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In what was incredibly appropriate timing given the ‘shocktober’ market blowup, Bloomberg News invited “Black Swan” author Nassim Taleb to its set on Halloween for a discussion about the increasingly fragile market ecosystem in which we all reside, and the mounting risks that, Taleb believes, could soon ignite another financial crisis that will be even more severe than what we saw in 2008.

Taleb, dressed up as “black swan man”, wasted little time in explaining how the global economy is becoming increasingly vulnerable to a global debt crisis, how the global quantitative easing did nothing to fix the underlying problem of too much debt – instead it exacerbated it – and how the inevitable reckoning might play out in markets once the long-dreaded “inflection point” finally arrives.

Taleb began the interview by describing how the global aggregate debt burden has only climbed since the crisis. And while this debt is no longer dangerously concentrated in a single sector, like, say, the housing market, it doesn’t change the fact that the overall credit risk in the system has been amplified. And while central banks have for years managed to impose metastability in global markets, as they transition from a period of low interest rates back to “neutral”, the destructive forces that they long suppressed will surge back to the surface.

Just like he did in the run-up to the 2008 crash, Taleb isn’t trying to forecast the next crash; he’s only trying to explain how the global economy has become “more fragile today” than it was in 2007.

“You put novocaine on cancer, and what happens? The patient is going to look better, he’s going to feel better, but at some point, you pay a higher price.”

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

Do Not Waste One More Second

November 3, 2018

Do Not Waste One More Second

Do not waste one more second of your time on this earth, for the insects are all dying, and the ice caps are vanishing, and the oceans are filling with plastic.

This could all be gone very soon, so don’t waste it. Don’t take any part of the crackling miraculousness of this cacophony for granted, because there are missiles being targeted, and there are vast battle plans being drawn. You could look outside your window tomorrow morning and see a mushroom cloud on the horizon, and you will regret letting life’s preciousness slip through your fingers.

We do not like to think about death. We say, “I will think about death some other day. Today I must busy myself with mental chatter about nonsense and the avoidance of feeling my feelings. I would love to stare into the white skull of the human condition, but my schedule is chock full of escapism.” We push death aside, and push death aside, and push death aside. And then, one day, death pushes us aside.

One way or another, the end is coming. But if you truly, deeply engage here, you can live more life in a week than most people live in an entire lifetime. By that I do not mean that you can have more experiences, I just mean that you can experience far more moments with far more depth and clarity than someone who’s just drifting through life on autopilot. One week fully and consciously appreciated contains more lived life than an entire stay in this world from cradle to grave when it is taken for granted.

And of course you will also have far more amazing experiences than someone who isn’t directly interfacing with the moment.

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

Risky Business

November 2, 2018

RISKY BUSINESS

“In 1961, at the height of the Cold War, a B-52 bomber carrying two Mark 39 thermonuclear bombs accidentally crashed in rural North Carolina. A low technology voltage switch was the only thing that prevented a 4-megaton nuclear bomb with 250 times the yield of the bomb dropped on Hiroshima from detonating on American soil. In addition to killing everyone within the vicinity of the blast, the winds would have carried radioactive fallout over Washington D.C., Baltimore, Philadelphia, and New York City. It is not inconceivable to imagine that, at the height of cold war, a weapon of that magnitude exploding randomly on the eastern seaboard would have triggered immediate accidental retaliation against the Soviets resulting in full scale Armageddon and the end of humankind as we know it. This is just one of many nuclear accidents during the cold war. Peace has a dark side.”

From Volatility and the Allegory of the Prisoner’s Dilemma by Chris Cole of Artemis Capital Management, October 2015.

Say what ? Here are more details:

The date was 24 January 1961. The plane was a United States B-52 Stratofortress carrying two nuclear bombs, which lost altitude over Goldsboro, in rural North Carolina. With the plane having sustained a fuel leak in its right wing, the crew were advised to maintain a holding pattern along the coast while they burnt off as much fuel as possible. On reaching their assigned position it transpired that the leak had worsened and they were now running out of fuel. The crew were advised to return immediately to Seymour Johnson Air Force Base.

