Tuesday, September 1, 2015

The Reality Skeptics Have Identified Another Buying Opportunity

The main drawback to being a reality skeptic is you never know when you're about to be clubbed like a baby seal. Again. 

A triple hurricane is bearing down on the markets and the straw hut CasinoConomy. The reality skeptics have identified a fantastic buying opportunity...




The peak in ALL risk assets has ALREADY occurred over the past weeks, months and years. An event that passed totally unnoticed by stoned zombies. The only risk asset yet to peak are machine guns which always peak last. (As always, invest at your own risk). 

The initial slow stair-step lower was to keep the sheeple from panicking. The first sign of acceleration came with the Yuan devaluation, August 11th. Momentum is building to the downside with each passing moment. All risk assets had a dead cat bounce last week, meaning that everything is in synch to the downside...

Aside from the straw hut economy - albeit the most important factor - the gathering storms weighing on stocks right now are:

1. Extreme divergences in breadth

"Buy the fucking dip"



Which equates to this asinine Skynet chicanery:




2. Declining Social Mood aka. Risk aversion...
Rydex asset allocation bull:bear



3. Yen Carry Trade Unwind
The Yuan devaluation hammered commodity currencies, forcing the Yen carry trade to reverse for the first time since Lehman. And before that the Asian currency crisis. 

Yen and S&P are tracking 1:1:



The third Aussie / Yen Carry Unwind in 15 years: 
There hasn't been a reversal like this since Lehman. The Yen is strengthening against all commodity currencies...



4. Volatility short squeeze
Last week's spike in the spot VIX inverted the futures curve. Now those who shorted volatility are getting squeezed harder with each passing day as front month futures converge with the higher spot VIX...

Black line is the spot VIX 10 DMA, Red line is the ratio of spot/futures i.e. the spike that caused the curve to invert...




5. Totally Ignored Flash Crash last week aka. "buying opportunity"

Nasdaq 100 -15% in 1 minute




6. Decoupling from reality

The greatest risk faced, is that the fantasy narrative of the U.S. being "decoupled" from Emerging Markets, is a fantasy narrative, and there's no one around to warn the sheeple...


Dow with Shanghai Comp:



Monday, August 31, 2015

Too Many Stunned Dunces For Any Of This To Survive

Every day, all day, casino junkies cry for more  "stimulus". If only we could lower interest rates to -20% and pump even more trillions into the casino, the problem would be solved. The Commies must do more to save capitalism. Print as much money as necessary to preserve our fake wealth.

Still other stunned dunces, decoupled from reality, decry this non-stop "Keynesian" intervention: 35 years of papering over trade deficits using ever cheaper money and ever more debt. Never once admitting that the trade deficit is any part of the underlying problem. Always looking at the symptom versus the cause. Too in love with Walmart to admit that there's no such thing as a "jobless consumer". Why can't all of the wage slaves just be happy at $1/hour aka. the "free market" wage? We all know that wouldn't affect corporate revenue much - already tanking dollar for dollar with the middle class, while boy-men wonder why.

Holy fuck. Keynes never predicted so many retards in one place at one time. 

As indicated recently, Globalization is a market that will NEVER EVER clear, even the U.N. admits as much:

The U.N. Conference on Trade and Development [2013]:
http://unctad.org/en/pages/PublicationWebflyer.aspx?publicationid=636
"Five years after the onset of the global financial crisis the world economy remains in a state of disarray. Prior to the Great Recession, buoyant consumer demand in the developed countries seemed[?] to justify the adoption of an export-oriented growth model by many developing and transition economies. But that expansion was built on unsustainable global demand and financing patterns. Thus, reverting to pre-crisis growth strategies cannot be an option."




Versus this quaint idea:




Even a barter economy would be better than the current clusterfuck. Which is good, because that's where we're headed.

Today's stunned dunces are all going to find out at the exact same time, that they're just stunned dunces. 





The Liecovery Is Over. Before It Started.

To best get a handle on this pseudo-economy, I went back to capacity utilization versus interest rates. As we see below, and as one would expect, interest rates always peak with capacity utilization (inflationary pressures):

Extreme deflation visualized aka. 35 years of trade deficits:

Black line is capacity utilization imported from FRED. Red line is 1 year treasury yields:




"Splat" visualized:
The Yuan devaluation just massively increased deflationary pressures aka. foreign competition, which is why they did it...

