How Things Fall Apart: Extremes Aren't Stable

A funny thing happens on the way to stabilizing things by doing more of what's failed: the system becomes even more unstable, brittle and fragile.

A peculiar faith in pushing extremes to new heights has taken hold in official circles over the past decade: when past extremes push the system to the breaking point and everything starts unraveling, the trendy solution in official circles is to double-down, pushing even greater extremes. If this fails, then the solution is to double-down again. And so on.

So when uncreditworthy borrowers default on stupendous loans they were never qualified to receive, the solution is to extend even more stupendous sums of new credit so the borrower can roll over the old debt and make a few interest payments for appearance's sake (also known as "saving face.")

A funny thing happens on the way to stabilizing things by doing more of what's failed: the system becomes even more unstable, brittle and fragile.

Central banks and states have latched onto a solution akin to a perpetual-motion machine: the solution to all problems is simple: print or borrow another trillion. If the problem persists, repeat the print/borrow another trillion until it goes away.

Consider China, a nation (like many others) dependent on a vast, never-ending expansion of credit. So what happens when defaults start piling up in the shadow banking system? The central bank/state authorities conjure up a couple trillion yuan (a.k.a. liquidity) so defaults go away: here, Mr. Bad-Risk-Default, is government-issued credit so you can pay off your defaulted private-sector loan. Everybody saves face, private losses have been transferred to the public sector/state, problem solved.

Small banks over-extended and technically insolvent? Solution: print or borrow another trillion and give the insolvent bank the dough. Problem solved!

Here in the U.S., the solution to student loan debt hitting an astronomical $750 billion was to double the student loan debt to $1.5 trillion. When faced with an extreme that's blowing up, double-down and do more of what's failing.

Once $1 trillion of that soaring student loan debt is in default, the solution will be for the Federal Reserve/Treasury to print or borrow another trillion dollars and hand it to the debtors so they can pay off their private-sector student loans. Problem solved!

There is literally no extreme that can't be doubled down. Tens of millions of disenfranchized folks getting restless and voting for the wrong candidates? Solution: print or borrow another trillion and distribute it as Universal Basic Income: problem solved. Repeat annually, and if it's still not enough to quell revolt, double-down: print or borrow $2 trillion more every year to double everyone's UBI bribe, oops, I mean entitlement.

In terms of system structure, extremes are not stable. They beg for a reversion to the mean. Extremes in finance, credit and debt are akin to monoculture crops: flood the fields with fertilizers, herbicides and insecticides, and the apparent stabilityof the monoculture is preserved (at great expense, but who cares? Just print or borrow another trillion.)

But the system isn't stable. It's brittle and fragile. Eventually some non-linear dynamic manifests: a blight that's resistant to the herbicide destroys the crop, an insect that's resistant explodes out of nowhere and eats the crop, etc. Pushing the system to an extreme only made it more vulnerable to an increasingly broad range of disruptors.

Systems made to appear stable by brute-force application of extremes will never be stable. Stability arises from all the features erased by brute-force application of extremes.

Debt at an extreme? Double-down. (Student loan version)

Debt at an extreme? Double-down. (China version)

Debt at an extreme? Double-down. (U.S. version)

Extremes beget extremes. Extremes of financialization lead to extremes of wealth which lead to extremes of class disparity which lead to extremes of political polarization which lead to destabilization and collapse.

By all means, double down again in the next crisis, Leadership Elites. That should destabilize the status quo for good and your privileges will go the way of all the other extremes: into the dustbin of history. 

Why Rising Interest Rates Are Not Always Good For Banks.

It is axiomatic among investors that rising interest rates are good for banks in terms of enhancing earnings.  But this is not necessarily true.  In fact, banks make money on widening interest rate and credit spreads, namely the different between the cost of money and the return on loans and investments.  Rising rates can be a mixed blessing.

In the 1980s, sharply higher interest rates during the term of Federal Reserve Chairman Paul Volcker essentially destroyed the housing finance sector in the US. Fixed rate mortgages and rising interest expenses led to widespread insolvencies in the savings & loan sector that cost US taxpayers hundreds of billions in losses.  Today the situation facing banks in the US is equally dire yet is largely unrecognized by the financial markets and policy makers.

