Posts Tagged ‘Bubbles’

Sometimes It’s Just a Black Duck

So if it looks like a duck, quacks like a duck, and walks like a duck, there’s a good chance it’s not a black swan no matter how much you’d like it to be one. – Ilene 

Sometimes It’s Just a Black Duck

Courtesy of Joshua M. Brown, The Reformed Broker

Death Crosses, the Hindenburg Omen, the Black Swan of all Black Swans, the AIDS Doji, the Devil’s Ladder, the Europocalypse, the plagues of pestilence and locusts, the Tony Robbins Alert, the Hitler Harami formation, etc.

Here a Swan, there a Swan, everywhere a Black Swan.

Except 18 months since the bottom of the market and 13 months since the NBER-recognized economic trough, none of these "Prophecies have been fulfilled".  Sleeping Beauty hasn’t pricked her finger on the spindle and that cabin in Upstate New York I stocked with guns and SpaghettiO’s lies empty still.

The trouble with the Recency Effect is that everyone all of a sudden thought they were Nassim Taleb, orinthological experts on the spotting of Black Swans.  Every blip on the screen or blurb in the newspaper was fresh evidence of the next hundred years’ storm.  Forget being fooled by randomness, people have become obsessed with randomness.

But as we’ve learned, not every aberration is a Black Swan in the making.  Sometimes, it’s just an ordinary Black Duck.  A negative event or possibility that is processed and dealt with, that doesn’t necessarily lead to contagion, panic and meltdown.

This is not to say that warning signs of future crises should be dismissed out of hand.  In fact, my argument is the opposite; the more we learn not to get hysterical over every Black Duck, the better the chances are that when the real things comes along, we will be cogent enough in our reaction to them.

Iranian nukes and the Straight of Hormuz, Al-Quaeda’s next terrorism attempts, the Pension Fund Time Bomb, the Chinese Real Estate Bubble, the Treasury Bond Bubble, the disappearance of non-program trading volume in the stock market, hyper-inflation, hyper-deflation, the commercial real estate shoe-to-drop, the Municipal Bond Minefield, etc.  All ugly problems, but all Black Swans?

Or just Black Ducks that will be unpleasant to deal with but dealt with regardless? 

 


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SocGen’s Dylan Grice: China Is A Decade Away From Japan Style Doom

SocGen’s Dylan Grice: China Is A Decade Away From Japan Style Doom

Courtesy of Gregory White at Business Insider 

China FloodDylan Grice of Societe Generale has released another of his scathing reports, this time targeting the rise of China and why it might soon become the new Japan, only much, much worse.

China is currently experiencing a tremendous amount of cash inflows, as it has been labeled the best of the emerging markets kings, the BRICs. But all that money could be funding a massive bubble.

But the bubble story, which is well heard of, is only part of the comparison. Grice notes that China also has a similar population problem, brought on by the one-child policy, that will eventually lead to a demographic crisis similar to Japan’s.

First, on Japan’s lost decade, from Grice (emphasis his):

Something else happened in Japan in the early 1990s which receives less attention but provides a simpler explanation for its post-bubble experience: demand is deflating because the workforce is shrinking (see the first chart on page 3). The table below shows that while Japanese real GDP growth has indeed significantly lagged behind that of the US over the past 20 years, per worker GDP has broadly kept pace, even outpacing it over the last five.

Grice then notes the five things the two economies, Japan pre-bubble and China, have in common:

  • Absence of democracy
  • State-directed capitalism
  • Currency manipulation and reserve accumulation


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The Perils of Prediction

The Perils of Prediction 

Courtesy of Charles Hugh Smith, Of Two Minds 

Fortune teller wheel

Nobody knows the future, so the best we can do is strive for an open mind and flexibility in our thinking and responses. 

In 1904, the "fact-based" consensus was that rising prosperity would stretch into the future as far as imagination allowed. The prosperity was so widespread that war, it seemed, had been abolished as bad for business.

In 1904, Imperial Tsarist Russia, though suffering from the usual spot of bother now and again, was stable and enduring. In 1904, Great Britain viewed France as its continental rival.

