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Guess Who Is Preparing For A Major Stock Market Crash?

Guess Who Is Preparing For A Major Stock Market Crash?

Pessimism is spreading like wildfire on Wall Street, and this is particularly true among one very important group of investors. And considering how much money they have, it may be wise to listen to what they are telling us. According to a very alarming survey that was recently conducted by UBS Wealth Management, most wealthy investors now believe that there will be a “significant” stock market decline before the end of next year. The following comes from Yahoo Finance

Wealthy people around the globe are hunkering down for a potentially turbulent 2020, according to UBS Global Wealth Management.

A majority of rich investors expect a significant drop in markets before the end of next year, and 25% of their average assets are currently in cash, according to a survey of more than 3,400 global respondents. The U.S.-China trade conflict is their top geopolitical concern, while the upcoming American presidential election is seen as another significant threat to portfolios.

Of course this could ultimately become something of a self-fulfilling prophecy if enough wealthy investors pull their money out of stocks and start increasing their cash reserves instead. Nobody wants to be the last one out of the barn, and it isn’t going to take too much of a spark to set off a full-blown panic. Perhaps the most troubling number from the entire survey is the fact that almost 80 percent of the wealthy investors that UBS surveyed believe that “volatility is likely to increase”

Nearly four-fifths of respondents say volatility is likely to increase, and 55% think there will be a significant market sell-off before the end of 2020, according to the report which was conducted between August and October and polled those with at least $1 million in investable assets. Sixty percent are considering increasing their cash levels further, while 62% plan to increase diversification across asset classes.

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

Blain’s Morning Porridge – November 11th 2019

BLAIN’S FINANCIAL PORRIDGE – NOV 11TH 2019

“Johnny Turk he was ready, he primed himself well. He rained us with bullets and showered us with shell. In five minutes flat he’d blown us all to hell. . ”

Last week stock markets staged a spectacular rally off the back of the “improved” trade outlook. Bonds have reversed. But despite equities sitting at all-time highs, it’s time to step back and focus on where this goes next.  Next few days will see the US impeachment hearings ratchet up – raising the prospect of market dislocation.  I’ve been reading missives from Republican and Democrat supporting chums and the issue of either getting behind Trump (no matter how bad he is) to keep the Democrats out, or TINA to getting rid of Trump. It looks as polarising as Brexit has become in the UK.  The threat of politics overtaking reality is worrying – and the market doesn’t seem that bothered about the implications for The US’ credibility, the Fed and the dollar.  Are we bothered? Slightly. 

Political instability remains the name of the game from the US, Hong Kong, The UK, and this morning, Spain. (And, add Italy and Germany to the list..) 

One of the key factors driving stocks higher in the wake of a trade “accommodation” rather than a peace treaty is momentum – markets want to go higher, anticipating growth. But the market is equally driven by the volume of cash ready to be thrown at it.  There is no shortage of ready liquidity – in this sense of too much easy money chasing too few assets, rather than liquidity: “who wants to buy this” conundrum.  When there is too much cash around the market can remain irrational for longer…

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

Crashing The Financial System For Fun And Profit

Crashing The Financial System For Fun And Profit

Huge Fortunes Can Be Made In Falling Markets

It would be wise to remember we are in uncharted waters and this market could reverse on a dime. The stories flowing out of companies such as WeWork that are burning through cash screams danger ahead! This means we should not discount the idea that those in charge might reach a tipping point where they crash the financial system for fun and profit. While this may seem outlandish the possibility is real. This doesn’t mean that every rich guy and gal would sign on to this plan, just enough to push things over the edge. When things have gone too far in one direction history shows that a correction always takes place. It could be argued we have reached that point and true price discovery has been lost.

A huge amount of money can be made during a market crash for those properly positioned. As long as the Fed and the big banks survive those who control these institutions couldn’t care less about how the 99.5% at the bottom fair. In fact, the Dodd-Frank Act which is over 2,300 pages allows this under Title II what is viewed by many as a “bank bail-in”. This is done by imposing the losses of insolvent financial companies on their common and preferred stockholders, debt holders, and other unsecured creditors including depositors.