Since the 2008 financial crisis, the Fed, ECB and Bank of Japan have suppressed the cost of funds, providing an enormous subsidy to bank equity holders and debtors at the expense of individual savers and bond investors.  In 2015, for example, the cost of funds for the $15 trillion in US bank assets fell to just $11 billion per quarter.  Prior to 2008, that number for quarterly interest expense was close to $100 billion.  In Q2 '18, the US banking industry reported net interest income of $161 billion vs a cost of funds of just $27 billion.  The latter figure showing interest expense is almost doubling every 12 months.

With the Fed now tightening policy, both by raising the target for short-term interest rates and by allowing its balance sheet to shrink, US banks are facing the prospect of rising interest expense and shrinking net interest margins.  At the end of the second quarter of 2018, the larger US banks saw their cost of funds rising by more than 55% year-over-year while interest earnings were increasing by about 1/10th that amount.  By Q4 '18, interest expense will be around $40 billion per quarter and rising faster in dollar terms than interest earnings for all US banks.

Based upon projections by Whalen Global Advisors, net interest income for all US banks will cease growing by year end and will be visibly declining in Q1'19.  In the event, the superficial narrative parroted by Wall Street pundits that rising interest rates are good for banks and other leveraged investors will be shown to be a complete nonsense.  Bank profits since 2008 have been supported by cheap funding, not robust asset returns, a situation that is rapidly changing.  Will Chairman Powell wake up before we run the good ship Lollipop aground?

Indeed, one reason that the ECB is reluctant to follow the example of their counterparts in the US by raising interest rates is because EU banks could never withstand such a change in funding costs.  As one ECB official told this writer in June, "we intend to reinvest the proceeds of quantitative easing indefinitely." BTW, the decision by Chinese conglomerate HNA to exit its incredible equity stake in Deutsche Bank now begs the question with respect to DB and the broader question of prudential supervision in Europe.

Adding to the dilemma facing Fed Chairman Jerome Powell and his colleagues on the Federal Open Market Committee is the fact that the trillions of dollars worth of securities purchased by the Fed, ECB, BOJ and other central banks since 2008 has effectively capped asset returns.  Central bank action to lower interest rates drove the return on earning assets for US banks down from well over 1% to just 70bp last year.  The gross spread, before funding costs, of the top 100 US banks is just 4%.  Margins for loans and securities are brutally tight.

As interest expenses for banks rise at double-digit rates, asset returns are barely moving, as illustrated by the sluggish response of the benchmark 10-year Treasury to Fed rate moves.  For the largest US banks, gross yields on their loan portfolios are below 3%, a reflection of the still tight credit spreads visible in the bond and debt markets.  Competition for assets is intense, effectively making it impossible for banks to grow their profit margins on loans even as short-term rates rise.

So long as the Fed and other central banks retain their nearly $9 trillion in securities, the effective return on loans and securities will be muted.  Central banks do not hedge their positions or even trade regularly, thus there is no selling pressure on long-dated securities.  While the FOMC under Chair Janet Yellen was perfectly content to manipulate long-term interest rates downward via "Operation Twist," when the Fed purchased long-term securities and sold shorter duration bonds, now the Fed sits by and does nothing as the Treasury yield curve threatens to invert. 

The strange asymmetry in Fed interest rate policy threatens the soundness of the US banking industry and, with it, the growth prospects of the US economy.  Just as a mismatch between rising interest rates and fixed-rate mortgages destroyed the S&L industry in the 1980s, US banks today face a market environment where funding costs are rising, but the returns on loans, securities and other assets are not increasing commensurately.  Indeed, the dearth of duration in the market continues to put downward pressure on spreads.

Simply stated, banks in the US are about to get caught in an interest rate squeeze of gigantic proportions.  In order to avoid this approaching calamity, the Fed needs to start outright sales of longer term securities, essentially the reverse of Operation Twist.  They might also have a chat with the Treasury about issuing longer dated paper, as we recently discussed in The Institutional Risk Analyst. 

Even sales of long-dated swaps and futures would be helpful to manage the transition back to "normal" that Chairman Powell has professed to be the goal of the US central bank.  Given Powell's previous statements in 2012 about the duration of the Fed's bond portfolio, one wonders what he is waiting for when it comes to managing this dangerous situation.