They never made it. They lost control of the plane at 10,000 feet as they began their descent. Five of the crew ejected and landed safely. One crew member ejected but was killed on landing. Two crew members died in the crash.

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

Tectonic Plate Splits in Two Raising Risks for West Coast

October 26, 2018

Tectonic Plate Splits in Two Raising Risks for West Coast

San Andreas Fault in California Can Be Observed from the Sky

Recent studies have revealed that the massive earthquake which stuck Mexico actually split a tectonic plate in two. This has done more than just shaken the ground. It has also shaken up the geologist community for this may even introduce a greater risk to California. That quake took place on September 7th, 2017, and was a magnitude 8.2 earthquake that struck southern Mexico. Earthquakes are common events around the world in different degrees. However, this powerful event wasn’t any run-of-the-mill tremor. It actually split the tectonic plate itself.

Normally, earthquakes take place where two tectonic plates meet. They constantly move around Earth’s surface, either grinding side by side, or they will crumble which ends up creating mountain ranges. They can also descend under another plate in what is referred to as a subduction zone. However, this one was a huge intraslab quake which resulted in breaking a plate in two. This means there is now a greater risk for more earthquakes along this fault line.

UBS Warns Trump’s Trade Fights Are ‘Reversing 15-Years Of Global Progress’

October 25, 2018

UBS Warns Trump’s Trade Fights Are ‘Reversing 15-Years Of Global Progress’

Protectionism has cross-party support in the U.S., and nationalist parties continue to gain traction in Europe. Where there is inequality, there is a surge in protectionism; a risk that could trigger the next global economic crisis sometime around 2020.

The Trump administration’s trade war and a hard Brexit could send tariffs to levels not seen in 15 years, according to UBS economist, as per Market Watch.

The Swiss bank views the U.S. tariffs, along with retaliatory measures (tit-for-tat with China), as the most significant factors boosting the metric. Second, are fears of a hard Brexit, which refers to the potential split between the U.K. and the European Union.

“Combined, these two would add 142 [basis points] to the average global import tariff, essentially reversing 15 years of progress in global tariff reduction,” said UBS chief economist, Arend Kapteyn, in a recent note.

The first chart shows how the U.S. significantly outpaces the U.K. in the bank’s report of “which tariff wall if bigger.” In other words, the next global economic crisis could be triggered by President Trump’s trade war.

The next chart reveals how the average global tariff could skyrocket to levels not seen since the early days of George W. Bush’s first presidential term.

Kapteyn then warns that trade wars and a hard Brexit could be the perfect cocktail to stymie global growth. “We wanted to give some sense of the jump in trade disruptions.”

* * *

BofA’s Michael Hartnett sings a similar tune of the coming turmoil. He warns U.S. fiscal easing and protectionism late in the economic cycle could cause trouble.

In the chart below, controls on trade, capital, and labor are likely to soar to levels not seen since the 1940s, effectively wiping out more than a half-century of progress under globalism.

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

The Market Is “Pulling Forward End-Of-Cycle Timing” – Nomura Warns of Shift To “Risk-Negative Mindset”

October 23, 2018

The Market Is “Pulling Forward End-Of-Cycle Timing” – Nomura Warns of Shift To “Risk-Negative Mindset”

With global investors desperately searching for a narrative to explain “what changed” as the calendar flipped a page to exuberant September to awful October, we suspect the realization of the fact that global central bank balance sheets are contracting and the world is tightening finally started to dawn on even the most ardent dip-buyer…

Even China’s promise of never-ending support for stocks was unable to support stocks overnight, and as Nomura’s MD of cross-asset strategy notes:

This then looks like general Macro consensual positioning “gross-down” flow, as “Longs” in SPX, Nikkei, Crude and USD are under pressure, while “Shorts” in USTs, ED$, EUR and Gold all squeeze.