TIP:TENZ Deflation expectations with short-term interest rates:




"We're decoupled. From reality"




"Don't Worry. Be Fat And Happy"


"Don't worry, this is NOT Global Warming."

"The Dow is a fantastic investment."

"Your team will win the election and fix everything."

"Everyone else will lose their job, except you." 

"Monsanto is not turning you into a toxic waste dump"

"You could have been a climate scientist despite having zero knowledge of the field. Or any other, for that matter"


"And this will all implode decades from now, on the children..."





"It's just weather"
2014






"Above all. Maintain status quo"

"Just keep buying bitchez, we're almost there"



Globalization: History's Largest Mass Delusion

"How will I know this is all ending?"

Optical refraction?

Race to the bottom visualized:




"Once the economy had been sold and deposited in the Caymans, it all collapsed with extreme dislocation to the vast majority's total surprise. They blamed it on subprime, and called borrowing too much money to sustain an unsustainable lifestyle, a 'one-time' event. Undaunted, Harvard-educated Bernankenstein lowered interest rates to 0% to resuscitate borrowing and then printed trillions to re-inflate their fake wealth. 

It did absolutely nothing for the economy - other than to give more time for full monetization. But it gave everyone the illusion of being successful, which is all they wanted in the first place. Jobless consumers headed straight back to Walmart to buy the other junk they didn't need. 

When it all collapsed again, in broad daylight, the sheeple were shocked and enraged. No one told them 'this' was all ending, again. Actually, many people told them, just not the ones they trusted for fair and balanced reporting."

"How will I know?" 
I will go out on a limb and say you won't...





That was the whole point of post-2008. To fix the problem. At the source.




A 35 Year Trade Deficit Is Not A *Free* Market

The cost of a 35 year trade deficit is called "sovereign banktruptcy" aka. Federal debt compounding at 9% annually. China's acquired wealth is not measured in reserve dollars, it's measured in factories. 

If today's "capitalists" actually believed in capitalism, this shit show would have ended in 2008. No bailout. No Wall Street. Barter economy. But instead, they inform us constantly about the *free* market. Such as the one that is propping up stocks right now compliments of trillions in printed money. Or the 0% subsidizing special dividends compliments of a 35 year trade deficit aka. intra-generational theft...

"Economics 102"
I just read that Walmart can't afford a higher minimum wage, due to the *free* market. Which means that the lowest paid people in society need to be collapsed down to the rest of the world making $1/hour or less, while the people at the top of this clusterfuck have their fake wealth printed by Central Banks, while giving everyone lectures on "free markets".  

Econ 101: Current account = capital account
There is nothing *free* about a trade deficit
Trade deficit versus debt:




"Let Them Eat Hornady 5.56mm" 
The only "free market" was the bailout handed to Wall Street in 2008. When the music stops the next time around, there will be no "free market". Instead, there will be what's known as a 'hard landing" i.e. mass implosion sans bailout. Only when all of the chairs get taken away at the same time, will everyone be on the same page about "free markets" and competing with people making $1/hour or less. There is no belief system or ideology that is any match for reality. 

Today's "Free market" visualized
i.e. Dow with Fed balance sheet and 0% while the economy is sold for special dividends:




Eye Of The Hurricane: Volatility Short Squeeze In Progress...

When spot VIX is higher than the VIX futures, then the term structure is said to be in "backwardation" which is extremely rare.

With each passing day, future volatility becomes more expensive as it converges on spot VIX. This creates a short squeeze situation by which overall volatility remains elevated due to arbitrage between spot and forward.

This can be seen below:

The red line is the ratio of VIX/VXV (Spot/3 month). The black line is VXV 10 day moving average. As we see, the red line always peaks before the black line, as one would expect, spot VIX drives future VIX higher, over the ensuing several days...



Even more interesting however, is that below the black line is spot VIX, which also peaks AFTER the red line backwardation peaks, implying that the volatility feedback loop is just beginning...




