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October is the Most Dangerous Month

The prospect of steep market declines worries investors – and the month of October has a particularly bad reputation in this respect.

Bad juju month: Statistically, October is actually not the worst month on average – but it is home to several of history’s most memorable crashes, including the largest ever one-day decline on Wall Street. A few things worth noting about 1987: 1. the crash did not presage a recession. 2. its extraordinary size was the result of a structural change in the market, as new technology, new trading methods and new hedging strategies were deployed. 3. Bernie (whoever he was/is) got six months.

Regarding point 2: in particular, the interplay between program trading and “portfolio insurance” proved deadly (the former describes computerized arbitrage between cash and futures markets, the latter was a hedging strategy very similar to delta-hedging of puts, which involved shorting of S&P futures with the aim of making large equity portfolios impervious to losses – an idea that turned out to be flawed). Too many investors tried to obtain “insurance” by selling index futures at the same time, which pushed S&P futures to a vast discount vs. the spot market. This in turn triggered selling of stocks and concurrent buying of futures by program trading operations – which put more pressure on spot prices and in turn triggered more selling of futures for insurance purposes, and so on. The vicious spiral produced a one-day loss of 22.6% – today this would be equivalent to a DJIA decline of almost 5,000 points. Due to circuit breakers introduced after 1987, very big declines will lead to temporary trading halts nowadays (since 2013 the staggered threshold levels are declines of 7%, 13% and 20%; after 3:25 pm EST the market is allowed to misbehave as it sees fit). Interestingly, program trading curbs were scrapped again.

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

21st Century Shoe-Shine Boys

September 16, 2017

21st Century Shoe-Shine Boys

Anecdotal Flags are Waved

“If a shoeshine boy can predict where this market is going to go, then it’s no place for a man with a lot of money to lose.”

– Joseph Kennedy

It is actually a true story as far as we know – Joseph Kennedy, by all accounts an extremely shrewd businessman and investor (despite the fact that he had graduated in economics*), really did get his shoes shined on Wall Street one fine morning, and the shoe-shine boy, one Pat Bologna, asked him if he wanted a few stock tips. Kennedy was amused and intrigued and encouraged him to go ahead. Bologna wrote a few ticker symbols on a piece of paper, and when Kennedy later that day compared the list to the ticker tape, he realized that all the stocks on Bologna’s list had made strong gains. This happened a few months before the crash of 1929.

Joseph Kennedy in 1914, at age 25 – at the time reportedly “the youngest ever bank president in the US”
Photo credit: John F. Kennedy Presidential Library and Museum, Boston.

Kennedy sold all his stock market investments over the next several months and put the money in what he considered the safest banks. He had already made a fortune in the bull market, and reportedly augmented it later by going short in the bear market. We are pretty sure his meeting with the market-savvy shoe-shine boy wasn’t the only reason for which he decided to sell. He did mention the anecdote later in life though and the experience served to solidify a conclusion he had already arrived at: It was very late in the game and the market was likely to crack badly fairly soon.

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

India: Cash is Back

July 4, 2017

India: Cash is Back

But the Crisis has Deepened and has Become More Entrenched (Part XIV)

Nobody for President

On 17^th July 2017, India will elect a new President through a vote of the elected representatives. The two real choices are between Ram Nath Kovind and Meira Kumar. Afraid of looking completely ignorant, I asked a few people who Kovind is. No-one knew of him and people only vaguely remembered Ms. Kumar.

Adults and juveniles have been arrested in different parts of India for celebrating Pakistan’s victory over India in a recently held cricket match. They have been charged with sedition, a charge that has serious legal ramifications and can potentially send these people to prison for life. With the British gone for 70 years, India’s laws and institutions have lost all mooring to their rational anchors. Photo credit: Amnesty India

India will get a complete nobody as its next President. Both candidates are from the Indian province of Bihar. If it were a country, Bihar with its 119 million inhabitants would be the 12^th most populated in the world. With a GDP of USD 420 per capita, it would also be among the world’s ten poorest countries.