Additionally, Charlie McElligott points out that the S&P as the “YTD global Equities safe-haven” theme now too is “cracking”:

After shattering through the 200d MA once again yesterday, S&P futures are now again within reach of the MTD lows (2712) as discretionary tactical longs “tap out” and asset managers continue to sell-down legacy longs (still ~$80B in SPX)

Pointing out that the S&P has big gamma at 2700 strikes (~$3.9B for 10/26 expiry, ~$3.6B for 10/29 expiry) with the largest “pull” remaining at the 2750 strike (~$4.7B / ~$4.0B)

The strategist warns of a slow and ongoing “pain trade” for legacy consensual Equities fund positioning as our global Equities factor monitors showing “Growth” again hit hard to the benefit of “Value” overnight across Asia-Pac, Japan and Europe (on top of the same ongoing MTD theme in U.S.)

This of course was the top concern going into EPS season:

would investors pivot to “late-cycle” mentality with regard to the likelihood of generally “lowered guidance,” or would they take the “glass half full” route of “lower bars to beat” in Q4

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

Backlash Against War on Cash Reaches the Bank of Canada

October 22, 2018

Backlash Against War on Cash Reaches the Bank of Canada

A cashless society could have “adverse collective outcomes.”

In recent months, a slew of political and financial institutions have raised concerns about the march toward a cashless economy. They include:

The ECB warned that a phase-out of cash could pose a serious risk to the financial system. Depending too heavily on electronic payment systems could expose financial systems to catastrophic failures in the event of power outages or cyber attacks. The European Commission has also backed off is war on cash.
The People’s Bank of China announced that all businesses in China that are not e-commerce must resume accepting cash or risk being investigated, and cautioned businesses against hyping the “cashless” idea when promoting non-cash payments.
In Sweden, one of the most cashless societies, the central bank and parliament have spoken out in support of cash.
Cities too have spoken out, including Washington D.C., whose City Council introduced a bill that sought to ban restaurants and retailers from not accepting cash or charging a different price to customers depending on the method of payment they use.

Now, it’s the Bank of Canada’s turn to sound the alarm. In a paper — “Is a Cashless Society Problematic?” — it outlines a number of risks that could arise if the country went fully cashless.

The premise underpinning the analysis is that at some point in the future individuals and firms decide, of their own volition, to cease using cash altogether. In response, the central bank stops printing physical money because of the large fixed costs inherent in supplying bank notes.

In such a scenario, even though most individuals and firms freely choose to abandon cash, there could be “adverse collective outcomes,” the study warns.

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

A New Era Of Geopolitical Risk In Global Oil Markets

October 9, 2018

A New Era Of Geopolitical Risk In Global Oil Markets

Amid never ending talk and speculation over how many more barrels of Iranian oil will be removed from global markets once sanctions slated to hit Iran’s oil production on November 6 take effect, some are claiming that geopolitical factors have driven the market just as much as supply fundamentals.

At Russia Energy Week in Moscow last week, both Saudi and Russian energy ministers saidthey see rising geopolitical risk as driving the recent oil price increase at a time when there is sufficient supply in the market. Of course, the notion of sufficient supply will be tested soon, as will both Saudi Arabia’s and OPEC’s spare production capacity will be called on to maintain this supply.

“Prices are continuing to rise and I think that proves the point that it is not the fundamentals of oil supply and demand that is behind this price increase,” Saudi energy minister Khalid al-Falih said on Thursday during the conference.

“The market has a strong influence,” he added. “Financial investors, speculators, sentiment, future expectations. The true elephant in the room is geopolitics. That has all combined to feed the market frenzy.”

Following al-Falih’s cue, Russian energy minister Alexander Novak agreed that geopolitical risks were having a disproportionate impact on global oil prices, which have recently breached new four-year highs.

