oceans filling with plastic – and despair at the prospects for serious change. Most then try to apportion blame or at least seek to understand why. Business blames consumers. NGOs blame business. Everyone blames politicians.

Almost everyone who is engaged and thoughtful on this, even inside companies, at some level blame capitalism, markets and big business. This is well justified given, after all, it has been the delivery vehicle for all these crises.

But where does that leave us? As a campaigner who has spent 40+ years on these issues, I’m not satisfied with just a problem diagnosis, I need a way forward, a credible path to success. When talking about risks to the future of civilisation, accepting failure is not really a strategic option.

I don’t disagree that capitalism has been the problem. I emphasise capitalism rather than Western free markets – just take a look at China where capitalism took hold and delivered an epidemic of pollution that nearly overwhelmed the country – and still may.

But problem accepted, we have to find a way forward and I would argue that some form of the market system, if guided or constrained by policy, is our best and probably only hope of moving fast enough.

I do not argue this from a love of markets or an inherent belief in the philosophies espoused by many of that system’s advocates. I approach this as a person who lives and breathes the fear of global collapse and I can’t see another viable way forward.

…click on the above link to read the rest of the article…

The 5 Previous Times This Stock Market Indicator Has Reached This Level Stock Prices Have Fallen By At Least 50 Percent

August 23, 2018

The 5 Previous Times This Stock Market Indicator Has Reached This Level Stock Prices Have Fallen By At Least 50 Percent

Have you ever heard of the “Sound Advice Risk Indicator”? Every single time in our history when it has gone above 2.0 the stock market has crashed, and now it has just surged above that threshold for the very first time since the late 1990s. That doesn’t mean that a stock market crash is imminent, but it is definitely yet another indication that this stock market bubble is living on borrowed time. But for the moment, there is still quite a bit of optimism on Wall Street. The Dow set another brand new all-time record high earlier this week, and on Wednesday we learned that this bull market is now officially the longest in our history…

For context, a bull market is defined as a 20% rally on a closing basis that’s at no point derailed by a subsequent 20% decline. March 9, 2009, has long been the agreed-upon starting point for such calculations because that was the absolute bottom for the prior bear market, which ended that day.

The S&P 500 has surged a whopping 323% over the period, with its roughly 19% annualized return slightly lagging behind the historical bull market average of 22%.

Of course the U.S. economy has not been performing nearly as well. Even if you accept the highly manipulated numbers that the federal government puts out, we haven’t had a year when GDP grew by at least 3 percent since the middle of the Bush administration.

It simply is not possible for stock prices to continue to soar about 20 percent a year when the U.S. economy is growing less than 3 percent a year. At some point a major adjustment is coming, and it is going to be exceedingly painful.

…click on the above link to read the rest of the article…

5 Signs That Global Financial Markets Are Entering A Bear Market, And 11 Ways That You Can Get Prepared For The Chaos That Is Coming…

August 19, 2018

5 Signs That Global Financial Markets Are Entering A Bear Market, And 11 Ways That You Can Get Prepared For The Chaos That Is Coming…

We haven’t seen carnage like this in the global financial marketplace in quite some time. On Wednesday, U.S. stocks were down some, but things were much, much worse around the rest of the world. Global banking stocks are plunging, emerging market stocks are cratering, and emerging market currencies continue their stunning decline. This represents a dramatic change from the relative stability that we have seen throughout most of 2018. It is almost as if someone flipped a switch once the month of August began, and the shakiness of global financial markets has many investors wondering what trouble fall will bring. What we are witnessing right now is not a full-blown panic yet, but it definitely has the potential to turn into one.

The term “bear market” is being thrown around a lot lately, but a lot of people don’t understand what a “bear market” actually is.

A bear market is generally considered to be when we see a decline of 20 percent or more from the 52-week high, and after the carnage of this past week a lot of those thresholds are now being crossed.

It would probably be too early to call this a “global stock market crash”, but we are well on the way to getting there. The following are 5 signs that global financial markets are entering a bear market…

#1 Global stocks have now fallen beneath all key moving averages. Those key moving averages are important psychological thresholds for investors, and if we have a few more days like Wednesday we could see global financial markets go into full panic mode.

#2 European banking stocks have now officially entered a bear market, and all major European stock indexes are now red for the year.

…click on the above link to read the rest of the article…

Here’s What We’ve Lost in the Past Decade

July 31, 2018

Here’s What We’ve Lost in the Past Decade

The confidence and hubris of those directing the rest of us to race off the cliff while they watch from a safe distance is off the charts.

