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So who’s holding the hot potato of systemic risk now? Everyone.

One of the greatest con jobs of the past 9 years is the status quo’s equivalence of risk and volatility: risk = volatility: so if volatility is low, then risk is low. Wrong: volatility once reflected specific short-term aspects of risk, but measures of volatility such as the VIX have been hijacked to generate the illusion that risk is low.

But even an unmanipulated VIX doesn’t reflect the true measure of systemic risk, a topic Gordon Long and I discuss in our latest program, The Game of Risk Transfer.

The financial industry has reaped enormous “guaranteed” gains by betting against volatility. As volatility steadily declined over the past two years, billions of dollars were reaped by constantly betting that volatility would continue declining.

Other “guaranteed” trades have been corporate buybacks funded by cheap credit and passive index funds Central bank policies–near-zero interest rates and “we’ve got your back” asset purchases that made buying every dip a no-brainer trading strategy–have changed as banks attempt to dial back their stimulus and near-zero rates, and as a result volatility cannot continue declining in a nice straight line heading toward zero.

Higher interest rates have introduced a measure of uncertainty in another “guaranteed gains” trade–betting that interest rates would continue declining. All of these trades were “guaranteed” by central bank stimulus and intervention. In effect, price discovery has been reduced to betting that central banks will continue their current policies–‘don’t fight the Fed.”

Now that central banks have to change course, certainty has morphed into uncertainty, and risk is rising, regardless of what the VIX index does on a daily basis.

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

Weekly Commentary: Anbang and China’s Mortgage Bubble

February 24, 2018

Weekly Commentary: Anbang and China’s Mortgage Bubble

The Shanghai Composite traded as high as 3,587 intraday on Monday, January 29th, a more than two-year high. This followed the S&P500’s all-time closing high (2,873) on the previous Friday. On February 9th, the Shanghai Composite traded as low as 3,063, a 14.6% decline from trading highs just nine sessions earlier. In U.S. trading on February 9th, the S&P500 posted an intraday low of 2,533, a 10.7% drop from January 26th highs. Based on Friday’s closing prices, the Shanghai Composite had recovered 43% of recent declines and the S&P500 70%.

Global equities markets demonstrated notably strong correlations during the recent selloff. Few markets, however, tracked U.S. trading closer than Chinese shares. From the Bubble analysis perspective, tight market correlations provide confirmation of the global Bubble thesis. It’s also not surprising that Chinese markets were keenly sensitive to the abrupt drop in U.S. stocks. The U.S. and China are dual linchpins to increasingly vulnerable global Bubble Dynamics. Moreover, intensifying fragilities in Chinese Credit – and finance more generally – ensure China is keenly sensitive to any indication of a faltering U.S. Bubble.

February 21 – Bloomberg: “China stopped updating its homegrown version of the VIX Index, taking another step to discourage speculation in equity-linked options after authorities tightened trading restrictions last week. State-run China Securities Index Co. didn’t publish a value for the SSE 50 ETF Volatility Index on its website Thursday. An employee who answered CSI’s inquiry line said the company stopped updating the measure to work on an upgrade. The move was designed to curb activity in the options market, said people familiar with the matter… It’s unclear when the index will resume.”

Derivatives rule the world. Of course, Chinese authorities had few issues with booming options trading when markets were posting gains. Here in the U.S., regulators will supposedly now keep a more watchful eye on VIX-related products.

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

Misconduct, Manipulation, Or Malfeasance? – US Regulators Begin Probe Of VIX Funds

February 23, 2018

Misconduct, Manipulation, Or Malfeasance? – US Regulators Begin Probe Of VIX Funds

Ten days after the reality of “rampant manipulation” in VIX was exposed yet again, perhaps because this time the market went down, US regulators are reportedly escalating their investigations into whether any wrongdoing occurred within VIX ETPs.