Ten years later, advanced, peaceful, hopeful Europe stumbled into the Great War, and three years into that war Tsarist Russia fell to revolution.

In 1928, permanent prosperity was again the consensus. Two years later, that hope was reduced to ashes.

In 1930, Germany and Japan were economically troubled, as were the other great nations of the world, but neither were seen as threatening. Less than ten years later, the two nations had declared war on the world.

In 1980, fear of a sudden massive Soviet tank attack on West Germany sparked a series of "what if" books and a push for short-range nuclear-armed missiles in Germany--a U.S. plan which galvanized the Western European peace movement.

Ten years later, the Soviet Empire had crumbled into dust and abandoned gulags.

In 1975, scholars and pundits confidently declared that the "cult of Mao" which fueled China’s Culutral Revolution was so entrenched, so pervasive and so central to China’s Communist regime that would outlast Mao the mortal and thus into the next century.

Three years later, Mao was dead and the Gang of Four lost power. Ten years after 1975, when the Cult of Mao was universally viewed as a permanent feature of China, that nation was four years into the state-controlled, limited-capitalist model of engaging the world that created its present-day pre-eminence.

I think you see my point: consensus predictions of what the future holds are generally wrong. The consensus in the U.S. about the world of 2020 is that it won’t be much different from the world of 2010. All the actuarial tables of Social Security run to 2040 and beyond, as if the road ahead will be an extension of the past sixty years of American global dominance and credit-based prosperity.

That alone tells me 2020 will…
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Credit Storm in Europe

Credit Storm in Europe

By MIKE WHITNEY writing at CounterPunch 

Munich Oktoberfest Preparations

Credit market turmoil in the Eurozone has ignited frenzied trading on global markets. On Tuesday, shares tumbled nearly 300 points on the Dow Jones before launching an unconvincing 257-point late-day comeback. Wednesday the mayhem continued; all the major indexes seesawed wildly as positive news on durable goods was nixed by  reports on wobbly EU banks. Erratic selling pushed the S&P down to 1,067 while the Dow slipped below 10,000 for the first time since February 7.  The rise in Libor (the London Interbank Offered Rate) is increasing volatility, a red flag indicating trouble in interbank lending. Banks are wary of each other’s collateral as Greece and other underwater Club Med members appear to be headed for debt-restructuring. Libor is not yet at pre-Lehman levels, but the rate that banks charge each other for short-term loans has rocketed to a 10-month high. Improving economic data have not eased fears of another meltdown or removed the rot at the heart of the system. The banks are still loaded with loans and assets that are losing value. The credit system is breaking down. 

When banks post collateral overnight for short-term loans, the collateral is effectively downgraded, limiting the banks’ access to capital. This is what triggered the financial crisis two years ago, a run on repo. Regulated "depository" institutions now rely on a funding system that operates beyond government oversight, a shadow banking system.  The banks exchange collateral, in the form of bundled securities and  bonds with institutional investors (aka—"shadow banks"; investment banks, hedge funds, insurers) via repurchase agreements (repo) for short-term loans. The repo market now rivals the  traditional banking system in terms of size but lacks the guard rails and stop signs that make the regulated system safe. The system is inherently unstable and crisis-prone as a recently released paper by the Federal Reserve Bank of New York  (FRBNY) admits. Moody’s rating agency summarized the paper’s findings like this: the tri-party repo market “will remain a major source of systemic risk, especially given the current market volatility and the fact that the Federal Reserve’s primary dealer emergency lending facilities are no longer in place…… the market remains structurally vulnerable to a repo run…… If cash investors pulled away in a stressed environment, the clearing banks would be faced with a choice (as they were several times in 2008)…
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Capitalism Without Capital

This is an excellent article by Mike about the causes of the financial meltdown. – Ilene