The whole event of a “bank bail-in” can be viewed as another way to disguise a massive default and it can happen here in America. An example of just how delusional we have become as to the fragility of our financial system is that many people have taken comfort in the efforts to control the banking sector through the Dodd-Frank act following the 2008 crisis. 

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

Three Examples Of How Chaos Theory Affects Financial Markets

Three Examples Of How Chaos Theory Affects Financial Markets

Chaos Theory – the idea that a butterfly in Thailand could cause a US hurricane – can actually create positive outcomes as well as mayhem. Consider that European banks, German long-term bunds and the offshore yuan are essentially the butterflies making for pleasant investment conditions just now. All have turned sharply in the last 2 months after previous discounting disaster. And all have more room to run.

Chaos Theory gets a bum wrap, and I think the reason is bad branding. The most common explanation of the phenomenon is the classic “a butterfly flapping its wings in Thailand can cause a hurricane in the Gulf of Mexico”. Initial conditions, in other words, can have outsized effects in complex systems like weather patterns. Fair enough, but one usually associates Chaos Theory with bad outcomes like cyclones and stock market crashes.

What about when initial conditions push their way through to create unexpectedly good outcomes? That’s Chaos Theory as well, but no one talks about the mayhem created by a lovely day… Bad branding, that, or at least misleading packaging…

Turning to the current sunny spell in global risk markets, three examples of why Chaos Theory can work to investors’ benefit as well as harm.

Exhibit #1: European Bank Stocks:

  • In early August, the EURO STOXX Banks Index looked like it was about to implode. At 77, it had not been lower since the 1990s. We wrote about it, highlighting that several market bears thought the group was destined to go into chaotic (there’s that word again) free-fall.
  • But then the group found its footing as Eurozone long-term interest rates bottomed (more on that in a minute).
  • From August 15th to now, the index is up 20%. Disaster averted, at least for now.

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

November 4th, 2019… Back in the Real World…

November 4th, 2019… Back in the Real World… 

Trawling through the market headlines this morning, I’m struck by the number of comments about how much better the investment environment looks. There is less likelihood of a global recession, corporate earnings aren’t as bad as expected, and jobs are growing. I am unconvinced. I see worrying connections across the wires.  From my perspective – which admittedly has been from a train in the middle of nowhere – its feels we’ve reached the end of the something.  Time has been called on this particular era of irrational market exhuberance. 

My spidey senses are tingling due to manner in which events across markets, individual stocks, politics, geopolitics and gut-instinct are connected. I’m not predicting sudden or massive financial collapse – just a wake up and smell the coffee correction in Bonds (which feels underway), and selective deflation in over-optimistic sectors of the stock markets. As always, any reversal will set off wailing and despair, yet most of the critical lessons will be missed.  Fear not – we will get another chance to relearn them in a few years time! (Blain’s Market Mantra No 2: The Market has no memory.)

It’s just as well we aren’t heading for the deep prolonged global recession so many naysayers have been predicting thru 2019. Slowdown yes. Trade is going to remain a problem. But growth drivers were changing anyway. Tech will change the world’s trade roads. China’s furious growth spurt of the last 20 years is over. India might be growing, but it lacks the state momentum to drive global growth the way China did. And climate change will prove deeply significant in the future as consumers are persuaded to believe food miles and imports matter. 

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

What Will Stocks Do When “Consensual Hallucination” Ends?

What Will Stocks Do When “Consensual Hallucination” Ends?

The phenomenon works – until it doesn’t. What’s astonishing is how long it works.

This is the transcript from my podcast last SundayTHE WOLF STREET REPORT:

There is a phenomenon in stock markets, in bond markets, in housing markets, in cryptocurrency markets, and in other markets where people attempt to get rich. It’s when everyone is pulling in the same direction, energetically hyping everything, willfully swallowing any propaganda or outright falsehood, and not just nibbling on it, but swallowing it hook, line, and sinker, and strenuously avoiding exposure to any fundamental reality. For only one reason: to make more money.

People do it because it works. Trading algos are written to replicate it, because it works.

It works on the simple principle: If everyone believes stocks will go up, no matter what the current price or the current situation, or current fundamental data, then stocks will go up. They will go up because there is a lot of buying pressure because everyone believes that everyone believes that prices will go up, and so they bid up prices and chase stocks higher.

