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That the Fed has been boxed in by unleashing destructive monetary policies to “fix” decades of prior policy mistakes, is something we have been warning about since our first day. And, with every passing day that the Fed and its central bank peers pile up error upon error to offset prior mistakes, the day approaches when this latest bubble, which some have dubbed it the “central banks all-in” bubble, will burst as well: Friday’s shocking announcement of NIRP by the BOJ just brought us one step closer to the monetary doomsday.

However, the one saving grace for the central banks was that as long as none of the market participants who benefited from these flawed policies dared to open their mouths and point out that the emperor is naked, nobody really cared: after all, why spoil the party, especially since virtually nobody outside of finance knows, let alone cares, about monetary policy or why the Fed is the most important institution in the world.

All of that has changed in recent weeks, when just one week ago in the aftermath of the Fed’s dovish quasi-relent, the billionaires in Davos were quite clear that in light of the upcoming bursting of the latest “policy error” bubble by the central banks, “The Only Winning Move Is Not To Play The Game.” As the WSJ summarized the Davos participants’ mood so well, “their mood here was irritated, bordering on affronted, with what they say has been central-bank intervention that has gone on too long.”

There is just one problem: central bank intervention simply can not go away. Exhibit A: NIRP in Japan.

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

How The Masses Deal With Risk (And Why They Remain Poor)

January 31, 2016

How The Masses Deal With Risk (And Why They Remain Poor)

Last week I discussed how humans are wired to pay attention to scary things.In financial speak: risk. Darwinism has chastised those who ignore risk by rewarding them with an early grave, and by process of elimination rewarded those who stay out of the cross hairs.

Thing is, we no longer live in a world where saber-toothed tigers threaten our existence. In today’s world far greater risk lies in the truly enormous and disproportionate emotional attitude to (and assessment of) risk.

This has nothing to do with Darwin but rather more to do with an educational system designed and built for the industrial age. Education today is an advertising agency which leads us to believe we need the society on which it relies upon for its existence.

Beginning with the schooling system and followed by “higher education”, the middle and upper middle class in developed societies are by and large serfs. And they’re serfs because they don’t understand risk.

The overwhelming majority look at risk incorrectly. They look at it two dimensionally: “The more risk I take the more ‘volatility’ I have.” The fact is, risk is actually subjective to your own personal situation. Mismanaging your own personal situation increases risk disproportionately.

Let me give you an example of how easily an otherwise intelligent person gets royally screwed by the system by routinely miscalculating risk.

Let’s take Harry, a fictional guy from a middle class family who’s just left high school. Harry really wants to get ahead and has set himself a goal of becoming a millionaire by the time he’s 25. He figures that by 35 he’ll be worth north of $10 million.

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

What If There Is No “Fed Put” – Paul Brodsky Thinks Yellen Will Not Bailout Markets This Time

January 15, 2016

What If There Is No “Fed Put” – Paul Brodsky Thinks Yellen Will Not Bailout Markets This Time

Earlier today, Art Cashin summarized most (very desperate) traders’ thoughts when he said that as a result of today’s market crash, “the Fed will try anything” to prop up the wealth effect it had so carefully engineered with seven years of central planning in the aftermath of the financial crisis. Perhaps the only question left is “where is the put”, or where on the S&P 500 is the Fed’s breaking point beyond which Yellen will have no choice but to make a statement, or take action, in support of the market.

Yet one person who is far less sanguine abou the latest in a long series of central bank bailouts of the stock market is Macro-Allocation’s Paul Brodsky, who believes that instead of the Fed Put, the time of the Fed Call has come.

Here’s why:

The Fed Put Call

Investors are blaming Fed rate hikes, and hence a strong dollar, for weakening global output, commodity prices, and global equity prices so far in 2016.

The Fed knows exactly what it’s doing.

Equity returns are certainly dismal thus far in 2016. Through January 14 at 14:00PM EST, the MSCI World Index had declined by 8.6%. Accordingly, “the markets” had begun to doubt the Fed’s resolve to hike rates four times in 2016. Fed funds futures implied the December Fed Funds rate at 0.70%, up only 34 basis points from the current rate (0.36%). This implies the market is betting the Fed will hike once or twice more.

Clearly, investors see the equity markets as the leading indicator of Fed policy. We disagree. The Fed no longer works implicitly for equity investors (i.e., “the Fed Put”); it is primarily working for the U.S. banking system by stabilizing and increasing its deposit base, and for the state by providing an incentive across the world to invest in Treasury debt.