A scene from a slum in Patna, Bihar’s capital. Photo credit: Yuri Birukov

Kovind is from the “lower caste” and is the choice of the Indian Prime Minister, Narendra Modi, who would like to make up for recent atrocities against the “lower caste”. While he is a nobody with hardly any public credentials and a yes-man to the system, Kovind is sympathetic to the cause of Hindu fanatics and has their support.

Why pull a passionate street fighter and rabble-rouser out of the street and place him in a position where he might compete with Modi for visibility?

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

Pulling Levers to Steer the Machine

April 14, 2017

Pulling Levers to Steer the Machine

Ticks on a Dog

A brief comment on Fed chief Janet Yellen’s revealing speech at the University of Michigan. Bloomberg:

“Before, we had to press down on the gas pedal trying to give the economy all of the oomph that we possibly could,” Yellen said Monday in Ann Arbor, Michigan. The Fed is now trying to “give it some gas, but not so much that we’re pushing down hard on the accelerator.” […]

“The appropriate stance of policy now is closer to, let me call it neutral,” Yellen said in response to questions during an event at the Gerald R. Ford School of Public Policy at the University of Michigan. Yellen said she expected the economy to continue to grow at a moderate pace and that gradual interest rate increases “can get us where we need to be.”

Central planners groping in the dark…

Every society is ruled by an elite. They prey upon the common folks like ticks on a dog. They work their way into positions of power and influence, using a combination of brains, connections, and claptrap.

The mob generally looks up to them, impressed by the hocus pocus. And then, eventually, the ticks grow too many and too fat. The poor dog weakens… and the magic fails.

Where exactly we are in the process, we can’t be sure. But surely, we took another step toward the eventual catastrophe when Ms. Yellen spoke.

Everything she said was preposterous.

No Oomph

The economy is not growing at a “moderate speed.” If it is growing at all – it depends on how you calculate consumer price inflation – it is doing so only at stall speed.

Officially, per capita growth is less than 1% a year. What kind of “oomph” is that?

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

The Fed’s Doomsday Device

June 21, 2016

The Fed’s Doomsday Device

Bezzle

BALTIMORE – Barron’s, in a lather, says the market is facing the “Two Horsemen of the Apocalypse.” Huh?

Apocalypse_vasnetsov Only two? There were four last time!

Supposedly, the so-called Brexit – the vote in Britain this Thursday on whether to leave or remain in the European Union (EU) – and uncertainty over where the Fed will take U.S. interest rates are cutting down stocks faster than a Z-turn mower.

But Brexit is a side show. As our contacts in London explained in last week’s issue of Bonner & Partners Inner Circle, Britain will do just fine outside of the EU. It will even thrive.

As for the Fed’s fumbling, it is a consequence, not a cause, of falling stock prices. The real threat to this market is more basic, more dangerous… and completely unavoidable. It is a “doomsday device” – hidden in plain view – in the feds’ fiat money system.

It took us a long time to understand how this works. For many years, we referred to the Fed’s EZ money policies as “printing money.” Finally, we realized that this metaphoric description of the Fed’s role probably hides more than it reveals.

The Fed is not printing money. If it were printing money, we’d have more money around and higher consumer prices. Instead, when the feds went to a “paper” money system in 1971, they did it very cleverly.

Yes, their new system is totally fraudulent and absolutely ruinous – just like an old fashioned money-printing scheme. But the fraud takes much longer to uncover, and the ruin is only obvious at the end. It is a “bezzle”… where you only become aware that you’ve been had when it blows up.

Unlimited Credit

Here’s the deal…Instead of printing money itself, the Fed allows banks to create an almost unlimited amount of credit (providing they meet certain capital requirements).

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

Janet Yellen’s $200-Trillion Debt Problem

June 20, 2016

Janet Yellen’s $200-Trillion Debt Problem

Blame “Brexit”

BALTIMORE – The U.S. stock market broke its losing streak on Thursday [and even more so on Monday, ed.]. After five straight losing sessions, the Dow eked out a 92-point gain. The financial media didn’t know what to say about it. So, we ended up with the typical inanities, myths, and claptrap.

