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Three Scenarios for the Global Economy
Three Scenarios for the Global Economy
The current upswing in growth and equity markets has been going strong since the summer of 2016. Despite a brief hiccup after the Brexit vote, the acceleration endured not just Donald Trump’s election as US president, but also the heightening policy uncertainty and geopolitical chaos that he has generated. In response to this apparent resilience, the International Monetary Fund, which in recent years had characterized global growth as the “new mediocre,” recently upgraded its World Economic Outlook.
Will the recent growth spurt continue over the next few years? Or is the world experiencing a temporary cyclical upswing that will soon be subdued by new tail risks, like those that have triggered other slowdowns in recent years? It is enough to recall the summer of 2015 and early 2016, when investor fears of a Chinese hard landing, an excessively fast exit from zero policy rates by the US Federal Reserve, a stall in US GDP growth, and low oil prices conspired to undercut growth.
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“Markets Have No Purpose Any More” Mark Spitznagel Warns “Biggest Collapse In History” Is Inevitable
“Markets Have No Purpose Any More” Mark Spitznagel Warns “Biggest Collapse In History” Is Inevitable
After making over $1 billion in one day last August, and warning that “the markets are overvalued to the tune of 50%,” Mark Spitznagel knows a thing or two about managing tail risk.
The outspoken practitioner of Austrian economic philosophy tells The FT, “Markets don’t have a purpose any more – they just reflect whatever central planners want them to,” confirming his fund-management partner, Nassim Taleb’s perspective that “being protected from fragility in the financial system is a necessity rather than an option.”
“This is the greatest monetary experiment in history. Why wouldn’t it lead to the biggest collapse? My strategy doesn’t require that I’m right about the likelihood of that scenario. Logic dictates to me that it’s inevitable.”
While some money managers are critical of a strategy that “sells fear,” The FT reports there are others who share Mr Spitznagel’s views that another reckoning is imminent.
Among those who share his worldview is former US presidential candidate, Senator Rand Paul, and his father Ron Paul.The elder Paul wrote the introduction to Mr Spitznagel’s 2013 book, The Dao of Capital. “As one of the leading voices in the country on economic policy, Mark has been a key friend and ally, and I’m thankful for his always-ready advice,” Senator Paul told the FT. But most investors will be praying he is wrong.
Universa started in January 2007 after its success during the financial crisis, when it reportedly gained about 100 per cent. The firm now protects about $6bn of investor money, backed by about $200m-$300m of capital (the firm declined to say exactly how much because of regulatory issues). Fees are paid on the nominal amount insured against calamity, rather than the capital invested.
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Bank of America Explains How Central Banks Rigged And Manipulated The Market
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”
Even The Big Banks Now Admit It: “This Is How The Fed’s ‘Massive Manipulation’ Broke The Market”
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 tailsA 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.
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Waiting to be SKEWered?
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.
“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 .
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It Starts: Broad Retaliation Against China in Currency War
It Starts: Broad Retaliation Against China in Currency War
The biggest global “tail risk” is China’s deteriorating economy and an emerging market debt crisis, according to BofA Merrill Lynch’s monthly poll of fund managers. And 48% of them were expecting the Fed to raise rates, despite languid growth and low inflation expectations.
Hot money is already fleeing emerging markets. Higher rates in the US will drain more capital out of countries that need it the most. It will pressure emerging market currencies and further increase the likelihood of a debt crisis in countries whose governments, banks, and corporations borrow in a currency other than their own.
This scenario would be bad enough for the emerging economies. But now China has devalued the yuan to stimulate its exports and thus its economy at the expense of others. And one thing has become clear today: these struggling economies that compete with China are going to protect their exports against Chinese encroachment.
Hence a currency war.
It didn’t help that oil plunged nearly 5% to a new 6-year low, with WTI at $40.55 a barrel, after the EIA’s report of an “unexpected” crude oil inventory buildup in the US,now, during driving season when inventories are supposed to decline!
And copper dropped to $5,000 per ton for the first time since the Financial Crisis, down 20% so far this year. Copper is the ultimate industrial metal. China, which accounts for 45% of global copper consumption, is the bull’s eye of all the fretting about demand. 5,000 is the line in the sand. A big scary number. Other metals fared similarly.
Copper powerhouse Glencore, whose shares plunged nearly 10% today, blamed“aggressive and synchronized large-scale short selling” for the copper debacle, instead of fundamentals. But fundamentals have been whacking copper for years, and shorts have simply been joyriding the trend.
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