Capitalism Without Capital

Statues of lions, Terrace of the Lions, Delos, Greece

Courtesy of MIKE WHITNEY writing at CounterPunch 

Volatility is back and stocks have started zigzagging wildly again. This time the catalyst is Greece, but tomorrow it could be something else. The problem is there’s too much leverage in the system, and that’s generating uncertainty about the true condition of the economy. For a long time, leverage wasn’t an issue, because there was enough liquidity to keep things bobbing along smoothly.  But that changed when Lehman Bros. filed for bankruptcy and non-bank funding began to shut down. When the so-called "shadow banking" system crashed, liquidity dried up and the markets went into a nosedive.  That’s why Fed Chair Ben Bernanke stepped in and provided short-term loans to under-capitalized financial institutions. Bernanke’s rescue operation revived the system, but it also transferred $1.7 trillion of illiquid assets and non-performing loans onto the Fed’s balance sheet. So the problem really hasn’t been fixed after all; the debts have just been moved from one balance sheet to another.

Last Thursday, troubles in Greece triggered a selloff on all the main indexes. At one point, shares on the Dow plunged 998 points before regaining 600 points by the end of the session. Some of losses were due to High-Frequency Trading (HFT), which is computer-driven program-trading that executes millions of buy and sell orders in the blink of an eye. HFT now accounts for more than 60 percent of all trading activity on the NYSE. Paul Kedrosky explains what happened in greater detail in his article, "The Run on the Shadow Liquidity System". Here’s an excerpt:

"As most will know, liquidity is, like so many things in financial life, something you can choke on as long as you don’t want any….Liquidity is a function of various things working fairly smoothly together, including other investors, market-makers, and, yes, technical algorithms scraping fractions of pennies as things change hands. Together, all these actors create that liquidity that everyone wants, and, for the most part, that everyone takes for granted…..

“Largely unnoticed, however, at least among non-professional investors, the provision of liquidity has changed immensely in recent years. It is more fickle, less predictable, and more prone to disappearing suddenly, like snow sublimating straight to vapor during a spring heat wave. Why? Because traditional providers of liquidity,


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Jeremy Grantham: Playing with fire, but stocks could race to old highs

Jeremy Grantham: Playing with fire, but stocks could race to old highs

Boy (7-9) holding sparkler, side view, night

Courtesy of Prieur du Plessis at Investment Postcards from Cape Town 

Jeremy Grantham has become a familiar and very popular face on this site. For those treasuring his insight, wisdom and prescient calls, the co-founder and chief investment strategist of Boston-based GMO has just published the April edition of his quarterly newsletter entitled “Playing with Fire (A Possible Race to the Old Highs)”.

Here are a few excerpts from Grantham’s newsletter.

“So what do I think will happen? That’s easy: I don’t know. We have been spoiled in the last 10 years with many near certainties – mainly that real bubbles would break – but this is definitely not one of them. Not yet anyway.  (However, I am still willing to play guessing games despite the fact that “I don’t know.” So here, as Exhibit 1, is my probability tree.)

“The general conclusion is that the line of least resistance is a market move in the next 18 months or so back to the old highs, say, 1500 to 1600 on the S&P, accompanied by an equivalent gain in most risk measures, followed once again by a very dangerous break. If that happens, rates will still be low and thus difficult to use as a jump starter, the financial system will still be fragile, and the piggybank will be more or less empty. It is remarkably silly for the Fed to allow, even encourage, this flight path. It is also remarkably silly for investors to be so carefree, given their recent experiences. Fortunately, there are several less likely outcomes that collectively,…
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A SELF SUSTAINING RECOVERY? NOT YET.

A SELF SUSTAINING RECOVERY? NOT YET.