“Investors” are pushing the DJIA back up again..apparently any excuse will do at the moment. The idea may backfire though, as exactly the same thing happened shortly before Sweden’s euro referendum (a prominent pro-euro politician was killed by a “lone nut” a few days ahead of the vote), and Sweden still had the krona last we looked… – click to enlarge.

“Brexit panic may be your big chance to buy the S&P 500,” says a headline at Marketwatch. The article claims investors have pushed down the value of the S&P 500 in fear of a so-called “Brexit.”

Next Thursday, in a national referendum, British voters will decide whether to end Britain’s 43-year membership in the European Union. But there are a number of problems with this…

First, there has been no big rout in the S&P 500; it’s only slightly below its all-time high. Second, Brexit is a mystery to most U.S. investors, not a cause for alarm. Third, nobody knows which side will win – or what it will mean.

Would a Brexit be good for Britain? Would it be bad for stocks? Nobody knows! Meanwhile, the Financial Times focuses on “slowing job growth and risk of Brexit…”

It notes that a possible Brexit next week is one reason Fed chief Janet Yellen cited for holding off on raising U.S. interest rates at this week’s monetary policy meeting. The newspaper also notes that the Fed has left “the door open” to rate increases.

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

Kuroda-San in the Mouth of Madness

May 14, 2016

Kuroda-San in the Mouth of Madness

Deluded Central Planners

Zerohedge recently reported on an interview given by Lithuanian ECB council member Vitas Vasiliauskas, which demonstrates how utterly deluded the central planners in the so-called “capitalist” economies of the West have become. His statements are nothing short of bizarre (“we are magic guys!”) – although he is of course correct when he states that a central bank can never “run out of ammunition”.

Bank of Japan (BOJ) Governor Haruhiko Kuroda attends a news conference at the BOJ headquarters in Tokyo, Japan, December 18, 2015. BoJ governor Haruhiko Kuroda Photo credit: Toru Hanai / Reuters

The mental state of BoJ governor Haruhiko Kuroda may be even more precarious though. As Marketwatch reports, he recently gave an interview to German financial newspaper Börsen-Zeitung, in which he inter alia threatened even more BoJ intervention:

Bank of Japan Gov. Haruhiko Kuroda said the central bank “can still ease [its] monetary policy substantially” if necessary, in an interview with German financial newspaper Börsen-Zeitung published Wednesday.

This is per se not surprising, although one wonders what Kuroda thinks can possibly be achieved by upping the ante on this:

Assets held by the BoJ vs. the Nikkei index – April 1999 = 100 – click to enlarge.

We have added the Nikkei Index to the chart of BoJ assets above because inflating stock prices is one of the central bank’s declared goals – its stake in ETFs listed on the Tokyo Stock Exchange has in the meantime exploded to more than 50% (which we believe is eventually going to create a socialist calculation-type problem).

The results of this mad-cap buying spree are decidedly underwhelming so far. Although the pockets of central banks are of unlimited depth, this is also no big surprise, as central bankers are probably the worst traders in the world. One also wonders how further monetary easing is supposed to “improve” on this situation:

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

Deficit Spending is Not the Answer

March 28, 2016

Deficit Spending is Not the Answer

The Growing Chorus for Fiscal Stimulus

Central bankers and monetary adherents the world over are united in the common grouse that fiscal policy is lacking. Grander programs of direct stimulation are needed, they grumble. Monetary policy alone won’t cut the mustard, they gripe.

1-global debt Global debt-to-GDP ratios (excl. financial debt). Obviously, it is not enough. More debt is needed, so we may “stimulate” ourselves back to prosperity.

Hardly a week goes by where the monetary side of the house isn’t heaving grievances at the fiscal side of the house. The government spenders aren’t doing their part to boost the GDP, proclaim the money printers. Greater outlays and ‘structural reforms’ are needed to spur aggregate demand, they moan.