By law the Fed is responsible for managing interest rates and employment, but in fact the yardsticks used by the American political class to measure the job performance of Chairman Powell and his colleagues on the FOMC are the debt and equity markets. Should the Fed continue its "do nothing" approach to monetary policy normalization, then we are likely to see an inverted yield curve, then a selloff in global equity markets led by financials and finally shrinking profits in the US banking system early next year.  These three eventualities may very well ensure that 2019 is a recession year in the US.

Is This the Nastiest Chart in the World?

Something has changed in the market.

The momentum-driven rally that pushed stocks to new all-time highs completely floundered a few weeks ago. What should have been a monster breakout on massive buying power ended up being a feeble push to new highs before stocks promptly rolled over.

More and more, that is looking like a false breakout. This opens the door to a SHARP correction downwards. The first major line of support is just below 2,800 at 2,780.

That is the GOOD outcome. The BAD one is if US stocks finally get contaminated with what the rest of the world is currently facing= a full-scale meltdown. If the US goes the same route as China, the Emerging Markets, industrial metals, and other growth-related asset classes, the S&P 500 could easily collapse to sub-2,600.

That's the pretty bad outcome. The REALLY bad one is that the Everything Bubble bursts and we swiftly move into a crisis that makes 2008 seem like a picnic.

"New Deals Are Being Canceled": Emerging Markets Increasingly Locked Out From Access To Capital

Following the recent rout in emerging markets, the biggest threat that has emerged to this bloc of nations is neither their slumping currencies - after all, this is a self-correcting mechanism which makes their exports more attractive and following a period of correction which bolsters trade and current account balances, the EM economies should see a rebound in output - neither the sharp drop in local asset prices, which while painful should also rebound once the underlying economy stabilizes. Instead, what is of highest concern to emerging markets is that with local debt at nosebleed levels, and with dollar-denominated indebtedness at all time high levels and in need of being periodically rolled over, a domino effect of defaults could emerge if the countries find themselves locked out of global capital markets.

That's exactly what is happening now, because after a record 2017, emerging-market debt issuers issued less money abroad in June, July and August than in any summer since 2013's taper tantrum, when fears that the U.S. was rolling back monetary stimulus triggered a broad selloff across bond markets.

As the WSJ writes, "the current falloff underscores the changing dynamics for emerging markets, which benefited from years of central bank stimulus and a recent period of synchronized global growth." Now, with U.S. interest rates rising and with the dollar surging, making debt more expensive at a time of heightened concern over trade protectionism and domestic problems in giants like Turkey and Argentina. Incidentally, as we have shown before, it is these two nations that have some of the highest current account deficits as a % of GDP, and are in greatest need of finding foreign investors who will keep injecting capital into their economies, or else risk a sharp economic contraction if not outright depression.

Some numbers: emerging-market companies raised $28 billion in bonds outside their home market, mainly in dollars, this summer, a fall of more than 60% from last year, according to Dealogic. At the same time, governments raised $21.2 billion, a drop of more than 40%.

Today, after a year of unbridled emerging market investor euphoria, the new issuance market appears to ground to a halt: new deals are being postponed or canceled and issuers coming to market are paying far more to generate interest for their dollar debt.

Some can't afford what investors demand: in early August, Indonesian property developer Intiland Development pulled an up to $250 million three-year bond deal despite offering a juicy yield of 11.5%. Theresia Rustandi, the company's corporate secretary, said they withdrew the deal because of unfavorable market conditions.

Others are still finding willing investors but this comes at a price: higher interest rates. Last week, Chinese petrochemical giant Sinopec, set out to raise $3 billion in debt but ended up with $2.4 billion as investors demanded a higher return from China's largest oil refiner.

No imminent change in sentiment is expected, as investors and bankers expect issuance to stay subdued for the rest of the year as the turmoil raging across emerging markets continues:

"You would expect volumes to be lower than in 2017, when all the stars aligned," said Samad Sirohey, head of debt capital markets for central and Eastern Europe, the Middle East and Africa at Citigroup . But "the last four months have been really subpar," he said.