On Friday, global oil benchmark London-traded Brent crude futures dipped slightly but still settled at a robust $84.33 per barrel, a price point that could arguably mark the beginning of supply disruption in developing economies where a strong U.S. dollar and rising oil prices are already creating economic woe, especially in Asia, including the Philippines, Vietnam and India.

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

Spain: IMF Highlights Rising Risks

October 8, 2018

Spain: IMF Highlights Rising Risks

The International Monetary Fund can be criticized for many things, but its analysis of countries’ debt risk tends to be worth a read.

In this case, the International Monetary Fund has once again warned Spain of the risk of reversing reforms and increasing imbalances.

It asks to deepen in the labor reform to end structural unemployment and credible measures for the 2019 budget.

The IMF is often criticized on many sides. It is often accused of being “neoliberal” despite the fact that in almost all its recommendations aim to prevent spending cuts. It is wrongly criticized, on many occasions, for being negative on countries. It is exactly the opposite. The IMF is often too diplomatic and, above all, undemanding with governments.

A clearly diplomatic IMF has verified in its last report the important risks facing the Spanish economy. As growth slows down more quickly than expected, the risks that threaten the recovery have increased and many of the socialist government’s announcements could be counterproductive and accelerate a relapse.

In a very diplomatic but forceful way, the IMF warns about the governments’ optimistic and inflated estimates of tax revenues. No wonder, because the average error in revenue estimates for new taxes in Spain is very important, an average of 5.8 billion euro annually.

Inflated estimates are an easy trick to square budgets. Making impossible estimates of tax revenue while spending increases are very real. Then, when deficits soar, blame an external enemy.

The graph below shows the historical overestimation of tax revenues (5.8 billion euro per annum more tax revenues estimated than actually collected).

Spain: IMF Highlights Rising Risks

The Spanish Treasury Inspectors themselves have warned: “It would also be very interesting that those who speak again and again of these striking figures will provide the studies on which they are based to compare them. From previous unsubstantiated studies, inadequate and impossible proposals arise”(Tax Inspectors, January 2015).

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

World economy at risk of another financial crash, says IMF

October 4, 2018

World economy at risk of another financial crash, says IMF

Debt is above 2008 level and failure to reform banking system could trigger crisis

The floor of the New York stock exchange in September 2008. Photograph: Richard Drew/AP

The world economy is at risk of another financial meltdown, following the failure of governments and regulators to push through all the reformsneeded to protect the system from reckless behaviour, the International Monetary Fund has warned.

With global debt levels well above those at the time of the last crash in 2008, the risk remains that unregulated parts of the financial system could trigger a global panic, the Washington-based lender of last resort said.

Much has been done to shore up the reserves of banks in the last 10 years and to put in place more rigorous oversight of the financial sector, but “risks tend to rise during good times, such as the current period of low interest rates and subdued volatility, and those risks can always migrate to new areas”, the IMF said, adding, “supervisors must remain vigilant to these unfolding events”.

A dramatic rise in lending by the so-called shadow banks in China and the failure to impose tough restrictions on insurance companies and asset managers, which handle trillions of dollars of funds, are highlighted by the IMF as causes for concern.

The growth of global banks such as JP Morgan and the Industrial and Commercial Bank of China to a scale beyond that seen in 2008, leading to fears that they remain “too big fail”, also registers on the IMF’s radar.

The warning from the IMF Global Financial Stability report echoes similar concerns that complacency among regulators and a backlash against international agreements, especially from Donald Trump’s US administration, has undermined efforts to prepare for another downturn.

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

This ‘Deflationary’ Bull Markets Ending – And Here’s What’s Coming Next For Investors

September 21, 2018

This ‘Deflationary’ Bull Markets Ending – And Here’s What’s Coming Next For Investors

After many years of cheap money and asset bubbles – it looks like the upside is finally over.

That is – the potential upside against the amount of risk taken on – is over.

I often write about investors needing to find asymmetric (low risk – high reward) opportunities. And lately – as I’ve written about earlier this month – many key indicators are now flashing potentially huge downside ahead.