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

Albert Edwards Hits Peak Pessimism: “S&P Will Fall 75%”, Global Recession Looms

January 13, 2016

Albert Edwards Hits Peak Pessimism: “S&P Will Fall 75%”, Global Recession Looms

2016 has thus far been a year characterized by remarkable bouts of harrowing volatility as the ongoing devaluation of the yuan, plunging crude prices, and geopolitical uncertainty wreak havoc on fragile, inflated markets.

With asset prices still sitting near nosebleed levels after seven years of bubble blowing by a global cabal of overzealous central planners with delusions of Keynesian grandeur, some fear a dramatic unwind is in the cards and that this one will be the big one, so to speak.

December’s Fed liftoff may well go down as the most ill-timed rate hike in history Marc Faber recently opined, underscoring the fact that the Fed probably missed its window and is now set to embark on a tightening cycle just as the US slips back into recession amid a wave of imported deflation and the reverberations from an EM crisis precipitated by the soaring dollar.

One person who is particularly bearish is the incomparable Albert Edwards. SocGen’s “uber bear” (or, more appropriately, “realist”) is out with a particularly alarming assessment of the situation facing markets in the new year.

“Investors are coming to terms with what a Chinese renminbi devaluation means for Western markets,” Edwards begins, in a note dated Wednesday. “It means global deflation and recession,” he adds, matter-of-factly.

First, Edwards bemoans the lunacy of going “full-Krugman” (which regular readers know you never, ever do):

I have always said that if inflating asset prices via loose monetary policy were the route to economic prosperity, Argentina would be the richest country in the world by now ?and it is not! The Fed?s pursuit of negligently loose monetary policies since 2009 is a misguided attempt to boost economic growth via asset price inflation and we will now reap the whirlwind (the ECB, Bank of Japan and the Bank of England are all just as bad).

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

For Commodities, This Is The Next Great Depression

January 7, 2016

For Commodities, This Is The Next Great Depression

While the “sell in 1973, and go away” plan had worked out for some in the commodity space, the destruction of the last decade has only one historical comparison… the middle of The Great Depression.

The 10-year rolling annualized return for commodities is -5.1% – the lowest since 1938…

During the same period Stocks are up 7.3% annualized, Bonds 6.6%, and Cash unchanged. Dip-buying opportunity? Maybe.

UBS thinks so: Tactically we can see a bounce in Q1 before the capitulation starts

Tactically, in September 2015, we actually expected a more significant oversold bounce in commodities from last year’s late September risk bottom into ideally early Q2 2016 before we anticipated more weakness into later 2016. So far, the bounce failed since particularly in the energy complex we saw further weakness into December and the metals have been actually just trading sideways. Nonetheless, according to our Q1 US dollar pullback call, we still see the chance for another rebound attempt in commodities into later Q1, and if so the move can be significant (short covering). Such a rebound would however not change our underlying cyclical roadmap for commodities, and this means that any rebound in Q1 should be limited in price and time before we expect another and potential final capitulation wave to start into H2 2016, where we expect the CCI index to minimum test its 2008 low at 350 to worst case 320.

Commodities… on the way into a multi-year buying opportunity

All in all we are sticking to our last year’s projection and strategy call that commodities are on the way into an important H2 2016/early2017 cyclical bottom. What is missing in our view is the final act in this first bear market.

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

A Disturbing Warning From UBS: “Buy Gold” Because A 30% Bear Market Is Coming

January 6, 2016

A Disturbing Warning From UBS: “Buy Gold” Because A 30% Bear Market Is Coming

As Wall Street axioms (Santa rally, January effect, as goes January etc.) are rapidly falling by the wayside at the start of 2016, following a chaotic but return-less 2015, the UBS analysts who correctly forecast last year’s volatility are out with their forecast for 2016. It’s simple – Sell Stocks, Buy Gold.

UBS Technical Analysts Michael Riesner and Marc Müller warn the seven-year cycle in equities is rolling over.

UBS expects S&P 500 to move into a 2Q top and fall into a full size bear market, with risk of a 20% to 30% correction into minimum later 2016 and worst case early 2017

“The comeback of volatility was the title of our 2015 strategy. Last year’s rise in volatility was in our view just the beginning for a dramatic rise in cross-asset volatility over the next few years,”

Noting that while equities have had a good run, Risener and Muller warn, “we are definitely more in the late stages of a bull market instead of being at the beginning of a new major breakout.”

Our key message for 2016 is that even if we were to see another extension in price and time, we see the 2009 bull cycle in a mature stage, which suggests the risk of seeing a significant bear cycle event in one to two years.

S&P-500 trades in 4th longest bull market since 1900 Bear markets are defined by a market decline of 20% and more. It’s a fact that since its March 2009 low, with 82 months and a performance of 220%, the S&P-500 now trades in its 4th longest and 5th strongest bull market since 1900. So from this angle alone we suggest the 2009 bull cycle has reached a mature stage.