Making matters worse, in a toxic feedback loop, the lack of funding leads to fears about defaults, and even slower economic growth. The concern is that a falloff in credit growth will impact economic growth while making it more difficult to pay off outstanding debt. Asian companies, for instance, have $38 billion worth of publicly issued dollar-denominated debt coming due this year, according to Dealogic.

The good news is that most emerging market countries and government still have a significant buffer - either in the form of cash or reserves - to weather a relatively brief storm.But what about a protracted one?

To be sure, most bankers and economists the WSJ spoke to believe it's still too early to say that the tougher lending conditions pose an acute risk for any but the most troubled economies. Issuance in some developing countries has held up well, including parts of Asia. Some of the more prudent companies and countries raised their money at the start of the year, expecting rates to rise, which may have front loaded issuance in 2018, bankers say.

However, as noted above, the risk is what happens should the EM turmoil persist, and with Trump engaging in a lengthy tit-for-tat trade war with China, this appears inevitable, resulting in a bear market in the MSCI Emerging Market stock index and some outright currency crashes, with Turkey's lira and Argentina's peso down 41% and 50% respectively against the dollar since the start of the year.

Meanwhile, in the bond market yields on hard-currency emerging-market debt have risen from 4.5% to 6% this year. And what has spooked investors is that after years of carry-funded profits, USD-denominated emerging-market debt has  recorded a negative return of 3.7% this year.

Making matters worse, emerging-market companies are more exposed to the international bond market than they were during the financial crisis, when risk appetite also dried up and emerging markets struggled to raise cash according to Charles Robertson, global chief economist at Renaissance Capital.

That is because banks in developed economies have scaled back syndicated-loan operations outside their home markets, forcing some firms in poorer countries to turn to public bonds instead.

That, and of course, the sheer amount of dollar-denominated debt that emerging markets are currently saddled with.

What happens next? Keep an eye on investor appetite, in some cases in the most obscure of locations. This week, Papua New Guinea hopes to issue a bond that will be a key test of investors' appetite for risk in emerging markets. If it fails, the pain for emerging markets - increasingly locked out of capital markets - may get much worse before it gets better. 

Minister Savona: the Euro is Germany’s 1940 Reichsbank plan, Italy should withdraw!

Italy's economic growth is decelerating, which is even more inevitable in view of the country's population decline. It looks as if the Italian business cycle had reached its peak in 2017, with a meagre 1.5% growth rate, and is now receding. Within ten years, Italy will have business cycles with only negative highs and lows. Unemployment is at 10% and it cannot be tackled because Rome is prohibited by the European Union from following the Japanese monetary and fiscal policies to counter the financial fallout as a result of a declining population. Italian academia still believes that replacing the highly-efficient European workforce with Africans will stimulate future economic growth. Italy appears to have been deliberately flooded by Africans, while white workers from Italy are moving to Germany and the Netherlands.

Paolo Savona, the new Italian Minister of Economic Affairs, believes that Germany is executing the 1940 Walther Funk plan1). Walther Funk was Director of the Bank of International Settlements and, in 1939, Hitler appointed him as the President of the Reichsbank. Mr Savona laid down his views in a 2012 letter to his German and Italian friends. "The Funk Plan, provided for national currencies to converge into the German mark's area and this is what you would like and have partially achieved," Paolo Savona wrote. "It also envisaged," he continued, "that industrial development only pertained to yourselves and that you would only be accompanied by France, your 'historical' ally, a solution now caused by the common European market and the single currency. The Plan wanted other countries to devote themselves to agriculture and tourist services, something that will happen out of necessity or because of a natural 'calling' and they will lend skilled labour to your leadership project." As it is, Paolo Savona, a representative of the Italian establishment, expressed the feeling of a big part of the Italian elite.

The establishment is divided over how to solve Italy's demographic and economic problems. Matteo Renzi, previous Italian Prime Minister, believed that he could save the country by letting in hundreds of thousands of undocumented Africans. To show that they are committed to repopulate Italy with Africans, the Italian establishment appointed a Congo-born African woman as their Minister for Integration in 2013, a year before the great exodus from Africa kicked off. Italy was on the way to becoming Europe's first black country.