The past decade of “recovery” and “growth” has actually been a decade of catastrophic losses for our society and nation. Here’s a short list of what we’ve lost:

1. Functioning markets. Free markets discover price and assess risk. What passes for markets now are little more than signaling devices to convince us the economy is doing spectacularly well. It is doing spectacularly well, but only for the top .1% of 1% and the class of managerial/technocrat flunkies and apologists who serve the interests of the top .1%.

2. Genuine Virtue. Parading around a slogan or online accusation, “liking” others in whatever echo-chamber tribe the virtue-signaler is seeking validation in, and other cost-free gestures–now signals virtue. Genuine virtue–sacrificing the support of one’s tribe for principles that require skin in the game–has disappeared from the public sphere and the culture.

3. Civility. As Scientific American reported in its February issue (The Tribalism of Truth), the incentive structure of largely digital “tribes” rewards the most virulent, the most outrageous, the least reasonable and the most vindictive of the tribe with “likes” while offering little to no encouragement of restraint, caution, learning rather than shouting, etc.

The cost of gaining tribal encouragement is essentially zero, while the risk of ostracism from the tribe is high. In a society with so few positive social structures, the self-referentially toxic digital tribe may be the primary social structure for atomized “consumers” in a dysfunctional system dominated by a rigged “market” and a central state that no longer needs the consent of the governed.

Common ground, civility, the willingness to listen and learn–all lost.

…click on the above link to read the rest of the article…

Leaked Note By Chinese Think Tank Warns Of Potential “Financial Panic”

June 27, 2018

Leaked Note By Chinese Think Tank Warns Of Potential “Financial Panic”

It’s not just Trump who is concerned about the level of the S&P as a result of escalating trade war with China: it appears that China is growing worried as well, and for good reason – as we noted earlier, the Shanghai Composite already tumbled to a bear market from its highs 6 months ago, a drop which comes at a very precarious time for China whose economy is slowing amid an aggressive deleveraging campaign, corporate defaults are rising, and the all important credit impulse is waning.

Confirming as much, this morning Bloomberg reported of a leaked report from a Chinese government-backed think tank which warned of a potential “financial panic” in the world’s second-largest economy, “a sign that some members of the nation’s policy elite are growing concerned as market turbulence and trade tensions increase.”

According to a study by the National Institution for Finance & Development that was seen by Bloomberg News, bond defaults, liquidity shortages and the recent plunge in financial markets pose particular dangers at a time of rising U.S. interest rates and a trade spat with Washington. The think tank also warned that leveraged purchases of shares – i.e. stocks bought with margin loans – have reached levels last seen in 2015, when a market crash erased $5 trillion of value.

“We think China is currently very likely to see a financial panic,” NIFD said in the study, which appeared briefly on the Internet on Monday, before being removed. “Preventing its occurrence and spread should be the top priority for our financial and macroeconomic regulators over the next few years.”

…click on the above link to read the rest of the article…

“Will The Real Global Economy Please Stand Up”

June 11, 2018

“Will The Real Global Economy Please Stand Up”

To say I’ve become skeptical of “markets” and their movements is probably an understatement. However, rather than waste more time trying to make sense of these skewed markets, I believe real economic activity is more accurately represented by changing populations and their energy consumption. So today, we’ll play a little “To Tell The Truth”, an old television show where two imposters could lie but one contestant had to tell the truth. The celebs would ask questions and then attempt to pick which contestant was the real deal. I’ll lay out the data and let you determine how well this lines up with non-stop narrative of record market valuations and stories of strong economic activity.

I’ll start with Japan and work my up progressively larger. The population data is from the UN and I use the 15 to 60 year old population to avoid speculation about changing birth rates over the next fifteen years. Energy data is from the US Energy Information Administration (EIA) and their projections using their IEO’17 (International Energy Outlook, 2017) models.

Japan

Core population peaked 1993, declined 14% since (as of 2015), will decline 22% by 2030 and 33% by 2040.
Energy consumption peak 2006, declined 17% since
- My est. -25% by 2030, -30% by 2040
- IEO’17 est. +3% by 2030, unchanged by 2040.

Germany

Core population peaked 1995, declined 5% since, will decline 17% by 2030 and 19% by 2040.
Energy consumption peaked 2006, declined 14% since, will decline 22% by 2030 and 28% by 2040. IEO’17 data will be wrapped together for EU below.

Italy

Core population peaked 2005, declined 4% since. Will decline 17% by 2030 and 25% by 2040.
Energy consumption peaked 2005, declined 17% since. I estimate declines of 26% by 2030 and 32% by 2040.

Greece

Core population peaked 2006, declined 5% since. Will decline 15% by 2030, 29% by 2040.
Energy Consumption peaked 2007, declined 27% since. I estimate declines of 40% by 2030, 47% by 2040

…click on the above link to read the rest of the article…

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Chart updated through Friday.

Chart updated through Friday – pathways remain unchanged

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