Keep in mind, since 1937 the average downside in a 7-year cycle decline was 34%…

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

My Financial Road Map For 2016

January 5, 2016

My Financial Road Map For 2016

Happy New Year to All! May 2016 bring peace to you and your loved ones.

Over the holidays, I had the opportunity to stay away from airports and hike Runyon Canyon with my dogs. For those of you that have never traversed Runyon’s peaks and dips, they are nature’s respite from the urban streets of Los Angeles, yet located in the heart of the City of Angels. It’s a place in which to observe, reflect, and think about what’s coming ahead.

As a writer and journalist covering the ebbs and flows of government, elite individual, central bank and private industry power, actions, co-dependencies, and impacts on populations and markets worldwide, I often find myself reacting too quickly to information. As I embark upon extensive research for my new book, Artisans of Money, my resolution for the book – and the year – is to more carefully consider small details in the context of the broader perspective. My travels will take me to Brazil, Mexico, China, Japan, Germany, Spain, Greece and more. My intent is to converse with people in their respective locales; those formulating (or trying to formulate) monetary, economic and financial policy, and those affected by it.

We are currently in a transitional phase of geo-political-monetary power struggles, capital flow decisions, and fundamental economic choices. This remains a period of artisanal (central bank fabricated) money, high volatility, low growth, excessive wealth inequality, extreme speculation, and policies that preserve the appearance of big bank liquidity and concentration at the expense of long-term stability. The potential for chaotic fluctuations in any element of the capital markets is greater than ever.

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

“We Frontloaded A Tremendous Market Rally” Former Fed President Admits, Warns “No Ammo Left”

January 5, 2016

“We Frontloaded A Tremendous Market Rally” Former Fed President Admits, Warns “No Ammo Left”

In perhaps the most shocking of mea culpas seen in modern financial history, former Dallas Fed head Richard Fisher unleashed some seriously uncomfortable truthiness during a 5-minute confessional interview on CNBC. While talking heads attempt to blame China for recent US market volatility, Fisher explains “It is not China,” it is The Fed that is at fault: “What The Fed did, and I was part of it, was front-loaded an enormous rally market rally in order to create a wealth effect… and an uncomfortable digestive period is likely now.” Simply put he concludes, there can’t be much more accomodation, “The Fed is a giant weapon that has no ammunition left.”

Must watch!!! A shocked Simon Hobbs (at 5:10) is a must-see… “Will The Fed come on and say ‘we’re sorry, we over-inflated the market’ when it crashes?”

Fisher appears to be undertaking a major “cover-your-ass” episosde, proclaiming that he was against QE3 which is what has forced “valuations to be very richly priced.”

In my tenure at The Fed, every market participant was demanding we do more… “It was The Fed, The Fed, The Fed… in my opinion they got lazy.. and it is time to go back to fundamental analysis… and not just expect the tide to lift all boats… and as [The Fed] tide recedes we are going to see who is wearing a bathing suit and who is not”

Bank of America Explains How Central Banks Rigged And Manipulated The Market

January 3, 2016

Bank of America Explains How Central Banks Rigged And Manipulated The Market

It used to be the provenance of “conspiracy theorists” – alleging that central banks have manipulated, rigged or otherwise broken the “efficient market.” That is no longer the case.

As we previously showed, now even the big banks admit it.

However, since for some unknown reason the broader media has yet to catch on to this concept which exonerates the “tinfoil” crowd and makes a mockery of the “bull market” of the past 7 years while posing some very troubling questions about how it all ends, here again is Bank of America explaining not only how “central banks have unfairly inflated asset prices” with the “market aware the price of risk is not correct”, but why the biggest risk to the financial system is a “loss of confidence in this omnipotent CB put”

And the cherry on top comes from JPMorgan which declares “Mission accomplished – QE drives up equity valuations”

Sources: “Fragility is the new volatility” by Benjamin Fowler, Global Equity Derivatives Rsch, Bank of America, December 9, 2015; “Eye on the Market Outlook 2016” by J.P.Morgan Private Bank

Even The Big Banks Now Admit It: “This Is How The Fed’s ‘Massive Manipulation’ Broke The Market”

December 28, 2015

Even The Big Banks Now Admit It: “This Is How The Fed’s ‘Massive Manipulation’ Broke The Market”

Raise your hand if this sounds familiar: markets are calm, things are stable, stocks are levitating on virtually no volume… and suddenly there is a price ‘air pocket’ as one or more assets unexpectedly plunge in what has become a now daily “flash crash” du jour, traders panic, unable to frontrun orderly traffic HFTs immediately shut down, and all hell breaks loose.