In a democracy it is a ruling class (or to be more precise its factions) that makes political choices and these are later presented to the people to vote for. An alternative policy to Matteo Renzi migration policy was introduced by Lega Nord and the Five-Star Movement. The Italian Minister of the Interior, Mateo Salvini, has challenged the European elites by stopping the endless flood of people from Africa and became incredibly popular. It is easier to halt the influx of people than to pull Italy out of the euro. A break-up of the euro would cause a significant crisis, and nobody knows how it would end, or whether it is manageable. However, the break up of the Sovjet Union and Yugoslavia were also examples of a "currency-union" break up.

To understand how the Italians will solve their ongoing crisis, we have to look at the political and business establishment. The Greek rebellion, led by the maverick Finance Minister Yanous Varoufakis and supported by the majority of the Greek people, ended in Mr Varoufakis being removed from office and the Greek economy destroyed because the minister failed to understand how a democracy functions. He believed it has something to do with the will of the people. He lacked the support of the ruling establishment, so failure was inevitable. Support from some parts, not necessary all, of the economic, academic, financial, juridical, media and security establishment are indispensable. We rightly noticed that both Donald Trump presidency and Brexit were supported by big chunks of US and British ruling elite respectively, whatever the pundits may want you to believe.

The Machiavellian Italian politicians in Rome understand that they have to build a strong opposition in Italy against Europe and Germany. Every crisis has to be blamed on powers outside Rome. The engineered migration crisis, with the support of the Brussels establishment, has backfired, giving Mateo Salvini the opportunity to pitch the Italian people against the European Union, and making him even more popular. According to the latest polls, Salvini's party is gaining in popularity rapidly, with 30% of the votes, while M5S is in decline from 40% to 30%2).

A euro exit will not be announced in advance but will be executed overnight the moment nobody expects. If the Italians start to pay their domestic obligations in liras, it will take a while before these are accepted and their value will collapse immediately, so much so that people will then start to withdraw their money from banks. For that reason, the government will take precautions, such as capital control by means of which people will not be allowed to take their money out of the country for a limited period. Unlike Greeks, the Italians will prepare an Italian exit from the euro carefully and secretly.
However, there are not many Italian politicians who dare to take the risk of an outright withdrawal from the European Union and face the consequences except for the Minister of European Affairs Paolo Savono. Mr Savona is now 82 and he has little to lose. He could go down in history as the man who took Italy out of the euro. However, it seems that the financial establishment has ousted Mr Paola Savona after he criticised them for mishandling the ongoing banking crisis and it is not known how much support he still has.

For now, Rome's strategy is to force the Germans to accept relaxed budget rules and allow Italy to introduce a parallel currency. The alternative, Italian withdrawing from the euro will not only result in chaos in Italy but also in Berlin as the consequences for the German financial system are unknown. The Italian budget rules violations will be ignored by the German political establishment who are not capable of preventing any crisis in advance. Angela Merkel will only move when things are already out of control.

If the Italians leave the euro, there will be a discussion about the outstanding debt, denominated in euro's, and there will also be a dispute about the Target2 balance. Target 2 is the real-time gross settlement system for the Eurozone. According to these balance positions, Italy and Spain have a liability from more than 800 billion euros. It is not clear how to interpret these liabilities and who has to pay Germany's balance total of nearly 1 trillion euro.

It is expected that the 2019 Italian budget will reveal whether the government is committed to lowering its debt to GDP levels as is required by the European Stability and Growth Pact or whether it will fulfil its promise to the Italian voters. After Mateo Salvini made good on his promise to stop Africans from flooding Italy, now it is Luigi Di Maio's (the M5S coalition partner's) turn to make good on his promise of a basic income. This basic income is a social security of about 780 euro for all Italians3). By implementing this social security program, Italian government spending will rise and provoke the first step to a confrontation with their German counterparts. In August, Luigi Di Maio said that "EU rules can't be excuse to block programs" and "respecting fiscal rules is not Italy's priority" he also announced to an Italian paper that the country's public deficit could exceed the European Union's ceiling of 3 per cent of the gross domestic product next year to fund spending measures promised.