Following previous reports that The Financial Industry Regulatory Authority (FINRA) was scrutinizing whether traders placed bets on S&P 500 options in order to influence prices for VIX futures, and a whistleblower’s detailed explanation of how easy it is to spoof VIX’s tail to wag the market’s dog; Bloomberg reports that The Securities and Exchange Commission and the Commodity Futures Trading Commission have been conducting a broad review of trading since Feb. 5, when volatility spiked and investors lost billions of dollars, several people familiar with the matter said.

As a reminder, according to his letter, the whistleblower blames this VIX manipulation as the driver of last week’s volatility complex collapse:

“We contend that the liquidation of the VIX ETPs last week was not due solely to flaws in the design of these products, but instead was driven largely by a rampant manipulation of the VIX index,”

And, Bloomberg notes that after the losses, SEC officials reached out to Credit Suisse, a person with direct knowledge of the conversations said. Neither Credit Suisse nor ProShares have been accused of any wrongdoing. The regulators’ examinations are at an early stage and won’t necessarily lead to sanctions or new rules.

As another reminder, in May of last year we academic confirmation of the rigged nature the US equity market’s volatility complex, when a scientific study found “systemic VIX auction settlement manipulation.”

Two University of Texas at Austin finance professors found “large transient deviations in VIX prices” around the morning auction,“consistent with market manipulation.”

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

Doug Casey on Why Gold Could Go “Hyperbolic”

February 18, 2018

Doug Casey on Why Gold Could Go “Hyperbolic”

Justin’s note: Volatility has come storming back.

Just look at the CBOE Volatility Index (VIX), which measures how volatile investors expect the market to be over the next 30 days.

It’s up 89% since the start of the year. Last week, it hit the highest level since 2016.

Investors aren’t used to this. After all, last year was the least volatile year ever for U.S. stocks. That lulled many investors to sleep. It led them to take risks they would normally never take.

Now, those same people are wondering what to do. They aren’t sure if this is just a run-of-the-mill pullback…or the start of something much worse.

To help answer this question, I called up Doug Casey. I knew he would have an interesting take on this matter…

Justin: Doug, U.S. stocks took a beating recently. Where do you see things going from here?

Doug: Well, I hate to make a firm prediction of timing. The fact that things have held together, against all odds, since 2009, has underlined the old saying about just because something is inevitable doesn’t mean it’s imminent. Predictions of disaster, and all these things unwinding, have been wrong over the last half a decade. And the smart bet is always for muddling through, in the direction of progress. But it seems that we’ve finally reached a peak, a major turning point.

Justin: So, what have you done to protect your wealth?

Doug: At the beginning of the year, I took all my original capital out of cryptos, plus 150% profits. I also took profits on crypto stocks. I got in late, and out a bit late. But it was a happy experience.

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

Its Different This Time

February 13, 2018

IT’S DIFFERENT THIS TIME

Remember all those bullish studies market pundits were passing around in early January? Do you recall the parroting about “how goes January, the rest of the year follows?” It’s easy to forget, but many market strategists were falling all over themselves bullish just a couple of weeks ago (see Parabolic Moves Don’t End by Going Sideways).

Now, some 300 handles lower in the S&P 500, many of these same forecasters are talking about the extensive technical damage and advocating caution.

I am not here to pick on any pundits – I subscribe to the Yogi Berra school of forecasting – it’s tough to make predictions, especially about the future. But I take issue with one major aspect of the current investing environment. Most market players are using the playbook from the last few decades in their forecasts. They are mistakenly thinking the rules of the game haven’t changed.

Their predictions from last month are still ringing in my ears; low volatility January rises have been followed with stock market strength, so there’s no way anyone could predict that stocks would swoon 10% in a week and a half for no real reason at all. Yet that’s exactly what they did.

What’s different today?

I find myself hesitant to type out these next few lines. As I struggle to find the words to communicate my thoughts, I worry they will be misconstrued. Yet I don’t know how else to say it – except to blurt it out. So at the risk of being labeled a fool, here it goes – it’s different this time.

Yup. I said it. I committed the cardinal sin of investing. I uttered the most expensive four words in the history of markets.

Before you call me a Luddite and hit delete on your email or click the home button on your browser, hear me out.