I call this phenomenon “consensual hallucination” – “consensual” because everyone eagerly smokes the same stuff in order to be able to get the same hallucinations everyone else is having, and to be part of the movement, because they believe that this movement will make them rich, and if enough people have this consensual hallucination, and if algos are programmed to trade with it, then it works wonderfully.

Until it doesn’t. The moment it doesn’t is when this hallucination begins to fade. And what happens then?

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

The Economic Crisis of 2008 Did Not End, It Has Been in Remission

The Economic Crisis of 2008 Did Not End, It Has Been in Remission

There have been many articles appearing in recent months suggesting that the economy might go into a recession within the next year. Many have focused on whether the Federal Reserve should cut interest rates to stop this from happening. There also has been a lot of speculation as to the effect that an economic downturn will have on the 2020 Presidential elections. I have not seen anyone talk about how today’s high stock prices will likely cause an economic collapse.

Trading Penny Stocks
Pexels / Pixabay

There have been numerous suggestions coming at things from the opposite direction, making the case that a recession will likely cause stock prices to fall hard. But I view that way of thinking about things as a holdover from the Buy-and-Hold Era. If stock price changes are caused by rational assessments of economic developments, it would make sense that economic bad times would cause stock prices to fall. But I believe that Shiller’s research showing that valuations affect long-term returns is legitimate research. If that is so, then high stock prices are caused by irrational exuberance and the inevitable disappearance of irrational exuberance causes trillions of dollars of consumer spending power to leave the economy, causing a contraction.

If that’s the way things work, the economic crisis of 2008 never came to an end. Employment numbers improved and businesses stopped going under. So, in a surface sense, economic conditions certainly improved. But the economic numbers improved only when CAPE levels returned to the dangerous levels that applied prior to the onset of the crisis. We pumped up stock prices to make people less fearful of spending but at the cost of insuring that a follow-up price crash would be coming in not too long a time.

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

THE WOLF STREET REPORT: What Will Stocks Do When “Consensual Hallucination” Ends

THE WOLF STREET REPORT: What Will Stocks Do When “Consensual Hallucination” Ends

What’s astonishing is how long it lasts (9 minutes).

Central Bank “Stimulus” is Really a Huge Redistribution Scheme

Central Bank “Stimulus” is Really a Huge Redistribution Scheme

When an economy turns from expansion to contraction there is an order of events. The first signs are an unexpected increase in inventories of unsold goods, both accompanied with and followed by business surveys indicating a general softening in demand. For monetarists, this is often confirmed by an inverting yield curve, which tells them that at the margin the short-term rates set by the central bank are becoming too high for business conditions.

That was the position for the US 10-year bond less the 2-year bond very briefly at the end of August, since when this measure, which is often taken to predict recessions, has turned mildly positive again. A generally negative sentiment, fueled mainly by the escalating tariff war between America and China, had earlier alerted investors to an international trade slowdown, expected to undermine the American economy in due course along with all the others. It stands to reason that backward-looking statistics have yet to reflect the global slowdown on the US economy, which is still buoyed up by consumer credit. The German economy, which is driven by production rather than consumption is perhaps a better guide and is already in recession.

After an initial hit, a small recovery in investor sentiment is understandable, with the negative outlook perhaps having got ahead of itself. But we must look beyond that. History shows the combination of a peak in the credit cycle and tariffs can be economically lethal. A brief return to a positive yield curve achieves little more than a sucker rally. It may be enough to put further monetary expansion on pause. But when that is over, and jobs begin to be threatened, there can be no doubt that central banks will ramp up the printing presses.

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

Geopolitical Signals Of Global Economic Crisis Abound

Geopolitical Signals Of Global Economic Crisis Abound

As I write this, news feeds are buzzing with questions and confusion over the October US/China trade talks. In September there was a massive propaganda campaign within the mainstream media to push the notion that a deal with China was imminent, which boosted markets otherwise on the verge of a plunge due to a hailstorm of bad financial news. This media campaign also indicated to me that there would be no deal in October – best case, there will be an announcement of “progress” and a temporary pause in tariffs, which will fall apart once again in a month’s time. Worst case scenario, the talks will falter before they ever really begin. Either way, the trade war will continue well into next year.