Breaching the budget rules is not a 'big deal' for now. The Italians already violated European banking rules when they rescued a couple of Italian banks in 2016 and 2017 with tax money. It will slowly sink in that Italy will never recover. By next summer, the German establishment will begin to understand that an ever-shrinking population is not only a problem for the sustainability of the public debt, but that it will also erode the Italian bank balance sheets further. The financial market will also ignore the problem for now because Italy has used the ECB bond buyback program to replace its short-term debt for long-term debt. The average maturity of outstanding debt has risen from less than four years in the 1990-1998 period, just before the introduction of the euro, to 6.9 years in 2017. Moreover, nearly 70 per cent of the debt is held by residents, which is amongst the highest in the European Union. For now, Italy does not need the financial market to refinance its old obligation. And for its increasing new debt, it already has an alternative plan: the mini-BOT, a coupon that can be used to pay taxes, state services, and for petrol at stations run by state-controlled oil company ENI. Those who understand money will realise the mini-BOT is a full-blown parallel currency.

The Italian establishment understands that it is the ruling class not the people that manages the country. Whether they leave the euro or not is not up to the populous. When they decide to pull the plug on the euro, they will take care that the people will applaud. After all Machiavelli was an Italian.

Hedge Fund CIO: "Like 2000 And 2008, This Too Is An Asset Bubble But It Differs In A Fundamental Way"

Anecdote

Central banks have created yet another asset bubble that will lead to a deflationary collapse just like 2000 or 2008, explained the famous investor.

And I agreed that there's an asset bubble, but this one differs in a fundamental way. The previous two asset bubbles created a powerful wealth effect. In 2000, the stock bubble made people feel wealthier. They spent more, saved less. When asset prices collapsed, consumption retrenched because the wealth they'd been spending evaporated. Only the debt remained. The same thing occurred in 2008 but with housing. Part of why growth has been comparatively anemic in this bubble is there's been no discernable wealth effect.

After two painful collapses in wealth, the consumer caught on to the Fed's game and refuses to be fooled a third time. The Fed refuses to repeat this painful cycle too. So they've committed to a gentle tightening, and a gradual balance sheet reduction, terrified that aggressive action will trigger a third deflationary bust. It is this fear that ensures the Fed will remain behind the curve.

But while this expansion is now finally generating inflation, the next market bust is unlikely to spark a deflation like the previous two -- because unlike those booms, today's inflationary impulse is not caused by the wealth effect. Prices are accelerating today in the absence of the wealth effect. Their rise is fueled by expanding deficits, tariffs, tax cuts, anti-immigration, de-globalization – all coming at a time of record low unemployment.

These things are new features in the economic landscape, introduced by politicians who were elected to address voter anger over wealth inequality, income insecurity – not just here in the US, but throughout Europe, Japan too. And these new features ensure that this cycle's turn will look profoundly different from the 2000 and 2008 deflationary collapses.

Modern Central Banking:

"Historical tenets for how monetary policy impacts inflation aren't functioning," said St. Louis Fed CEO, James Bullard. "The Phillips Curve has disappeared and neither low unemployment nor faster real GDP growth gives a reliable signal of inflationary pressure."

Given the uncertainty, Bullard argues the Fed should use financial market signals in deciding monetary policy – specifically the yield curve slope. In his estimation the Fed was wrong to ignore the flattening curve in 2000 and 2006 when tightening policy.

I wanted to ask Bullard if monetary policy changes this decade (dot plots, quantitative easing, yield curve control, negative term premium targeting, etc.) might be distorting the yield curve. In that context, is it correct to compare today's yield curve to previous decades? Given these interventions, how would one begin to separate central bank action from market signal? Is there not a risk of treating the direct results of your own actions as an independent variable to further validate your actions? But Bullard wasn't taking questions.

The Whole Isn't The Sum Of The Parts:

"One of the great difficulties in convincing believers that neoclassical economics fundamentally misunderstands capitalism is that, at a superficial and individual level, it seems to make so much sense…. At an individual level, the basic economic concepts of utility-maximizing and profit-maximizing behavior seem sound…. Since they seem to make sense of the personal dilemmas we face, it is fairly easy to believe that they make sense at the level of society as well. The reason this does not follow is that most economic phenomena at the social level – the level of markets and whole economies rather than individual consumers and producers – are 'emergent phenomena': they occur because of our interactions with each other – which neoclassical economics cannot describe."

