Category Archives: Asset Classes

The R Word

From highly respected Ned Davis Research via Zero Hedge:

Expect a global recession. It either has begun or will begin shortly. Though no guarantee, as 7.89% of the time since 1970 when the global economic indicators that make up this model were above 70, a recession did not occur.

Res Ipsa Loquitur

Squeeze?

There are two big speculative shorts out there, just begging for squeezes. One of course is the record short position in Treasuries. Interest rates going up? Must mean short the long end, amirite? Not if recent history is any guide. The other is in volatility, where hedge funds are shorter than they were before the February massacre.

Blockchain RIP?

The blockchain technology is a partial solution to the Byzantine generals problem. A full solution to the problem has been mathematically shown to be impossible. As a result, blockchain systems are vulnerable to attack by introducing enough fraudulent voting power to improperly modify the blockchain.

Apparently this is now happening to some of the smaller networks.

The potential prizes on the larger ones are rich enough that it is probably just a matter of time until one of them is compromised for serious money. Then we’ll see what happens.

Wag The Dog

As I have said many times before, I believe the biggest mistake the CFTC has ever made is the securitization of VIX. This decision has allowed VIX futures, options and ETFs, trading in any and all of which provides staggering leverage on the overall market. Here’s a piece which shows both how easy it is to manipulate VIX, and the effect of VIX manipulation on the overall market.

I’m watching this as I write, as the manipulators crush price discovery. Of course the eventual consequences of this will be catastrophic – the “Volgasm” of early February was just the fat lady clearing her throat.

Perspective

“Just a flesh wound,” said the Black Knight.

Credit Impulse

The credit impulse isn’t the sudden urge to borrow – it is the additional income and concomitant spending that results from an increase in aggregate debt. Spending capacity = net income + credit impulse. Credit impulse (annual) = current debt amount – year ago debt amount. Not complicated.

The credit impulse is how easy money creates economic expansion as economic entities – households, corporations, governments, etc. are able to spend more than they earn.

The downside is that, sooner or later, the entities reach the limit of their ability to borrow. The credit impulse disappears and the economy shrivels. Incomes diminish and defaults begin as entities can no longer service their debt. Credit becomes very difficult to obtain, lenders fail as capital losses mount and the economy accelerates downhill as the credit impulse goes negative as borrowers are unable to roll over their debt.

Let’er Rip, Potato Chip

Larry Kudlow, newly minted economic advisor, was on CNBC last night, advising that the Fed should “Let the economy rip.”

Larry, if you want to see what happens when a country monetizes its deficits, look south.

A Little Late

Maybe a few folks at the BIS now realize that the light at the end of the tunnel is, in fact, a train.

The previous analysis suggests that there is a prima facie case for monetary policy to pay closer attention to the financial cycle than in the past. We may have been underestimating the influence of benign disinflationary forces and overestimating the ability of monetary policy to fine-tune inflation, especially to push it up towards targets in the face of powerful headwinds. If so, we may also have been underestimating the collateral damage that such strategies may generate in terms of financial and macroeconomic stability over longer horizons, especially by amplifying the financial cycle.

Fed Minutes

Another day, more blather from the Fed. Risk is “on” with a vengeance as the Fed continues to demonstrate its unwillingness to “take away the punch bowl” as Fed Chairman Martin put it.  Apparently there is no such thing, in their minds, as too much stimulus. We’ll see about that. In my view, a financial catastrophe is almost inevitable at this point. Overpriced stocks and the fear of inflation have always been a toxic mixture. Add in the overhang of aggregate debt somewhere in the neighborhood of 350-400% of GDP and you have a recipe for a protracted decline to well below fair value, unlike 1987’s brief shock.