As I predicted in my article ‘The Ugly Truth About The Trade War’ in September:

“…Every couple of months the trade war deal hype is recycled and every couple of months the markets are hit with renewed disappointment. The latest trade talks are set for Octoberand if they happen at all, it is unlikely they will result in anything of significance. At most, they will be heralded as the “start of a great deal” and both sides will claim “progress was made”, and then, once again, nothing will happen and the conflict will accelerate. You would think people would have figured it out by now, but the investment world learns very slowly and functions solely on blind hope. At the very least, economic analysts are starting to realize that no deal is coming and that the situation is only going to get more tense. In fact, it is designed to get more tense…”

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

What’s Holding Up the Market?

What’s Holding Up the Market?

The Fed’s nearly free money for financiers policies in support of the Super-Rich do not exist in a vacuum–the disastrous consequences are already baked in.

What’s holding up the U.S. stock market? The facile answer is the Federal Reserve (“the Fed has our back,” “don’t fight the Fed,” etc.) but this doesn’t actually describe the mechanisms in play or the consequences of a market that levitates ever higher on the promise of more Fed money-for-nothing injected into the diseased veins of the financial system.

As Gordon T. Long and I discuss in our latest half-hour video program, What’s Holding the Market Up? (34 minutes), the primary prop under stock valuations are corporate buybacks, which total in the trillions of dollars since the 2008-09 Global Financial Meltdown and the Fed’s “rescue of the rich,” which continues to this day.

Rather than risk capital in productive investments, U.S. corporations have borrowed trillions of dollars and used the cash to buy back their own shares. The Fed’s suppression of interest rates has incentivized stock buybacks in several ways:

1. When it’s cheap to borrow billions, the biggest bang for the buck is to use the borrowed bucks to buy back shares, which creates an illusion of growth as per-share sales and earnings both rise as shares are withdrawn from the public market.

Let’s say a company has a million shares outstanding and earns a net profit of $1 million. The per-share net profit is thus $1 per share. If the company borrows money and buys back 500,000 shares of its own stock, the per-share net earnings double to $2 per share.Presto-magico, the company appears to be more profitable, and so its valuation based on its price-to-earnings ratio (P-E) adjusts higher, even though revenues and earnings have remained stagnant.

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

Getting Ready For The Stock Market Crash…

Getting Ready For The Stock Market Crash…

It is something of a tradition amongst market commentators to make bold stock market calls because they gain you notoriety if you get it right. Over here at AiC, I don’t particularly care what people think. I’m here to make money—that’s it. Therefore, I’ve refrained from big market calls—particularly as I have no real edge in guessing where an index of a few hundred companies will be trading at a certain date in the future. This doesn’t mean that I don’t recognize economic and share-price cycles and manage my portfolio accordingly. 

Over the past few years, I have been increasingly concerned about the massive structural imbalances in the world, along with excess debt and asinine monetary policy leading to an epic equity market bubble. Remember, your investment returns are directly correlated to the price you pay, not your analytical ability and I refuse to play in the greater-fool theory of finance. With that in mind, I have consistently managed my portfolio with a rather reduced overall exposure profile. Despite holding plenty of cash, I have certainly not been a perma-bear—those guys tend to complain a lot but make no money. Rather, I’ve continued to find opportunities to do smart things in esoteric sectors of the market, leading me to consistently trounce the US equity markets over the past few years. Yet, the whole time, I have been quick to sell companies that appreciated to 80% of fair value, I have been un-willing to take on risk and have passed on many perfectly good investments as I preferred to miss something than increase my market exposure.

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

Blain’s Morning Porridge – September 18th 2019

Blain’s Morning Porridge  – September 18th 2019 

“There is no equilibrium, we invest into unstable constantly changing markets. ”

Why so Calm? 

Even as the Fed meeting pondered raising rates by a smidge, it had to intervene to pump money into the short-term US financial system for the first time since the 2008 crisis.  That’s a clear sign of financial dislocation – but markets seem utterly unconcerned.  (The wires all quote issues such as tax payments and an imbalance between new funding and low redemptions to explain the sudden lack of cash, but none of my money market chums are convinced. They fear something else, a big No-See-Em is underway.)  