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

Whistleblower Exposes “Rampant Manipulation Of VIX”

February 13, 2018

Whistleblower Exposes “Rampant Manipulation Of VIX”

We first exposed the “conspiracy fact” that VIX manipulation runs the entire market back in 2015 as the ubiquitous VIX-crushing algo-runs coincided with a non-stop shorting of VIX futures by a seemingly bottomless-pocketed player in the market… which happened to coincide with the arrival of Simon Potter as the head of The New York Fed’s trading desk…

Probably just a coincidence, right?

Then, in May of last year we academic confirmation of the rigged nature the US equity market’s volatility complex, when a scientific study found “systemic VIX auction settlement manipulation.”

Two University of Texas at Austin finance professors found “large transient deviations in VIX prices” around the morning auction,“consistent with market manipulation.”

Griffin and Shams calculate that “the size of VIX futures with open interest at settlement is on average 5.7 times the size SPX options traded at settlement, and it is 7.3 times for VIX options that are in-the-money at settlement.”

So if you are a trader who owns a lot of the market in VIX futures, you could push around a large dollar value of futures by trading a small dollar value in options. This is particularly true because the S&P option volume is divided among many strikes, and the illiquid deep out-of-the-money S&P 500 options have a big influence on the VIX: You can move the price of those options a lot with relatively small trades, and those price changes have a disproportionate effect on the VIX.

While this was immediately played down by CBOE, and the subject quickly disappeared from the headlines – because VIX was dropping incessantly and stocks were going up, up, up – until VIX flash-crashed rather awkwardly into the morning auction settlement in mid-December, bring the chatter of manipulation back to life…

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

Asia Crashes, Europe Slides, US Rebounds But Yields Resume Ominous Rise

February 9, 2018

Asia Crashes, Europe Slides, US Rebounds But Yields Resume Ominous Rise

“$5 trillion was wiped out from global stocks this week.”

After yesterday’s violent last hour plunge in US stocks, which also sent the VIX surging back to the mid-30s, the overnight session was somewhat muted, with European stocks falling further on Friday morning, but at a slower pace than the sharp sell offs in Asia and New York.

Europe’s 600 Index, down -1% as of this moment and back to session lows after a modest rebound earlier, was set for its worst week since 2016 as banks and financial-services stocks led most industry sectors lower. The drop, however, was relatively modest and followed a sheer plunge in Asia, where stocks tumbled across the region, wiping out most of their gains from the previous two sessions. The Shanghai Composite recouped some gains to close down “only” 4.1% – in what has now been a two-week selloff without the Chinese National Team making an appearance and buying stocks – the Hang Seng was down 3.1% with losses across all sectors. Tokyo’s Topix closed down 1.9 per cent.

The renewed slide followed Thursday’s drop in the S&P 500, which pushed the index to a 10 per cent decline from its January high – officially, a correction – stirred renewed concerns over the future of the long bull market that followed the 2008 financial crisis, and whether the selloff that was catalyzed by systematic quant funds would spill over to retail investors. And, as we highlighted overnight, that’s precisely what happened following the single biggest weekly outflow from equity funds on record.

And while we look forward to today’s session to see if the retail liquidation continues, S&P 500 futures little changed, after earlier rising as much as 0.9%, while Dow contracts reverse advance to slide 0.3%, even as Congress passed a delayed budget deal, after the government was briefly shut down.

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

ECB “In Touch With Market Participants” Over Market Crash; White House “Concerned”

February 6, 2018

ECB “In Touch With Market Participants” Over Market Crash; White House “Concerned”

According to Bloomberg, ECB staff “have been in contact with market participants over the current selloff in stocks to gauge if there is any risk to financial stability.”

As Bloomberg adds, the latest communications are part of the ECB’s regular interactions with financial institutions and the central bank isn’t yet overly concerned by the global equity rout. The underlying assumption is that “it’s simply a correction because valuations may have become overstretched.”

Of course, if the VIX explosion continues, the ECB will be far more worried.