As I wrote then – it’s not like I’m predicting markets to tank tomorrow. Or even next week.

But what I’m getting at is that there’s significantly more risk ahead than reward – at least for the general market and equities.

I’m not alone thinking this way. . .

Bank of America & Merrill Lynch (BAML) recently published a white paper with an interesting trading suggestion. . .

First, they show us that the nearly 10-year monster U.S. bull market has been highlydeflationary. And in case you forgot, deflation refers to when there’s an overall decline in the prices of goods and services.

The ‘deflationary assets’ group includes U.S. investment grade bonds, government bonds, the S&P 500, ‘growth stocks’, U.S. high yield credit, and U.S. consumer discretionary equities (aka non-essential goods – such as luxury goods, entertainment, automobiles, etc.) . . .

And the ‘inflationary assets’ group which includes commodities, developed market stocks (excluding U.S. and Canada), U.S. bank stocks, ‘value stocks’, cash, and treasury inflation protected securities (aka TIPS) . . .

Since the end of the 2008 crash – the Fed embarked on a ‘easy money’ and expansionary path via ZIRP (zero interest rate policy) and QE (quantitative easing; aka money printing).

But even after all this – deflationary assets have seriously outperformed inflationary assets. . .

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

The Biggest Risk In Today’s Oil Markets

September 19, 2018

The Biggest Risk In Today’s Oil Markets

The oil market is “tightening up,” but the Trump administration could still spoil oil prices if its aggressive trade war against China drags down economic growth.

The U.S. stepped up the trade conflict with China on Monday when the Trump administration announced $200 billion in tariffs on Chinese imports. The move had been expected for weeks but trade proponents had hoped that the administration would ultimately shelve the idea when push came to shove.

Not only did Trump move forward with punitive tariffs on China, but he also hinted that another $267 billion in tariffs are under consideration.

The trade war could hit the oil and gas markets in several ways. First, the back-and-forth escalation of tariffs could drag down economic growth. The first round of tariffs, which hit $50 billion in Chinese goods, targeted a relatively narrow set of products. But the latest $200 billion in tariffs will raise the cost for a wide array of consumer goods in the U.S., which could slow the economy. Specific industries that are affected by the tariffs will see more concentrated damage.

Second, oil and gas are likely to be specifically affected by the trade war, which wasn’t the case in the previous rounds of tariffs. China announced $60 billion in retaliatory measures on Tuesday, which included a 10 percent tariff on imported LNG from the United States.

The problem with the trade fight is that once the tariffs are in place, there is pressure on both sides not to back down. That doesn’t bode well to a swift resolution of this conflict.

Over the longer-term, the tariff upends the economics of building new LNG export terminals in the United States. China has emerged as the main driver of LNG demand growth, and any new export terminal located anywhere around the world likely has China at the center of its calculations.

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

We’re All Speculators Now

September 18, 2018

We’re All Speculators Now

When the herd thunders off the cliff, most participants are trapped in the stampede..

One of the most perverse consequences of the central banks “saving the world” (i.e. saving banks and the super-wealthy) is the destruction of low-risk investments: we’re all speculators now, whether we know it or acknowledge it.

The problem is very few of us have the expertise and experience to be successful speculators, i.e. successfully manage treacherously high-risk markets. Here’s the choice facing money managers of pension funds and individuals alike: either invest in a safe low-risk asset such as Treasury bonds and lose money every year, as the yield doesn’t even match inflation, or accept the extraordinarily high risks of boom-bust bubble assets such as junk bonds, stocks, real estate, etc.

The core middle-class asset is the family home. Back in the pre-financialization era (pre-1982), buying a house and paying down the mortgage to build home equity was the equivalent of a savings account, with the added bonus of the potential for modest appreciation if you happened to buy in a desirable region.