The last crisis started in money markets.  Add that to the ongoing WTF-happened questions about the Saudi bombings, and there seems to be a curious sense of false calm in markets.  No vol, no concern, and gold hardly moving.  I can’t help but think of ducks; serenely floating upstream while their legs are furiously paddling below the surface.  Something is happening, and we don’t know what it is.. 

Since I don’t know either, today is the day to take a pop at the Green Puritan movement:  

There is a great comment from Bill Gates in the FT – Fossil fuel divestment has “zero” climate impact, says Bill Gates.  Worth a read, and maybe get yourself thinking about what damage ESG/Green group-think nonsense is doing? Its distorting the global economy and voiding perfectly sane investment strategies. As regular readers will know, I absolutely believe Climate Change is The Big Threat – but I’m more and more convinced that much of the ESG / Green Investment bandwagon is utter bollchocks!  

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

What a Relief that the U.S. and Global Economies Are Booming

What a Relief that the U.S. and Global Economies Are Booming

Doing more of what’s failed for ten years will finally fail spectacularly..It was a huge relief to see the charts of the Baltic Dry Index (BDI) and the U.S. retail sector ETF (RTH): both have soared to the moon, signaling that both the U.S. and global economies are booming: the BDI is widely regarded as a proxy for global shipping, which is a proxy for global trade and economic activity.

Amazon is 18% of the RTH basket of retail stocks, but the rest are conventional bricks and mortar chains with online sales: Walmart, Home Depot, Lowes, Costco, CVS, etc.The American consumer must be ready, willing and able to spend freely since the retail sector is hitting new heights.

OK, now let’s change channels from soaring market valuations to the real-world economy. What planet are buyers of BDI and RTH on? Maybe the shipping and retail sectors are incredibly robust on Sirius B, but here on Planet Earth the global economy is weakening, trade is stagnating, shipping is in recession, and retail sales and profits are stagnating.

Lumping all American households in one basket gives a false signal of financial health. If we look at averages, debt levels are reasonable, incomes are notching higher and so expectations of rising household debt and spending are reasonable.

But this radically distorts reality: only the top 10% are creditworthy and have rising incomes; the bottom 90% are over-indebted, poor credit risks and their income is stagnant and/or precarious.

The top 10% of households–a mere 12 million households–are also precarious, as much of their wealth and income is based on insanely overvalued asset bubbles in stocks, bonds and real estate. The wealth effect fuels their free-spending ways (recall that the top 10% collect roughly half of all income and account for almost half of all consumer spending).

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

US Equity Futures Trade Near All Time High After ECB Goes All In

US Equity Futures Trade Near All Time High After ECB Goes All In

If it was Powell’s intention to have the S&P trade at an all time when he cuts rates by another 25bps next Wednesday, he achieved it.

S&P futures rose alongside Asian and European stocks as shares globally headed for a third weekly gain and a six week high as markets cheered signs of progress in US-China trade talks and the ECB’s just launched open-ended QE. Treasury yields climbed, with the US 10Y rising as high as 1.81%; the dollar slipped while the yuan rose and pound soared on easing no-deal Brexit fears.

 The resurgent risk appetite was largely the result of renewed trade war optimism after President Trump said on Thursday he was potentially open to an interim trade deal with China, although he stressed an “easy” agreement would not be possible.

Following a muted Asian session where many markets in the region were closed, we saw a groggy start in European trading after Bloomberg reported that most core European nations did not want to restart the ECB’s money printing program, the main bourses eventually traded well in the green, as basic resources and auto sectors outperformed, adding to what was already set to be a fourth straight week of gains.

“We have quite an interesting reaction to the ECB meeting with the sense of the pushback from the core countries, and that essentially that the ECB has now thrown its last cards in,” said John Hardy, head of FX strategy at Saxo bank. “It looks like we are also getting to some pretty interesting levels for yields. If the consolidation continues, at some point you have to question whether the easing (from the central banks) is actually there.”

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

Olduvai IV: Courage
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Olduvai II: Exodus
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