Stocks and Precious Metals Charts - The Greatest Show On Earth - A Banquet of Consequences, Part I

"It's probably early days, but now might be the time to start taking precautions against a 2008 class event in the financial markets. I would suggest it might arrive anytime between now and July 2020. These sorts of things depend on the magnitude of any 'trigger event,' which is why it is so difficult to forecast with regard to specific dates. As time goes on the required force for a market moving event decreases until it takes very little to set that ball in motion."

Jesse, 24 July 2018


"Welcome to October, the month of unexpected falls from heights, and stock market tears."

Jesse, 1 October 2018


"The VIX futures were in contango today. That means that the nearer term months were at a higher value than the following months. Usually it is the other way around. backwardation, with the futures in the following months gradually increasing in price. This is a signal that a nearer term and disruptive spike in risk is being expected by a number of traders, and they are seeking protection from it.

If you look at the NDX futures chart below, you can see how every day for the past three days that the futures have slumped heavily lower, recovering a bit in the afternoon while Asia and Europe are asleep, only to drop sharply again the next day, and fail to completely recover.

Stocks may turn around and rally higher from here. But the risk for equities is pronounced."

Jesse, Monday, 8 October 2018


“We have been in a state of stagnation since 2008.  We’re moving towards stagflation.  It feels good right now but it’s a false dawn.”

Alan 'Bubbles' Greenspan

Ba da bing, ba da boom.   Le voilà.

Stocks were down sharply on very heavy volumes. They went out near the lows of the day.

Today was the kind of day when you could almost feel your IQ start to decline from listening to the spokemodels and guest commentary on financial television—   a 'contact high' of hubris and self-delusion.

We can always hope that our tax cut flush companies will start buying their own stocks again once earnings season is underway and they make their announcements.

We may get a decent attempt to rally back up some time, likely after some follow through to the downside. The ESF might take a shot at it tomorrow, but if these volumes keep distributing to the downside I don't think they have enough ammo to turn it around. They might have to wait for a capitulation first.

The 2770 level on the SP 500 Futures chart looks like an important support level.  Below that the bulls will need to start taking Xanax if they break 2740 and stick a close below that.

If the market turns and puts a multi-day rally together, and starts approaching this last blow off top, and it fails, look out below.

Either way, there is most likely much worse to come with time. That we expect something different is remarkable, a genuine triumph of modern persuasion, the power of dark money, and old-fashioned demagoguery.

Need little, want less, love more. For those who abide in God abide in love, and love in them.

Have a pleasant evening.

No Real Chance of Another Financial Crisis - 'Silly'

I like Dean Baker quite well, and often link to his columns. On most things we are pretty much on the same page.

And to his credit he was one of the few 'mainstream' economists to actually see the housing bubble developing, and call it out. Some may claim to have done so, and can even cite a sentence or two where they may have mentioned it, like Paul Krugman for example. But very few spoke about doing something about it while it was in progress.  The Fed was aware according to their own minutes, and ignored it.

The difficulty we have in the economics profession, I fear, is a great deal of herd instinct and concern about what others may say. And when the Fed runs their policy pennants up the flagpole, only someone truly secure in their thinking, or forsworn to some strong ideological interpretation of reality or bias if we are truly honest, dare not salute it.

Am I such a person? Do I actually see a fragile financial system that is still corrupt and highly levered, grossly mispricing risks? Or am I just seeing things the way in which I wish to see them?

That difficulty arises because economics is no science. It involves judgement and principles, and weighs the facts far too heavily based upon 'reputation' and 'status.' And of course I have none of those and wish none.

But it makes the point which I have made over and again, that all of the economic models are faulty and merely a caricature of reality.  And therefore policy ought not to be dictated by models, but by policy objectives and a strong bias to results, rather than the dictates of process or methods.  In this FDR had it exactly right.  If we find something does not stimulate the broader economy or effect the desired policy objective, like tax cuts for the rich, using that approach over and over again is certainly not going to be effective.

Economics are a form of social and political science.  And with the political and social process corrupted by big money, what can we expect from would be 'philosopher kings.'

The housing bubble was no 'cause' of the latest financial crisis. More properly it was the tinder and the trigger event. The S&L crisis was just as great, if not greater. Why then did it not bring the global financial system to its knees?

The interconnectedness of the global system with its massive and underregulated TBTF Banks, the widespread and often fraudulent mispricing of risk, all make cause for a financial system to be 'fragile.' In this thinking Nassim Taleb is far ahead of the common economic thought as a real 'systems thinker.'   The Fed is not a systemic thinking organization because they are owned by the financial status quo, and real systemic reform rarely comes from within.

I see the same fragility which existed from 1999 to 2008 still in the system, only grown larger, global, and more profoundly influencing the political processes.

The only question is what 'trigger event' might set it spinning, and how great of a magnitude will it have to be in order to do so. The more fragile the system, the less that is required to knock it off its underpinnings.

And a crisis is not a binary, singular event. There is the 'trigger' and the dawning perception of risks, and the initial responses of the political, social, and regulatory powers to consider.

There is no point in debating this, because the regulators and powerful groups like the Fed are caught in a credibility trap, which prevents them from seeing things as they are, and saying so.

So Mr. Baker, rather than looking for the bubble, let's say we have a fragile system still disordered and mispricing risk, with a few very large banks engaging in reckless speculation, mispricing risk for short term profits, manipulating markets, and distorting the processes designed to maintain a balance in the economy.

Rather than hold out for a 'new bubble' as your criterion, perhaps we may also consider that the patient is still on full life support after the last bubble and crisis.  Why do we need to find a new source of malady when the old one is still having its way?

I think if one exercises clear and open judgement, they can see that we have stirred up the same pot of witches brew that has made the system fragile and vulnerable to an exogenous shock, and has kept it so.