Volatility begets volatility and the "virtuous cycle" of ever-lower volatility has now reversed. The VIX represents the cost of hedging which is now extremely expensive, making further selling inevitable to maintain delta hedging, which makes higher volatility inevitable.

All part of the momentum feedback loop that will drill this "imagined reality" a mile underground. 





The Arc Of The Idiocracy: A Momentum Feedback Loop

This six year multi-trillion risk asset rally was a Centrally Planned Momentum feedback loop. Central Banks and HFT algorithms provided the ignition fuel, and then greed and misallocation of capital took over...




Momentum begat momentum. This entire era took on a life of its own, complete with self-rationalizing 24x7 non-stop bullshit, to justify the asinine risk taking. Any time momentum stalled, more Central Bank dopium would rush in. There was never any exit strategy, as we see every day in China. 

Those caught up in this last bubble - aka. everyone, started to believe their own bullshit. Throwing all of their money at the casino, which in turn levitated their fake wealth. Causing them to throw more money away...

Remember this? 

ZH: Dec. 31st, 2014
Hugh Hendry: I Am Taking The Blue Pills Now
"There are times when an investor has no choice but to behave as though he believes in things that don't necessarily exist. For us, that means being willing to be long risk assets in the full knowledge of two things: that those assets may have no qualitative support; and second, that this is all going to end painfully...China is set to record its weakest growth in GDP in 25 years. Yet it seems to have entered a bull market and may be where we deploy much more of our risk capital next year. That's because the recent exuberant run up in onshore Chinese equities seems to me to amply demonstrate the power of imagined realities."

Since China ran into the brick wall of reality, momentum worldwide has stopped and now reversed:

Abrupt momentum reversal visualized:
Shanghai Comp. and Dow



Momentum globally is now building up in the opposite direction. Slowly at first, but since the Yuan devaluation, picking up notable acceleration to the downside. 

Sooner rather than later, it will become out of control to the downside. And it will drill this imagined reality deep underground. We've had ample warning.

Aussie / Yen Carry Trade:




"Mo in. Mo out"

Momentum in. Momentum out




Globalization: Human History's Largest Bubble

Billunaires took their massively inflated arbitrage profits thrown off by the global output gap, and invested them back into the ouput gap, making it even larger. And now it's imploding...

Fake wealth visualized:



The fantasy premise of Globalization was that the developing world would bootstrap their way up to the big table first by being factory slaves and then by creating their own "modern economy". Their dependence upon exporting ever-cheaper crap, would yield to a balanced economy.

While all of that wasn't happening, the accumulating debt from the recurring trade imbalances was piling up in the form of subprime housing mortgages and 1% "Patriot loans". Bernankenstein decried the "global savings glut" aka. the profits from Child sweatshop labour. Which he monetized into 0% interest rates for stock market speculation.  

Imported poverty recycled into 0% for stock market speculation:
Human history's largest game of musical chairs...
Capacity Utilization (aka. "Full Time (Un)Employment")  and Fed Funds Rate:





When 2008 came and imploded, the Globalized "Growth miracle" which was causing environmental degradation on an unprecedented scale, essentially stopped growing. 

The fantasy was over, and worse yet, the developing nations had never achieved anywhere near a developed world standard of living.

They were now doing all of the things we used to do but at ten cents on the dollar. The difference taken up by arbitraged corporate profit. "We" benefited from 0% loans forever aka. free money as long as we were willing to look the other way to our standard of living being continually eroded. Which for zombies was their inclination anyways...

The average minimum wage of the BRIC countries is $1 / hour. They are the "superstars" of Globalization...

Sunday, August 30, 2015

Ticking Time Bomb: Volatility Explosion

It's too late to hedge en masse. Another event like Monday will cause (options) volatility to explode. Selling will beget selling as programmatic algorithms "derisk" and the unhedged shit their pants...



"16/16 times historically since 1950 when the market traded in a 6%+ range that ended "flat", the market was extremely volatile the following week. Minimum range 3%, maximum 10%."

Nine times ended up on the following week, 7 times ending lower. However, the majority of large swings in both directions were during bear markets.

Last week ended with a "hammer" which is usually bullish.