Bull standing on pile of coins, snorting

Courtesy of The Pragmatic Capitalist 

Richard Koo’s latest commentary is not quite as wildly bullish as equity investors have gotten in recent weeks and I fully agree with his outlook.  The markets are pricing in a self sustaining organic recovery and I still believe we have anything but that.  While we are still very constructive on the economy in H1 (and likely into Q3), I believe we are still mired in a balance sheet recession that is simply being papered over by extraordinary amounts of government spending.  In essence, the government has implemented a massive private sector crediting of accounts while their balance sheets remain highly indebted and continue to be worked down.  Richard Koo agrees.  Mr. Koo notes that the lending market is actually not improving at all:

“From borrower’s perspective, credit crunch is worsening Amid a severe nationwide credit crunch, the Fed is now actively listening to borrowers and trying to build a close cooperative relationship with the National Federation of Independent Business (NFIB), a leading small business organization. This is a major, unprecedented change. Traditionally, the Fed paid little attention to the views of borrowers, and as a result there were no data series like the index of banks’ willingness to lend as seen by the borrowers found in the Bank of Japan’s Tankan survey. Without input from borrowers, the Fed tended to administer policy based solely on the views of lenders—ie, the financial sector.”

koo1 A SELF SUSTAINING RECOVERY?  NOT YET.

“Like the Bank of Japan, the NFIB has been asking borrowers for their views on banks’ willingness to lend for many years. The relevant question asks businesses whether they find it easier or harder to obtain bank loans than they did three months ago. Recent numbers are deep in negative territory, indicating that banks are much more reluctant to lend than they were three months ago. This suggests that the credit crunch is not over and in fact is growing worse.

Koo elaborates on the deep weakness in the credit markets by claiming that mark to market would result in widespread banking bankruptcies if they were forced to actually mark these assets down to their true values:

“If US authorities were to require banks to mark their commercial real estate loans to market today, lending to this sector would be extinguished, triggering a chain of


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GRANTHAM: THE FED IS BLOWING MORE BUBBLES

GRANTHAM: THE FED IS BLOWING MORE BUBBLES

Courtesy of The Pragmatic Capitalist 

Must see interview here.  Jeremy Grantham, founder of GMO, discusses the mechanics of bubbles, where the next bubbles are forming, why equities are expensive and how Bernanke is repeating the mistakes of Greenspan:

GMO GRANTHAM: THE FED IS BLOWING MORE BUBBLES


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Why Are Silver Sales Soaring?

The best way to play a bubblemania is to get in at the beginning of course.  So is silver headed towards a bubble? The folks at Casey Research seem to think so. – Ilene 

Why Are Silver Sales Soaring?

Soccer balls floating in air (studio shot)

Jeff Clark, Senior Editor, Casey’s Gold & Resource Report

The U.S. Mint just reported another record, but this time it wasn’t for gold. The Mint sold more Silver Eagles in March and in the first quarter of the year than ever before. A total of 9,023,500 American Silver Eagles were purchased in Q110, the highest amount since the coin debuted in 1986.

While this is certainly bullish, there’s something potentially more potent developing in the background. Namely, how this matches up with U.S. silver production. Like gold, the U.S. Mint only manufactures Eagles from domestic production. And U.S. mine production for silver is about 40 million ounces. In other words, we just reached the point where virtually all U.S. silver production is going toward the manufacturing of Silver Eagles.

Yikes.

This is especially explosive when you consider that roughly 40% of all silver is used for industrial applications, 30% for jewelry, 20% for photography and other uses, and only 5% or so for coins and medals.

To be sure, mine production is not the only source of silver. In 2009, approximately 52.9 million ounces were recovered from various sources of scrap. Further, the U.S. imported a net of about 112.5 million ounces last year. (Dependence on foreign oil? How about dependence on foreign silver!) So it’s not like there’s a worry there won’t be enough silver to produce the Eagle you want next month. 

Still, why so much buying? The silver price ended the quarter up 15.5% from its February 4 low – but it was basically flat for the quarter, up a measly 1.9%. We tend to see buyers clamoring for product when the price takes off, so the jump in demand wasn’t due to screaming headlines about soaring prices.

I have a theory.

For some time, silver has been known as the “poor man’s gold.” Meaning, silver demand tends to increase when gold gets too “expensive.” The gold price has stubbornly stayed above $1,000 for over six months now and spent much of that time above $1,100. You’d be lucky to pay less than $1,200 right now for a one-ounce coin (after premiums), an amount most workers can’t pluck out of their back pocket. But Joe Sixpack just might grab a “twelve-pack” of silver.