For example, last month, just prior to the G20 gala, the Organization for Economic Cooperation and Development (OECD) asserted that “Getting back to healthy and inclusive growth calls for urgent policy response, drawing on monetary, fiscal, and structural policies working together.”

The OECD report also stated that “The case for structural reforms, combined with supporting demand policies, remains strong to sustainably lift productivity and the job creation.”

4295203312_1ec36291bc_b The Chateau de la Muette in Paris – this magnificent building that once housed members of France’s nobility nowadays ironically serves as the headquarters of the socialistic central planning bureaucracy known as the OECD. This parasitic carbuncle is high up on the list of globalist institutions that must be considered an extreme threat to economic freedom and progress. Photo via oecd.org

Several weeks later, on March 10, European Central Bank President Mario Draghi offered a similar refrain. At the ECB press conference Draghi remarked that “all [Eurozone] countries should strive for a more growth-friendly composition of fiscal policies.”

Then, wouldn’t you know it, former Fed Chairman Ben Bernanke also added his alto vocals to the chorus. Last week, in his Brookings Institution blog, he wrote:

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

No Courage, Feckless Experiments and the Deep State

December 23, 2015

No Courage, Feckless Experiments and the Deep State

Hosannas and Hat-Tipping

Today’s post is about you dear reader… and the world you live in. That world got notice last week that henceforth short-term interest rates would be more than zilch. From all over the planet came hosannas and hat-tipping.

Some commentators congratulated the Yellen Fed on its careful stewardship… others applauded the strength of a U.S. economy that permitted a “return to normalcy.” But some fretted, too…

hat tipping An overenthusiastic outbreak of hat-tipping Photo credit: Jeremy Daniel

Perhaps it is too soon, they thought. What if the economy failed to reach “escape velocity”? And what if the Fed – like has happened to so many other central banks around the world – was forced to beat a retreat?

The first few hours of trading after the Fed’s move seemed to confirm its wisdom: U.S. stocks traded higher. But over the following two days, the Dow lost more than 600 points. Then on Monday, it found its feet with a 123-point increase.

A quarter of a percentage point rate hike is piddling. But supposedly, it signals a new regime – a recovering economy that can afford to pay rates of interest more closely connected to the real world.

At the Diary, we never claim to know what is true… what is right… or what the future will bring. The best we can do is to try to recognize error. And then, only big ones. But here we need no careful regard for the details.

Here, big as life, we see George Armstrong Custer riding to the Little Big Horn. We see the Titanic headed out of Southampton harbor. We see Lenin headed back to Russia… Napoleon back to France… and another Bush or Clinton headed back to the White House…

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

Junk Bonds Under Pressure

November 18, 2015

Junk Bonds Under Pressure

While the Stock Market is Partying …

There are seemingly always “good reasons” why troubles in a sector of the credit markets are supposed to be ignored – or so people are telling us, every single time. Readers may recall how the developing problems in the sub-prime sector of the mortgage credit market were greeted by officials and countless market observers in the beginning in 2007.

Photo credit: Getty Images

At first it was assumed that the most highly rated tranches of complex structured products would be immune, as the riskier equity tranches would serve as a sufficient buffer for credit losses. When that turned out to be wishful thinking, it was argued that the problem would remain “well contained” anyway. After all, sub-prime only represented a small part of the overall mortgage credit market. It could not possibly affect the entire market. This is precisely the attitude in evidence with respect to corporate debt at the moment.

A weekly chart of high yield ETF HYG (unadjusted price only chart) – click to enlarge.

The argument as far as we’re aware goes something like this: there are only problems with high yield debt in the energy and commodity sectors. This cannot possibly affect the entire corporate credit market. We should perhaps point out that in spite of this sectoral concentration, problems have recently begun to emerge in other industries as well (a list of recent victims can be found at Wolfstreet).