A new crisis does not have to happen. This is the vain comfort in these sorts of 'black swan' events, being hard to predict.  But they can be more likely given the right conditions, and I fear little will be done about this one until even those who are quite personally comfortable with things as they are begin to feel the pain,

The problem is not a 'bubble.'  The problem is pervasive corruption, fraud, and lack of meaningful reform.  The 'candidate' is the financial system itself, with its outsized hedge funds and the TBTF Banks with their serial crime sprees and accommodative regulators in particular.

And if one cannot see that in this rotten system with its brazenly narrow rewarding of a select few with the bulk of new income, then there is little more that can be said.

Neil Irwin, a writer for the NYT Upshot section, had an interesting debate with himself about the likely future course of the economy. He got the picture mostly right in my view, with a few important qualifications.

"First, his negative scenario is another recession and possibly a financial crisis. I know a lot of folks are saying this stuff, but it's frankly a little silly. The basis of the last financial crisis was a massive amount of debt issued against a hugely over-valued asset (housing). A financial crisis that actually rocks the economy needs this sort of basis.

If a lot of people are speculating in the stock of Uber or other wonder companies, and reality wipes them out, this is just a story of some speculators being wiped out. It is not going to shake the economy as a whole. (San Francisco's economy could take a serious hit.)

Anyhow, financial crises don't just happen, there has to be a real basis for them. To me the housing bubble was pretty obvious given the unprecedented and unexplained run-up in prices in the largest market in the world. Perhaps there is another bubble out there like this, but neither Irwin nor anyone else has even identified a serious candidate. Until someone can at least give us their candidate bubble, we need not take the financial crisis story seriously.

If we take this collapse story off the table, then we need to reframe the negative scenario. It is not a sudden plunge in output, but rather a period of slow growth and weak job creation. This seems like a much more plausible story...

Anyhow, a story of slow job growth and ongoing wage stagnation would look like a pretty bad story to most of the country. It may not be as dramatic as a financial crisis that brings the world banking system to its knees, but it is far more likely and therefore something that we should be very worried about."

Dean Baker, Debating the Economy with Neil Irwin, 31 October 2015

Dangerous Markets: Here Are Some Levels and Triggers to Watch

We typically do not get major market corrections in May. They tend to cluster in the Spring and the Fall.  By major correction I mean 15+%.

 

For example, in 1929 there was a 'market break' in March, and then the exchange shook it off and went on to have a bumpy summer of ups and downs with a final climb to a top in October.

 

Every market decline has its own specific course of events, but they do tend to have some things in common.  There is generally a build up of conditions that make it the right kind of market, and then some trigger event occurs to set things in motion.   It is much like what occurs in the build up to an avalanche, or a wildfire.

 

So we are talking about 'avalanche conditions.'  

 

That does seem to be a little counter-intuitive, because we seem to have markets that are almost sleep walking within ranges with short term algo-driven volatility.  These are very 'cynical markets.'  The masters of the universe believe that they are firmly in control.

 

Looking at the composition of this market and the economies, I see bubbles both in the US and especially in China, in bonds and in stocks.   

I see a paucity of liquidity of the right sorts, of determined investment money of the durable sort, and economies that are narrowing, with most of the discretionary money shoved well into the top tier of consumers and investors.

And the money is hot, compliments of the Fed, and the focus is for the most part short term.  I think my opinion of the Fed is well known by now to any regular readers, and the ECB is no better. 

So in surveying this mountain with its potentially dangerous conditions, one looks for potential trigger events.

Greece looms large. Despite the pooh-poohing and brinksmanship by both sides, a Greek failure could prove to be the underanticipated Lehman event that would set the cascade of dominos falling.

And then there are the many confrontational hotspots around the world, in the Mideast of course, in the South China Sea, and in the Ukraine among others.

What makes this particularly dangerous is the cavalier attitude of the neo-con chicken hawks towards military action, especially in some of the English speaking countries.

Two articles this morning brought this thinking into focus.  But I have been having this conversation off and on with some trading friends for the past few weeks, and I also noted in the beginning of the year some signs of trouble.  What 2000, 2008, and 2015 May Have In Common

 

The first, Shrinking Liquidity Exposes Markets to Crunch, sounds like a prelude to 'no one could have seen this coming.'

And the second from my friend Adam Taggart, For Heaven's Sake Hedge,  shows some of the other aspects that make markets dangerous.

 

I have not yet seen the classic 'crash patterns' on the charts that I have documented extensively over the years, but as I am saying, and I hope I am clear about this, I see dangerous market conditions that, given the right kind of trigger event, could unleash quite a bit of mispriced risk and concealed fragility.

 

I don't get into sentiment or contrarian indicators all that often, because from my experience they can be very much in the eye of the beholder.  But the tenor of the discussion on financial TV is especially disconnected from reality now, with a clueless bravado that is characteristic of a coming conflagration.

 

The discussion of the TPP this morning on Bloomberg and of gold on CNBC in particular were striking.

 

I am taking a defensive posture, not because I think we are going to crash the markets, since only mugs make those calls and bet on them with their own money.  Rather, I think we are seeing dangerous markets, with the danger exacerbated by the willful arrogance of the market masters and their money men.

 

I extend this watch to October, and will keep looking for changes.  I do not expect much to come of this.  This is just a caution, but given a trigger event of sufficient magnitude, this could become a problematic market even during the dog days of Summer.  Our leadership and financial management is just that bad, reckless and irresponsible.

 

One thing I learned, most painfully, is that the Fed can and will keep an obvious asset bubble going much longer than one might expect, given the lack of a major trigger event.  And they have absolutely demonstrated a disregard for the consequences from doing so several times in the past fifteen years.

 

So keep your eyes open, and take some modest precautions.