As a result, staff are “watching for signs the downturn might enter a self-reinforcing spiral or spread from equities to bonds.”

One worry is that the selloff was triggered by strong U.S. economic data that led to expectations of faster interest-rate increases, a symptom that financial markets are still relying on monetary support, one of the people said.

Meanwhile, across the Atlatnic, White House Spokeswoman Mercedes Schlapp said on Fox that “obviously we’re concerned about setbacks that happened in the stock market” however, she was quick to hedge that “with that being said, we’re looking at the long term strong economic fundamentals.”

Seeking to distance the White House from Trump’s relentless boasting about every uptick and sudden silence now that stocks have crashed, she instead decided to sound like your typical, worthless sellside analyst, and said that people should focus on “improving fundamentals” instead:

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

“Euphoria Turns To Terror”: Dow To Open 750 Points Lower As VIX Eruption Accelerates

February 6, 2018

“Euphoria Turns To Terror”: Dow To Open 750 Points Lower As VIX Eruption Accelerates

Update: VIX SURGES ABOVE 50 FOR FIRST TIME SINCE AUGUST 2015

* * *

It’s a bloodbath, with the Dow set to open 750 points lower “thanks” to the +377 fair value…

… but it could have been much worse, with S&P futures actually trading toward the highs of the overnight session after tumbling an additional 3.5% from Monday’s close, as risk assets around the world crashed then modestly rebounded even as traders remain on edge over what the implosion in the vol complex means for everyone.

World stock markets nosedived for a fourth day running on Tuesday, having seen $4 trillion wiped off from what just eight days ago had been record high values.

“Playtime is officially over, kids,” analysts at Rabobank said. “Rising volatility painfully reminds some investors that one-way bets don’t exist.”

“Since last autumn, investors had been betting on the ‘Goldilocks’ economy – solid economic expansion, improving corporate earnings and stable inflation. But the tide seems to have changed,” said Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities.

Meanwhile, “The euphoria has turned to terror.”

There was a modest bound in European bourses, which opened sharply lower in the wake of the largest ever point loss in Dow Jones Industrial Average history. London’s FTSE 100 lost 3.5% at the opening bell, with every constituent falling and financial stocks hit hardest. The Europe-wide Stoxx 600 fell 2.2 %, while Frankfurt’s Xetra Dax 30 fell 3.5%, before recouping some losses. As of this writing, core European cash equity markets trade around -1.5%/-2.0%.

In fact, as Bloomberg notes, the Stoxx Europe 600 Index at one point today slumped the most since Brexit, with every industry sector falling as much as 2 percent.

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

The Leveraged Economy BLOWS UP In 2018

January 5, 2018

The Leveraged Economy BLOWS UP In 2018

Enjoy the good times while you can because when the economy BLOWS UP this next time, there is no plan B. Sure, we could see massive monetary printing by Central Banks to continue the madness a bit longer after the market crashes, but this won’t be a long-term solution. Rather, the U.S. and global economies will contract to a level we have never experienced before. We are most certainly in unchartered territory.

Before I get into my analysis and the reasons we are heading towards the Seneca Cliff, I wanted to share the following information. I haven’t posted much material over the past week because I decided to spend a bit of quality time with family. Furthermore, a good friend of mine past away which put me in a state of reflection. This close friend was also very knowledgeable about our current economic predicament and was a big believer in owning gold and silver. So, it was a quite a shame to lose someone close by who I could chat with about these issues.

While some of my family members know about my work, I don’t really discuss it with them. If they ever have a question, I will try to answer it, but I found out years ago that it was a waste of time to try and impose my knowledge upon them. Which is the very reason I started my SRSrocco Report website… LOL. So, now I have a venue to get my analysis out to the public. I don’t care about reaching everyone, but rather to provide important information to those who are OPEN to it.