The argument also ignores the interconnectedness of the credit markets. Once investors begin to lose sufficiently large amounts of money in one sector, the more exposed ones among them (i.e., those using leverage, a practice that gains in popularity the lower yields go, as otherwise no decent returns can be achieved), will start selling what they can, regardless of its relative merits. This will in turn eventually make refinancing conditions more difficult for all sorts of industries.

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

The End of the World Has Already Begun

October 22, 2015

The End of the World Has Already Begun

Disappearing Growth

Nothing much to report from the stock market yesterday. Investors are regaining their calm. A few weeks ago, it looked as though the end of the world had begun. We are talking, of course, about the world in which credit, stocks, and central bank reputations only go up.

Fated to eventually become a house of ill repute: the Mariner Eccles building (Fed board HQ)
Photo credit: AgnosticPreachersKid

But after a big fright in August, investors recovered their relaxed madness. They concluded that there was nothing to worry about. They may be right. You never know. But our guess is that the end of the world has already begun… and they just can’t face it.

The SPX, monthly – a proxy for the seemingly never-ending asset bubble. What if the end of the party is already here and people have just not noticed yet? – click to enlarge.

Since the end of World War II, credit has been expanding in the U.S. At first, it was a healthy expansion. Young, middle-class families took out mortgages and ran up bills on “charge cards,” such as Diners Club and American Express.

Then, in the late 1950s, came the first credit cards. This was accompanied by large increases in consumer credit. Until the 1970s, all was well, because wages were rising, too. And with so much new technology coming online, people believed their wages could only increase.

Debt was no problem – neither for the nation nor for households. We would “grow our way out of it.” But a strange – and as yet not fully understood – new trend began in the 1970s. After accounting for inflation, incomes for most Americans dramatically tapered off.

Total credit market debt, federal debt and GDP – a non-problem on its way to becoming an intractable problem … – click to enlarge.

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

Europe’s Banks – Insolvent Zombies

September 9, 2015

Europe’s Banks – Insolvent Zombies

The Walking Dead

Now that Europe’s fractionally reserved banking system has been regulated into complete inertia, it is a good time to assess the current bottom line, so to speak. We should mention here that there are essentially two ways of dealing with the banking system. One is to introduce an unhampered free market banking system based on strong property rights and nothing else. Such a system would work best if it were based on sound money, i.e., a market-chosen medium of exchange. The regulations governing such a system would fit on a napkin.

zombie bank2

Image credit: Warner Bros, processing fmh

The Euro-Stoxx bank index, weekly, over the past 10 years. Recently the index has been unable to overcome resistance in the 160-162 area. The bust and the reaction of the authorities to the bust has made zombies out of Europe’s big banks – click to enlarge.

The other way is to construct what we have now: a banking cartel administered and backstopped by a central bank, based on fiat money the supply of which can be expanded at will and involving continual violations of property rights. Fractional reserve banking represents a violation of property rights, because it is based on the assumption that two or more persons can have a legally valid claim on the same originally deposited sum of money (for an extensive backgrounder on this, see our series on FR banking – part 1, part 2 and part 3). This legal fiction is very convenient for the banks and the State, but it sooner or later renders the banking system inherently insolvent (a de facto, but not a de iure insolvency).

Given this system’s inherent insolvency, the regulations governing it obviously won’t fit on a napkin. Instead they fill several volumes the size of telephone directories and keep growing like weeds.

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

The Case for Outlawing Cash

September 3, 2015

The Case for Outlawing Cash

Losing Confidence

GUALFIN, Argentina – September is here. As expected, market volatility is increasing. The Great Zombie War is intensifying. And investors are getting scared. On Tuesday, the Dow lost 470 points – a nearly 3% drop. Bloomberg:

“U.S. stocks joined a worldwide sell-off, after equities’ worst month in more than three years, amid continuing concerns that China’s slowdown will weigh on the global economy.

‘The problem is, as much as China is the catalyst for this, it’s also that we’re seeing weakness in fundamentals here,’ said Matt Maley, an equity strategist at Miller Tabak & Co LLC in New York.

‘A lot of company earnings were hurt by China in the second quarter and it’s only gotten worse. People are losing confidence with the whole situation there breaking down, not just in the stock market but in data as well.’”