We expect everyone to have gone through this “local tail” event scenario at least once and likely many times, one which we predicted would become the norm back in 2009, and one which has, as of 2015, become the norm.

Thank the Fed.

But don’t take it from a “fringe, tinfoil hat, conspiracy theory” website which has been repeating this for so many years we have to dig deeper with every passing day to keep ourselves amused at this farce: here is Bank of America’s head of global equity derivatives research, Benjamin Bowler, with a piece slamming the massively manipulated “market” that 7 years of global central bank intervention has created, and a simple schematic which demonstrates just how broken everything is, and why one should expect many, many more such “local tail” freakouts in the future.

From Bank of America

Central bank’s risk manipulation well explains local tails

A good way to explain why we have seen local tail risks arise so frequently since central banks began to heavily manipulate asset prices is with the following analogy, illustrated in Exhibit 1. Essentially central banks, by unfairly inflating asset prices have compressed risk like a spring to unfairly tight levels. Unfortunately, the market is aware the price of risk is not correct, but they can’t fight it, and everyone is forced to crowd into the same trade. By manipulating markets they have also reduced investors’ inherent conviction by rendering fundamentals less relevant.

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

Azerbaijan Currency Crashes 50% As Crude Contagion Spreads

December 21, 2015

Azerbaijan Currency Crashes 50% As Crude Contagion Spreads

OPEC blowback continues to ripple around the world. With Russia’s Ruble pushing back towards record lows against the USD, and Kazakhstan’s Tenge having tumbled to record lows, the writing was on the wall for Azerbaijan. As Bloomberg reports, the third-biggest oil producer in the former Soviet Union moved to a free float on Monday and the manat crashed almost 50% instantly to its weakest on record with the second devaluation this year.

First the Russian Ruble…

Then Kazakhstan’s Tenge…

While Azerbaijan’s former Soviet allies Russia and Kazakhstan have moved to floating currency regimes in the past year,the Azeri central bank has questioned whether the country was prepared for a similar shift. Governor Elman Rustamov said there was no need for another devaluation of the manat, according to a televised interview broadcast on Sept. 25.

And now Azerbaijan’s Manat crashes 50%…

As Bloomberg reports, “It looks like Azerbaijan’s authorities are following Kazakhstan’s devaluation path,” said Oleg Kouzmin, a former Russian central bank adviser who works as an economist at Renaissance Capital in Moscow. “After devaluing the currency once, some time ago, they concluded that the first move was not enough to tackle all the challenges of a weaker oil price environment.”

Azerbaijan relies on hydrocarbons for more than 90 percent of its exports and the manat has lost almost half its value against the dollar this year, the worst performance of currencies globally.

The Azeri central bank’s reserves were at $6.2 billion at the end of November, down from more than $15 billion a year earlier.

The Russian ruble’s collapse and a 70 percent plunge in the crude price since June last year have ushered in a new era of volatility for Azerbaijan, which is also beset by challenges ranging from declining oil output to a festering conflict with neighboring Armenia.

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

Worries Build Among Investors Over Oil and Gas Industry’s Exposure to Water and Climate Risks

October 27, 2015

Worries Build Among Investors Over Oil and Gas Industry’s Exposure to Water and Climate Risks

When it comes to financial risks surrounding water, there is one industry that, according to a new report, is both among the most exposed to these risks and the least transparent to investors about them: the oil and gas industry.

This year, 1,073 of the world’s largest publicly listed companies faced requests from institutional investors concerned about the companies’ vulnerability to water-related risks that they disclose their plans for adapting and responding to issues like drought or water shortages.

Many of those companies responded by reporting their information to a group called CDP, which works with over 800 institutional investors with assets of US$95 trillion to push for corporate transparency. But in the oil and gas industry, the compliance rate was just over half the average, with only 22% of companies providing information, CDP reported.

That’s a concern for investors, CDP wrote, because their data showed that roughly two thirds of oil and gas companies say they are vulnerable to water risks — and those risks are not just speculative risks to keep an eye on for some future time.

Nearly half of the oil and gas companies who responded report that their bottom line has already suffered due to “water-related challenges” over the past year, placing the industry in the ranks of the most vulnerable, the CDP reported.

“Just as oil was to the 20th century, water is fast becoming the defining resource of the 21st century,” said Cate Lamb, head of water at CDP. “Unfortunately however, unlike oil, there is no replacement for water.”

The growing risks of unaddressed climate change are beginning to draw the attention of the financial community, with investors, central bankers and global economic institutions increasingly questioning what impacts shifting weather patterns might have on business as we know it.