What would perhaps lend evidence to my theory is if gold sales were down in the face of these higher silver sales.

The U.S. Mint reported a decline in gold bullion sales of 20.8% this past quarter vs. the same quarter in 2009. Further, other world mints have seen sharp declines…
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Hoenig: What about zero?

Hoenig: What about zero?

metallic zero

Courtesy of Edward Harrison at Credit Writedowns 

Below is a link to the speech Thomas Hoenig, president of the Reserve Bank of Kansas City, gave today in Santa Fe, NM.  The critical part of his speech was:

Under this policy course, the FOMC would initiate sometime soon the process of raising the federal funds rate target toward 1 percent. I would view a move to 1 percent as simply a continuation of our strategy to remove measure that were originally implemented in response to the intensification of the financial crisis that erupted in the fall of 2008. In addition, a federal funds rate of 1 percent would still represent highly accommodative policy. From this point, further adjustments of the federal funds rate would depend on how economic and financial conditions develop.

As I have been saying, the pressure to normalize both fiscal and monetary policy will be too great to bear in the U.S. I see zero rates as a distortion that needs to end. See Niels’ piece When the Facts Change about how this creates echo bubbles. On the other hand, fiscal stimulus, especially for job creation, is something I have advocated in the past (but have since moved away from). Irrespective of whether you think all this stimulus is a good thing, we are likely to see less of it.

Source

What about Zero (pdf) – Thomas Hoenig, KC Fed

Pragcap’s docstock (prior post) here.


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Zero Hedge

TikTok Files New Injunction Against White House Amid Reports Deal Is "Falling Apart"

Courtesy of ZeroHedge View original post here.

As Fox Business publishes rumors that the TikTok-Oracle deal is falling apart, TikTok-owner ByteDance has filed a petition for an injunction Wednesday afternoon, asking a federal court in Washington DC to intervene and quash President Trump's threatened ban of TikTok on national security grounds.

The injunction, filed Wednesday afternoon, comes after a California court shut down Trump's attempt to ban Tencent's...



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Phil's Favorites

SPACs are still bulls***

 

SPACs are still bulls***

Courtesy of 

I almost slipped and bought into the SPAC Renaissance. Almost.

Draftkings looks legit. But Draftkings could have been a true IPO. The SPAC wrapper was beside the point. Chamath and Ackman will probably do something legit, those guys usually find a way to win. Maybe a few others. The rest are / will be garbage. My first impression was right.

Nikola’s stock has now fallen from near 100 down into the 20’s as the guy’s whole story has unraveled. Then the guy stepped down and ran away. None of this had to happen. But Nikola arrived on the markets as the quarry of a Special Purpose Acquisit...



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ValueWalk

Real Estate Crash Ahead or Inflation Hedge

By Sven Carlin. Originally published at ValueWalk.

2021 might bring a real estate crash, but analyzing the last crash of 2009 and what the FED is doing, it is more likely we see inflation increasing real estate prices rather than collapsing them.

[reit]

Q2 2020 hedge fund letters, conferences and more

The real estate market is in the following situation:

  • undersupply in more than 50% of places all over the words
  • be there!
  • a differentiation in demand for various real estate properties
  • Extremely low interest rates that make it cheap to buy and take a mortga...


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Kimble Charting Solutions

Is Gold/US Dollar Ratio Sending Bearish Signal To Precious Metals?

Courtesy of Chris Kimble

Last month, I featured this Gold / US Dollar ratio chart in an article warning of the potential for a trend reversal.

While the broader bullish trend is still intact (higher lows since 2015), it could be time for Gold to take a breather.

Looking at today’s “updated” chart, we can see that the ratio formed a “doji star” candle last month with momentum running at peak levels (concerning). And this month we are seeing follow through to the downside (in the form of a red candle).

As well, this bearish reversal pa...