– Steve Keen, D. E.

Outlier:

At this week's inflation conference, the questions were predictable, the analysis uniform, orthodox, and the singular conclusion was that inflation will be 2% over almost any horizon. Tariffs were treated as one-offs -- short-term deviations from a stable trend. I was the outlier, suggesting a different perspective: What if what we see today is all connected? Instead of looking from the bottom up, at the tariff, look top down at the reason for the tariff.American nationalism, Brexit, Italian elections, (among others), do they reflect a secular shift?

"Algos Ain't Investors" Trader Warns Quiet Markets Don't Mean Safe Ones

For the last few months of summer, amid dwindling volumes and the deafening roar of event risks around the world, US equity markets have meandered higher on a bed of ever-decreasing volatility as machines (and corporate share-buy-backers) bought every headline dip, sold every vol rip, and generally confirmed Trump's narrative that everything is awesome.

Even as the economic data is dismal...

But as former fund manager and FX trader Richard Breslow warns, algorithms aren't investors. They are very aggressive day traders. Nothing more than that.

They key off of market depth, flows and momentum. They interpret the world strictly in the moment. Humans shouldn't try to emulate that behavior. It doesn't pay off over any meaningful time period. You may be able to get away with it for a day or two.

Via Bloomberg,

The calendar is conspiring to make this a day where in Europe and North America, participation is going to be light and interest in events even less so.

It's quiet.

That doesn't mean all the pressures that have been roiling markets are suddenly spentand it's time to get the party started again. But that seems to be the recommendation of the day.

We are all aware of the amusing comments from a gathering on the banks of Lake Como in Italy. They were followed by a slew of commentators gushing over the attractiveness of the BTP market. I know people like to tout the nice risk reward of a trade by saying the stop is only half as far away as the objective. Actual flesh and bones investors should require the fundamental story to carry the same sort of profile. Especially if they are going to execute another bunch of trades, or even re-handicap the ECB's intentions, based upon it.

Carry is a powerful narcotic. Most efficaciously pursued when there is a reasonable expectation of some semblance of calm. A majority of the people I talk to don't think volatility is suddenly preparing to resume its gloriously delicious slumber. Stop watching the e-mini futures. Yet, I've got an inbox with oodles of folks telling me things are "overdone", luscious opportunities are beckoning and all we have to do is winnow out the wheat from the chaff.

That may be true and I'm being overly cautious. But dismissing the concept of "contagion" as a momentary, panicky phenomenon may equally be overly bold. Especially as I'm staring at a launchpad view that reminds me that the MSCI Emerging Markets Index made a new low on the year just this morning. And their EM Currency Index, at least on my charts, isn't screaming, "quick, catch my falling knife."

I detest the concept of purchasing power parity. But I understand its potential allure. If it does have any usefulness, it is over a long period of time. The same is true, on both counts, trying to analyze currency movements in terms of correcting for, or exacerbating trade flows and current account deficits. It's risky, and not very nice, to talk to traders as if they are economists.

It's probably a good day to take a deep breath and see how prices play out. It won't be the last chance you'll have to get involved. Aside from basking in some feel-good comments and getting excited by the lull, you need to ask, what, if anything, has changed.

The 11th Hour: 8 Examples Of Mainstream Media Sources Warning Us Of Imminent Economic Disaster

Are we on the verge of another great financial crisis, a devastating recession and a horrific implosion of the global debt bubble?  I have been relentlessly warning about the inevitable consequences of our very foolish actions, but now the mainstream media is beginning to sound just like contrarians.  The coming crisis is so close now that a lot of them are starting to see it, and of course economic disaster is already a reality for much of the rest of the planet.  For years, the mainstream media told us that things would get better, and in a lot of ways we did see some improvement.  But now the tone of the mainstream media has become quite ominous, and that is definitely not a positive sign.  The following are 8 examples of mainstream media sources warning us of imminent economic disaster…

#1 Forbes: "Disaster Is Inevitable When America's Stock Market Bubble Bursts"…

As shown in this report, the U.S. stock market is currently trading at extremely precarious levels and it won't take much to topple the whole house of cards. Once again, the Federal Reserve, which was responsible for creating the disastrous Dot-com bubble and housing bubble, has inflated yet another extremely dangerous bubble in its attempt to force the economy to grow after the Great Recession. History has proven time and time again that market meddling by central banks leads to massive market distortions and eventual crises. As a society, we have not learned the lessons that we were supposed to learn from 1999 and 2008, therefore we are doomed to repeat them.