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

The World Hits Its Credit Limit, And The Debt Market Is Starting To Realize That

October 18, 2015

The World Hits Its Credit Limit, And The Debt Market Is Starting To Realize That

One month ago, when looking at the dramatic change in the market landscape when the first cracks in the central planning facade became evident and it appeared that central banks are in the process of rapidly losing credibility, and the faith of an entire generation of traders whose only trading strategy is to “BTFD”, we presented a critical report by Citigroup’s Matt King, who asked “has the world reached its credit limit” summarized the two biggest financial issues facing the world at this stage.

The first is that even as central banks have continued pumping record amount of liquidity in the market, the market’s response has been increasingly shaky (in no small part due to the surge in the dollar and the resulting Emerging Market debt crisis), and in the case of Junk bonds, a downright disaster. As King summarized it “models linking QE to markets seem to have broken down.”

Needless to say this was bad news for everyone hoping that just a little more QE is all that is needed to return to all time S&P500 highs. And while this concern has faded somewhat in the past few weeks as the most violent short squeeze in history has lifted the market almost back to record highs even as Q3 earnings season is turning out just as bad, if not worse, as most had predicted, nothing has fundamentally changed and the fears over EM reserve drawdown will shortly re-emerge, once the punditry reads between the latest Chinese money creation and capital outflow lines.

The second, and far greater problem, facing the world is precisely what the Fed and its central bank peers have been fighting all along: too much global debt accumulating an ever faster pace, while global growth is stagnant and in fact declining.

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

Waiting to be SKEWered?

October 15, 2015

Waiting to be SKEWered?

SKEW Goes Pear-Shaped

Back in 1998, at the height of the Russian crisis, the CBOE SKEW Index reached its all time high of 146.88. Previously very high values were seen on the eve of the 1990 recession, and in March 2006 it spiked again when sudden worries about the housing bubble surfaced.

Black-Swan lr “There are no black swans” they said …

Over the past two years, SKEW has begun to act totally crazy, regularly rising to rarely before seen levels. In late 2014 and again in September this year, moves to around the 140 level have become quite frequent. On Tuesday it broke its Russian crisis all time high, spiking briefly to 148.91.

SKEW spikes to a new all time high on Monday – click to enlarge.

“What the hell is SKEW?” we hear you ask. Here is the explanation from the CBOE, where SKEW lives (or rather, where the options that are used in its calculation live):

“The CBOE Skew Index – referred to as “SKEW” – is an option-based indicator that measures the perceived tail risk of the distribution of S&P 500 log returns at a 30- day horizon. Tail risk is the risk associated with an increase in the probability of outlier returns, returns two or more standard deviations below the mean. Think stock market crash, or black swan. This probability is negligible for a normal distribution, but can be significant for distributions which are skewed and have fat tails. As illustrated in the chart below, the distribution of S&P 500 log returns has a sizable left tail. This makes it riskier than a normal distribution with the same mean and the same volatility. SKEW quantifies the additional risk.

SKEW is derived from the price of S&P 500 skewness. That price is calculated from the prices of S&P 500 options using the same type of algorithm as for the CBOE Volatility Index (VIX). The details of the SKEW algorithm and a sample calculation are presented in the SKEW White Paper http://www.cboe.com/SKEW .

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

Unstable world: Is it time to buy volatility?

October 12, 2015

Unstable world: Is it time to buy volatility?

On Wall Street buying options–options on stocks, on commodities, on currencies, on almost anything–has been seen as a sucker’s bet (unless you are doing it to hedge an existing investment).

For the uninitiated, options are the right to buy or to sell something–practically anything really–at a set price over an agreed period of time. I can call my broker and buy the right to purchase Yahoo at $35 a share between now and April 15 next year for $2.32 a share. I can also buy the right to sell Yahoo at $25 a share for $1 a share. I might do this if I owned the stock and wanted to protect my investment in case of a decline. With Yahoo trading at about $32 a share, neither option would make me any money right now. But either one could make me money, and possibly lots of it, if there were to be a major move in Yahoo either up or down between now and April 15. In essence, I would be buying volatility.

Yahoo dropping to $2 a share or zooming upward to $200 in the period before the options described above expire would surely destroy a significant chunk of the wealth of those who sold options to others that allow them to sell at $25 in the former case or to buy at $35 in the latter case.

But, it turns out that most stock and commodity options expire worthless. And so, those selling the options walk away with the premium paid by the buyer and then reinvest that money or spend it elsewhere. These option sellers (or “option writers” as they are often called) make a very handsome living during times of low volatility such as we have seen since the stock market bottomed in 2009.

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

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