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Politics

'Colossal Backdoor Bailout': Outrage as Pentagon Funnels Hundreds of Millions Meant for Covid Supplies to Private Defense Contractors

 

'Colossal Backdoor Bailout': Outrage as Pentagon Funnels Hundreds of Millions Meant for Covid Supplies to Private Defense Contractors

"If you can't get a Covid test or find an N95, it’s because these contractors stole from the American people to make faster jets and fancy uniforms."

By Jake Johnson

Secretary of Defense Mark Esper and Chairman of the Joint Chiefs of Staff Army Gen. Mark Milley hold an end of year press conference at the Pentagon on December 20, 2019 in Arlington, Virginia. (Photo: Drew Angerer/Getty Images)

Instead of adhering to congressional inten...



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Biotech/COVID-19

How and when will we know that a COVID-19 vaccine is safe and effective?

 

How and when will we know that a COVID-19 vaccine is safe and effective?

How much longer must society wait for a vaccine? ANDRZEJ WOJCICKI/Getty Images

By William Petri, University of Virginia

With COVID-19 vaccines currently in the final phase of study, you’ve probably been wondering how the FDA will decide if a vaccine is safe and effective.

Based on the status of the Phase 3 trials currently underway, it i...



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Chart School

Stocks are not done yet - Update

Courtesy of Read the Ticker

There are a few times in history when a third party said this US paper (stocks, funds or bonds) is worthless.

Here is two.

1) 1965 Nixon Shock - The French said to US we do not want your paper dollars please pay us in gold. This of course led to the US going off the gold standard.

2) 2007 Bear Stern Fund Collapse - Investors said their funds collateral was worth much less than stated. This of course was the beginning of the great america housing bust of 2008.


In both cases it was stated .."look the Emperor is naked!"... (The Empe...

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Digital Currencies

Cryptocurrencies Rarely Used To Launder Money, Fiat Preferred

Courtesy of ZeroHedge View original post here.

Authored by Shaurya Malwa via Decrypt.io,

Traditional channels continue to dominate the estimated $2 trillion global money laundering racket instead of cryptocurrencies, a report says.

In brief
  • Money laundering via cryptocurrencies is not a preferred tool for criminals, a report said...



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The Technical Traders

Adaptive Fibonacci Price Modeling System Suggests Market Peak May Be Near

Courtesy of Technical Traders

Our Adaptive Fibonacci Price Modeling system is suggesting a moderate price peak may be already setting up in the NASDAQ while the Dow Jones, S&P500, and Transportation Index continue to rally beyond the projected Fibonacci Price Expansion Levels.  This indicates that capital may be shifting away from the already lofty Technology sector and into Basic Materials, Financials, Energy, Consumer Staples, Utilities, as well as other sectors.

This type of a structural market shift indicates a move away from speculation and towards Blue Chip returns. It suggests traders and investors are expecting the US consumer to come back strong (or at least hold up the market at...



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Lee's Free Thinking

Texas, Florida, Arizona, Georgia - The Branch COVIDIANS Are Still Burning Down the House

 

Texas, Florida, Arizona, Georgia – The Branch COVIDIANS Are Still Burning Down the House

Courtesy of Lee Adler, WallStreetExaminer 

The numbers of new cases in some of the hardest hit COVID19 states have started to plateau, or even decline, over the past few days. A few pundits have noted it and concluded that it was a hopeful sign. 

Is it real or is something else going on? Like a restriction in the numbers of tests, or simply the inability to test enough, or are some people simply giving up on getting tested? Because as we all know from our dear leader, the less testing, the less...



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Insider Scoop

Economic Data Scheduled For Friday

Courtesy of Benzinga

  • Data on nonfarm payrolls and unemployment rate for March will be released at 8:30 a.m. ET.
  • US Services Purchasing Managers' Index for March is scheduled for release at 9:45 a.m. ET.
  • The ISM's non-manufacturing index for March will be released at 10:00 a.m. ET.
  • The Baker Hughes North American rig count report for the latest week is scheduled for release at 1:00 p.m. ET.
...

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Mapping The Market

How IPOs Are Priced

Via Jean Luc 

Funny but probably true:

...

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About Phil:

Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...

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