The purpose of this report is to warn society of the path that we are on and the risks that we are facing.

#2 CNBC: "Tech stock sell-off could be just beginning if trade war with China worsens"…

Congressional scrutiny of social media companies and fears of new regulation pummeled their stocks, but other tech names could also soon be vulnerable to a new round of selling pressure if President Donald Trump goes through with new tariffs on Chinese goods.

#3 Bloomberg: "Emerging-market rout is longest since 2008 as confidence cracks"…

For stocks, it's 222 days. For currencies, 155 days. For local government bonds, 240 days.

This year's rout in emerging markets has lasted so long that it's taken even the most ardent bears by surprise. Not one of the seven biggest selloffs since the financial crisis — including the so-called taper tantrum — inflicted such pain for so long on the developing world.

#4 CNN: "Emerging Markets Look Sick. Will They Infect Wall Street?"…

Chinese stocks are is in a bear market. Turkey's currency has collapsed. South Africa has stumbled into a recession. Not even an IMF bailout has stemmed the bleeding in Argentina.

The storm rocking emerging markets has its origins in Washington. Vulnerable currencies plunged as the US Federal Reserve steadily raised interest rates. And President Donald Trump's trade crackdown added gasoline to the fire.

The trouble could spread, infecting other emerging markets or even Wall Street.

#5 The Motley Fool: "6 signs the next recession might be closer than we realize"…

To be perfectly clear, trying to predict when recessions will occur is pure guesswork. Top market analysts have called for pullbacks in the market, unsuccessfully, in pretty much every year since the Great Recession ended. But the economic cycle doesn't lie: recessions are inevitable. And in my estimation, we're probably closer to the next recession than you realize.

How can I be so certain? Well, I can't. Remember, I just noted there's virtually no certainty when it comes to predicting when recessions will occur. There are, however, six warning signs that suggest a recession could be, in relative terms, around the corner.

#6 Forbes: "U.S. Household Wealth Is Experiencing An Unsustainable Bubble"…

Since the dark days of the Great Recession in 2009, America has experienced one of the most powerful household wealth booms in its history. Household wealth has ballooned by approximately $46 trillion or 83% to an all-time high of $100.8 trillion. While most people welcome and applaud a wealth boom like this, my research shows that it is actually another dangerous bubble that is similar to the U.S. housing bubble of the mid-2000s. In this piece, I will explain why America's wealth boom is artificial and heading for a devastating bust.

#7 Savannah Now: "Global debt soars, along with fears of crisis ahead"…

"We were supposed to correct a debt bubble," said David Rosenberg, chief economist at Gluskin Sheff, a wealth-management firm. "What we did instead was create more debt."

#8 CNBC: "The emerging market crisis is back. And this time it's serious"…

But markets are feeling a sense of deja vu. Blame it on a stronger dollar, escalating tensions since President Donald Trump came to power, worries over a full-fledged trade war with China or rising interest rates in the U.S., this time around the crisis seems to have entered a new phase.

The damage is far more widespread. The crisis has engulfed countries across the globe — from economies in South America, to Turkey, South Africa and some of the bigger economies in Asia, such as India and China. A number of these countries are seeing their currency fall to record levels, high inflation and unemployment, and in some cases, escalating tensions with the United States.

I don't think that we have seen such ominous declarations from the mainstream media since the last global financial crisis in 2008. And the mainstream media is not alone.  Yesterday, recently it was discussed the fact that tech executives on the west coast are setting up luxury survival bunkers in New Zealand in order to prepare for what is ahead.

They all know what is coming, and they also know that it is approaching very rapidly. This chapter in American history is not going to end well.  On some level, all of us understand this.  Storm clouds have been building on the horizon for quite some time and the warning signs are all around us.

The day of reckoning may have been delayed, but it was not canceled.  America has a date with destiny, and it is going to be exceedingly painful.