In the late 1990s, the stable, boring market for mortgages was fully financialized and globalized, turning a relatively safe investment and debt market into a speculative commodity. We all know the results: with the explosion of easy access to unlimited credit via HELOCs (home equity lines of credit), liar loans (no-document mortgages), re-financing, etc., the hot credit-money pouring into housing inflated a stupendous bubble that subsequently popped, as all credit-asset bubbles eventually do, with devastating consequences for everyone who reckoned their success in a rising market was a permanent feature of the era and / or evidence of their financial genius.

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

Corporate Credit – A Chasm Between Risk Perceptions and Actual Risk

September 14, 2018

Corporate Credit – A Chasm Between Risk Perceptions and Actual Risk

Shifts in Credit-Land: Repatriation Hurts Small Corporate Borrowers

A recent Bloomberg article informs us that US companies with large cash hoards (such as AAPL and ORCL) were sizable players in corporate debt markets, supplying plenty of funds to borrowers in need of US dollars. Ever since US tax cuts have prompted repatriation flows, a “$300 billion-per-year hole” has been left in the market, as Bloomberg puts it. The chart below depicts the situation as of the end of August (not much has changed since then).

Short term (1-3 year) yields have risen strongly as a handful of cash-rich tech companies have begun to repatriate funds to the US.

Now these borrowers find it harder to get hold of funding. This in turn is putting additional pressure on their borrowing costs. At the same time, the cash-rich companies no longer need to fund share buybacks and dividends by issuing bonds themselves.

The upshot is that the financially strongest companies no longer issue new short term debt, while smaller and financially weaker companies are scrambling for funding and are faced with soaring interest rate expenses – which makes them even weaker.

As Bloomberg writes:

What is really noteworthy about this is that as these corporate middlemen are getting out, the quality of fixed-rate securities available to the rest of the investoriat continues to deteriorate in the aggregate.

Risk Perceptions vs. Risk

Meanwhile, despite the fact that euro-denominated corporate debt is reportedly still selling like hot cakes, both spreads and absolute yields have increased markedly in euro as well since late 2017 (as yields on German government debt are used as sovereign benchmarks for the euro area and remain stubbornly low, credit spreads on corporate and financial debt have increased almost in tandem with nominal yields).

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

This Vital Oil And Gas Choke Point Could Be At Risk

August 22, 2018

This Vital Oil And Gas Choke Point Could Be At Risk

Beijing is taking to task a Pentagon report, ”Military and Security Developments Involving the People’s Republic of China 2018” released last Thursday on China’s military activities.

The annual report issued by the Pentagon and presented to Congress, highlights growing Chinese naval capability, all the while underscoring the narrowing gap between China’s maritime forces and he U.S. Navy as well as China’s increased naval activity in the Western Pacific Ocean. The report states that China’s People’s Liberation Army Navy (PLAN) has global ambitions far beyond the traditional perimeters of its land-based defense systems, a claim that Beijing has always cleverly downplayed.

“The PLAN continues to develop into a global force, gradually extending its operational reach beyond East Asia and the Indo-Pacific into a sustained ability to operate at increasingly longer ranges,” the Pentagon report said, “The PLAN’s latest naval platforms enable combat operations beyond the reach of China’s land-based defenses.”

“China’s aircraft carrier and planned follow-on carriers, once operational, will extend air defense coverage beyond the range of coastal and shipboard missile systems, and enable task group operations at increasingly longer ranges,” the report states. It adds that Chinese bombers are also likely training for “strikes” on U.S. targets. Experts agree, claiming that decades of increased investment in new technology by China’s military means it will soon have the capabilities to strike U.S. military installations in the Pacific by air.

“Furthermore, the PLAN now has a sizable force of high-capability logistical replenishment ships to support long-distance, long-duration deployments, including two new carrier operations. The expansion of naval operations beyond China’s immediate region will also facilitate non-war uses of military force.” China continues to learn lessons from operating its first aircraft carrier, Liaoning, the Pentagon said.

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

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