However, here is a hammer week that was not bullish, blue box:

Lehman:



Selling fire insurance during an inferno, is a bad idea. Shorting volatility - the dominant Wall Street strategy of the past six years, will lead to history's biggest short squeeze...

Damocles' Sword Is Already Falling. Overnight.

Yen carry traders are tanking the U.S. in the Asian time zone. The inevitable outcome when six years of monetary casino money gets unwound overnight. Picture a scenario where S&P futures are limit down every day. That's what this quant is predicting, the one who predicted last Monday... 

Does anyone know where $2.8 trillion of "free casino money" went over six years? Don't worry, it's all controlled by computers. Selling is automatic - buy on the way up, sell on the way down - Harvard PhDs really making the best of their education. Monday's massive sell-off was merely Skynet executing the "SELL" procedure which has never been triggered for six years straight. Momentum created this six year clusterfuck, and momentum will unwind it a tad bit faster...




I noticed that by "strange coincidence", ALL of the major trend down days in the past two weeks were initiated off hours via the futures and then continued lower during the day. Everyone attributed it to China, but China's been in meltdown for two months. Something else had to account for the massive futures sell-offs that seemed to come out of nowhere...

The Idiocracy Is Decoupled. From Reality.

U.S. markets just had their worst flash crash in history, as unprecedented overnight futures selling "came out of nowhere" via the Yen Carry unwind and programmed selling. It's a buying opportunity...



"Bottoming" visualized:
The last times the average stock fell to these levels, people were panicking to get out. Not trying to buy the fucking dip... 
52 week range of average S&P stock:



Barron's...
We expect the U.S. economy will avoid contagion and continue to expand...The stock market responded sharply and excessively to fears of a slowdown in China,” ...


"Buy some JP Morgan"
Because a $237 billion company Flash Crashing back to 2013 levels is no cause for concern...




It's perfectly normal for the fifth largest ETF (QQQ) to give up 17 months of gains -15% in one minute:




“The U.S. doesn’t export a lot to China. The countries that are vulnerable are commodity producers like Australia and Canada.

Aussie / Yen Carry Unwind
The prior two cycles ended badly, but this time will be different, because we know that the Yen is no more than 100% correlated to the S&P 500




"Keep buying bitchez, throwing away your life savings is the only thing keeping this shit show afloat"



The Madoff Moment: The Globalized Ponzi Scheme Is Collapsing

China's Yuan devaluation triggered domino collapse. The flow of fake wealth 'hot money" back to the Emerging Markets via the carry trades, was always the weakest link in this Ponzi clusterfuck. 

Domino collapse visualized:




There wasn't just one Bernie Madoff on Wall Street, there is a generation of Bernie Madoffs on Wall Street aka 'Trusted sociopaths' to the stoned Idiocracy. All pretending that their PhD-designed momentum strategies are not massively correlated with everyone else's.

The momentum-driven Ponzi scheme will unwind overnight literally. As trillions in "hot money" flows out of Emerging Markets amid currency collapse. This week was merely a preview of the main event. Slumdog billunaires will be the very last to realize that their fake wealth was predicated upon industrial arbitrage. A one-time self-liquidating Cayman "dividend". There's no demand in the Third World for the 10x overpriced shit they sell, and demand here is predicated upon debt accumulation.

'b' waves are fake rallies, based upon unsustainable fundamentals aka. 'debt'...




Dow losses will be measured in decades. 



Comes The Deluge
"And then China blinked and devalued. Third World deflation immediately flooded the entire planet. Imported by multinational corporations and Mad Men and exported by child sweatshops. Into the eager hands of jobless bankrupt 'consumers'"

"And then the unwind began, as Ponzi "wealth" fled Emerging Markets overnight. To the shock of "everyone", the scheme was insolvent"





40 days and 40 nights


Saturday, August 29, 2015

Locus of Overnight Risk

The Yen is the largest offshore carry trade funding source in the world. Commodity and EM currency reversals are forcing carry unwind creating a momentum feedback loop via ever-stronger Yen.

The downside momentum will accelerate into the decline...

Aussie Dollar / Japanese Yen
BBG: April 19, 2015
“In a world of zero and negative yields, Aussie stands out as king ...Carry is here to stay for the foreseeable future.”