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

2017 Year In Review

December 27, 2017

Tortoon/Shutterstock

2017 Year In Review

Markets fiddle while Rome burns

Every year, friend-of-the-site David Collum writes a detailed “Year in Review” synopsis full of keen perspective and plenty of wit. This year’s is no exception. As with past years, he has graciously selected PeakProsperity.com as the site where it will be published in full. It’s quite longer than our usual posts, but worth the time to read in full. A downloadable pdf of the full article is available here, for those who prefer to do their power-reading offline. — cheers, Adam

Introduction

“He is funnier than you are.”

~David Einhorn, Greenlight Capital, on Dave Barry’s Year in Review

Every December, I write a survey trying to capture the year’s prevailing themes. I appear to have stiff competition—the likes of Dave Barry on one extreme¹ and on the other, Pornhub’s marvelous annual climax that probes deeply personal preferences in the world’s favorite pastime.² (I know when I’m licked.) My efforts began as a few paragraphs discussing the markets on Doug Noland’s bear chat board and monotonically expanded to a tome covering the orb we call Earth. It posts at Peak Prosperity, reposts at ZeroHedge, and then fans out from there. Bearishness and right-leaning libertarianism shine through as I spelunk the Internet for human folly to couch in snarky prose while trying to avoid the “expensive laugh” (too much setup).³ I rely on quotes to let others do the intellectual heavy lifting.

“Consider adding more of your own thinking and judgment to the mix . . . most folks are familiar with general facts but are unable to process them into a coherent and actionable framework.”

~Tony Deden, founder of Edelweiss Holdings, on his second read through my 2016 Year in Review

“Just the facts, ma’am.”

~Joe Friday

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

Weekly Commentary: China Initiating a Global Bear Market?

December 2, 2017

Weekly Commentary: China Initiating a Global Bear Market?

Chair Yellen is widely lauded for her accomplishments at the Federal Reserve. For the most part, her four-year term at the helm of the Fed boils down to four (likely soon to be five) little rate hikes over 24 months. Most lavishing praise upon Janet Yellen believe she calibrated “tightenings” adeptly and successfully. Yet financial conditions have obviously remained much too loose for far too long. This predicament was conspicuous in the markets this week. A test of a North Korean ICBM that could reach the entire U.S. modestly pressured equities for about five minutes – then back to the races.

Bubble Dynamics are in full force. The Dow gained 674 points this week. The Banks were up 5.8%, the Broker/Dealers gained 4.5% and the Transports jumped 5.9%. The Semiconductors were hit 5.6%. Bitcoin traded as high (US spot) as $11,434 and as low as $9,009 in wild Wednesday trading. Curiously, the VIX traded up 15% to 11.43.

It used to be that markets would fret the Fed falling “behind the curve,” fearing central bankers would be compelled to employ more aggressive tightening measures. Not these days. Any fear of central bank-imposed tightening is long gone. There is little fear of anything.

I recall writing similar comments back with the Bush tax cuts: “I’m as much for lower taxes as anyone. Yet I question the end results when tax cuts exacerbate late-stage Bubble excess.” And I seriously question the merits of aggressively slashing corporate tax rates when the federal government is $20 TN in debt. One of these days the bond market is going to wake up and impose some much need fiscal discipline. In a different era, the Treasury market would be forcing some realism upon Washington politicians (and central bankers).

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

Get Ready To Party Like It’s 2008

October 20, 2017

Get Ready To Party Like It’s 2008

Apparently Treasury Secretary, ex-Goldman Sachs banker Steven Mnuchin, has threatened Congress with stock crash if Congress doesn’t pass a tax reform Bill. His reason is that the stock market surge since the election was based on the hopes of a big tax cut. This reminds me of 2008, when then-Treasury Secretary, ex-Goldman Sachs CEO, Henry Paulson, and Fed Chairman, Ben Bernanke, paraded in front of Congress and threatened a complete systemic collapse if Congress didn’t authorize an $800 billion bailout of the biggest banks.