Burning_Money Now they even want to do away with the State’s own scrip – because it might help you to escape the depredations of madcap central bankers.
Image credit: Stephen Krow / Getty Images

Yes, investors are losing confidence…they’re probably losing confidence in corporate managers, for instance. Who wants to own stock in companies run by numskulls who buy back shares in their companies at record prices just before a major sell-off?

The still yo-yoing DJIA – “investors” (we use the term loosely) came back out to play on Wednesday already, via StockCharts, click to enlarge.

Or maybe they’re wondering whether the world’s $200 trillion in total debt (roughly 300% of total output) can possibly be paid back? Or maybe they’re beginning to puzzle out how scammy and fraudulent the Fed’s policies are.

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

Jackson Hole – Meeting of the Physics Envy Brigade

August 27, 2015

Jackson Hole – Meeting of the Physics Envy Brigade

Planners Meet to Discuss the Impossible

The Jackson Hole pow-wow takes place this weekend. A more revolting get-together of actual and armchair central planners (i.e., the advisors to the planners, many of whom see themselves as planners-in-waiting) could hardly be imagined. One has to wonder how much more damage they will be allowed to inflict before someone finally says “enough!”. The parlous state of the global economy and the series of booms and busts we have experienced over the past 20 to 30 years are almost exclusively their doing (some of the responsibility has to be shared by politicians and other bureaucrats, who have hopelessly over-regulated and overtaxed economies, especially in the developed world).

fischer1 Fed vice chairman Stanley Fischer, one of the keynote speakers at the Jackson Hole conference – more on him further below
Photo credit: Simon Dawson/Bloomberg

In their conceit these supposed “wise men” (we prefer the more fitting term “high IQ morons”, h/t Bill Bonner) seem to believe that bureaucrats can actually plan the economy and will deliver an outcome that is superior to that the free market would provide. In spite of all the evidence to the contrary that has amassed over what are by now centuries, they actually appear to be buying their own BS, which makes them especially dangerous.

As Ludwig von Mises has shown in 1920 already (in his seminal monograph Economic Calculation in the Socialist Commonwealth), central planning of the economy is literally impossible. Mises focused on the lack of a price system once the material factors of production are under government control and no longer freely tradable. Without proper prices, it is impossible to engage in rational economic calculation and hence it is no longer possible to properly allocate scarce resources.

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

The Exquisite Market Setup – Monetary Metals Supply-Demand

August 24, 2015

The Exquisite Market Setup – Monetary Metals Supply-Demand

Interesting Developments in Gold

There is an exquisite setup building once again. Tight fundamentals in the gold market apply upwards pressure on the price. For quite a while, we have been saying gold’s fundamental price was around a hundred bucks above the market price. Well, the market price moved up $46 this week. What happened to the fundamental price? You’ll have to read on to see (no cheating and reading ahead!) but suffice to say it’s quite a bit higher than the market.

Byzantine Empire. Constantine VII Porphyrogenitus, with Romanus I and Christopher. 913-959 AD. Gold Solidus, Constantinople mint. Struck 924-931 AD.

At the same time, the fundamental price of silver is below the market price. We included a graph last week, showing that gold is being sold at a discount and silver at a premium to their fundamental prices. The price of silver moved up this week, though it didn’t move like gold. It was up, then down, then up, then back down, ending a mere nine cents higher than last week. In fact, on Friday, the price of gold went up about 0.8% but the price of silver dropped 1.7%.

And this is the crux. According to popular belief, the prices of the metals are supposed to move together. Silver is supposed to go up when gold goes up, only more. This is due to money printing, inflation, economic fear, anticipation of further policy madness from the Fed, or whatever. It’s much clearer when you price everything in gold.

The fundamentals for silver just aren’t there right now. What happens when a trading thesis is believed by just about everyone?

These are the market upsets about which stories are told years later.

Could we see gold with a 13 handle and silver with a 14 handle? Read on…

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

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