Fast forward to the foreseeable future...

Aug. 25, 2015
It's 2008 Deja Vu:



Bearing in mind that the Yuan devaluation was a mere two weeks ago...
"One of the most popular carry trades in recent months was borrowing yen to buy Australian dollars...The deals started to lose money, as weaker growth in China and falling raw-materials prices sent the Aussie tumbling toward this week’s six-year low versus the dollar." 

Overnight Yen strengthening, visualized...



Clearly a decent chunk of Japanese trillions found its way to the U.S. stock market over six years:

S&P (red) with Yen (black)





China Implosion->Aussie Implosion->Unwind Yen Carry Trade -> Yen appreciation -> Sell S&P futures overnight

The (reverse) momentum feedback loop is just getting started. 

"We're decoupled"

From reality.

"It was a bad time to be short volatility"



"Who Will Tell Me When This Is All Ending?

No one



The Old Age Home will never admit that the status quo is a dead-end. Still praying it gets dumped on the children. Human history's largest circle jerk:

Groupthink:
"Is a psychological phenomenon that occurs within a group of people, in which the desire for harmony or conformity in the group results in an irrational or dysfunctional decision-making outcome. Group members try to minimize conflict and reach a consensus decision without critical evaluation of alternative viewpoints, by actively suppressing dissenting viewpoints, and by isolating themselves from outside influences.

Loyalty to the group requires individuals to avoid raising controversial issues or alternative solutions, and there is loss of individual creativity, uniqueness and independent thinking. The dysfunctional group dynamics of the "ingroup" produces an "illusion of invulnerability" (an inflated certainty that the right decision has been made). Thus the "ingroup" significantly overrates its own abilities in decision-making, and significantly underrates the abilities of its opponents (the "outgroup"). 

"There's strength in numbers"



The Matrix is a fatal fabrication. It keeps the corporate disposable batteries firmly in place until they're fully used up... 

2015: When Genius Failed. To Exist.


1987 x 1997 x 2008 x 2010 x Epic Denial = Colossal Risk
The monkeys got hammered this week, amid a global currency crisis, which they took as a strong sign to buy more. Central Planning has assured them that major sell-offs can no longer happen. They are immune to reality.  

The Idiocracy is swan diving into pavement, with no one to tell them otherwise...

A 1997-style currency crisis is the catalyst for global sell-off...
Emerging Market currencies and EM local debt:



A 1987 Waterfall collapse aka. Third wave down at all degrees of trend...

Ponzi World Is Ending. The Race To The Bottom Is Reaching The Bottom

When China sneezed, the world caught a cold. The oblivious Idiocracy is swan diving into pavement, with no one to tell them otherwise. Ponzi schemes collapse from the bottom to the top...

The entire world is in a third wave down. Global Dow just lost two years of gains.
Emerging Markets and China are the world's marginal consumers, so GDP growth just got hammered...




BBG: August 26, 2015:
China's losses are DOUBLE the market cap of the other BRICs combined...

Friday, August 28, 2015

"More Free Money 4.0 Please"

Six years of Central Planning for billunaires has made gamblers extremely complacent. Instead of hedging, they look for Central Banks to bail them out constantly with printed money. Which as we see below from the red line (Fed balance sheet) is what happened in 2009, 2010, and 2012. The rally didn't resume until money printing resumed... 




EVERYONE is gambling their portfolio on the QE4 "put". Apparently they slept in late on Monday. The Federal Reserve doesn't meet on microsecond boundaries. And they are not currently in "easing mode", they are in tightening mode.  

To be sure, QE4 will come. But by definition, not at this level...

Now For The Feature Presentation

After 6 years of moral hazard, gamblers were extremely badly positioned for the first leg down. But instead of adding protection, they bought more stock. Meanwhile, those few who were hedged, monetized their hedges out of fear of another V-shaped recovery, leading to the biggest short covering rally in 7 years. If they were badly positioned for Monday, they are far more exposed now...

"It was a bad time to be short volatility"


Major technical damage...


Emerging Markets are pausing in no man's land, at six year low. Levels first reached in 2006...


"Decoupling" for blind men...