The U.S. financial system is experiencing an asset “bubble” that is unprecedented in history. This is a bubble that has been fueled by an unprecedented amount of Central Bank money printing and credit creation. As you are well aware, the Fed printed more than $4 trillion dollars of currency that was used to buy Treasury bonds and mortgage securities. But it has also enabled an unprecedented amount of credit creation. This credit availability has further fueled the rampant inflation in asset prices – specifically stocks, bonds and housing, the price of which now exceeds the levels seen in 2008 right before the great financial crisis.

However, you might not be aware that Central Banks outside of the U.S. continue printing money that is being used to buy stocks and risky bonds. The Bank of Japan now owns more than 75% of that nation’s stock ETFs. The Swiss National Bank holds over $80 billion worth of U.S. stocks, $17 billion of which were purchased in 2017. The European Central Bank, in addition to buying member country sovereign-issued debt is now buying corporate bonds, some of which are non-investment grade.

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

Eric Peters On Tipping Points: “It All Worked Incredibly Well, Until It Blew Up”

October 1, 2017

Eric Peters On Tipping Points: “It All Worked Incredibly Well, Until It Blew Up”

Two years ago, long after we first suggested that the transformation of VIX from a measure of implied market volatility to a reflexive instrument that can be traded – and thus influence the underlying assets whose volatility it was supposed to measure – allowed the VIX to serve as the “fulcrum security” for broad asset manipulation, first the FT, then the WSJ confirmed what we said, namely that pervasive market manipulation was not only possible, but took place on a regular basis, courtesy of the VIX (see “Conspiracy “Fact” – VIX Manipulation Runs The Entire Market” and “Another Rigged Market: Scientific Study Finds Systemic VIX Auction Manipulation“).

Today, one of our favorite hedge fund commentators, One River Asset Mgmt CIO Eric Peters, discussed various market “tipping points” in his latest weekly notes, which emphasized why volatility is no longer a “measurement”, as much as a “target.” More his latest Sunday anecdote:

“When a measure becomes a target, it ceases to be a good measure,” said the Englishman, stepping outside of himself.

“That’s Goodhart’s Law.” Charles Goodhart observed that central banks measured money supply, and found certain M1 growth rates to be optimal. But once they targeted that optimal range, M1 lost its value as a measure.

Market and economic actors adjusted their behavior to game the M1 system. So central bankers shifted to M2, then M3, and M4.

“Investing is obviously not a science, but if it were, we would say that you can’t act on something and observe it at the same time.” French colonialists discovered this in rat infested Hanoi, when they offered a bounty for killing rodents. To receive the reward, the Vietnamese were required to produce severed tails. Soon thereafter, tail-less rats scurried throughout the city. The bounty hunters removed their tails and released them to the filthy sewers to breed. Boosting their bounty.

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

Former BIS Chief Economist Warns “More Dangers Now Than In 2007”

September 13, 2017

Former BIS Chief Economist Warns “More Dangers Now Than In 2007”

Having warned in the past that “the system is dangerously unacnhored,” former chief economist of the Bank for International Settlements, William White, told Bloomberg TV overnight that the current situation “looks very similar to 2008,” adding that OECD sees “more dangers” today than in 2007.

The chairman of Economic and Development Review Committee at OECD, warned that prices are very high – in particular for high yield assets, VIX is very low, house prices are rising strongly, equity markets rising, and all these are a source of concern.

Additionally, White noted:

India’s debt problems go back a long way, and there are significant governance issues, including at state-owned banks.
China’s debt situation isn’t a lot different to India’s, but the acceleration of loans and credit growth in China is very fast
It’s not just the debt level in China that is worrisome, but the speed that it’s accumulating; maybe some of these loans won’t be repaid or serviced.
We don’t have a liquidity problem that central banks can solve – if we have too much debt, we have a debt resolution or insolvency problem and only governments can address problems like that.
World needs more fiscal expansion, structural reforms, and also have to look closely at debt write-off some of it and maybe recapitalize financial institutions.
We have got the mix of income that goes to capital versus labor wrong in many countries, and we need to look at that.
Central bank tightening is inevitable, but have to be careful.

“it is every man for himself. And we do not know what the long-term consequences of this will be,”

and it appears to be getting worse.

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