2019: The Beginning Of The End

For ten long years, the world’s central banks have dragged everyone along for one last attempt at scaling Mount Credit.

At several points along the way, in 2011, in 2013 and then again in 2016 it seemed all but certain that the wrong route had been picked and all was lost.  We warned people then about the risks but to no avail. They found a way to navigate even higher from there.

And here we are again in 2018, warning everyone of the same risks. Starting back in August of 2018 we were questioning whether “it” had arrived and then were declaring that it had throughout October and November.

“Until and unless” the central banks reverse course 2019 will see even more of the same. More stock market volatility, more bond losses, and falling real estate. Eventually, these credit stresses will impact those portions of the economy dependent on continued access to more dumb money. 

Weak companies that cannot sustain themselves without borrowing more will go out of business and lay people off. Major corporations seeing that writing on the wall will reel in their own hiring and expansion plans.

Eventually, all the of the highly leveraged trading strategies have to pack up shop and go home and that’s when we discover that these “markets” are as fake as a spray on sun tan. No actual liquidity, only the appearance of such as temporarily afforded by all the computer algos out there.

In a very successful attempt at holiday season humor, the Wall Street Journal finally noted that the equity markets had become dominated by computer algos, a fact we noted – oh – 7 years ago:

Behind the Market Swoon: The Herdlike Behavior of Computerized Trading

Dec 25th, 2018

Behind the broad, swift market slide of 2018 is an underlying new reality: Roughly 85% of all trading is on autopilot—controlled by machines, models, or passive investing formulas, creating an unprecedented trading herd that moves in unison and is blazingly fast.

“Electronic traders are wreaking havoc in the markets,” says Leon Cooperman, the billionaire stock picker who founded hedge fund Omega Advisors.

Behind the models employed by quants are algorithms, or investment recipes, that automatically buy and sell based on pre-set inputs. Lately, they’re dumping stocks, traders and investors say.

“The speed and magnitude of the move probably are being exacerbated by the machines and model-driven trading,” says Neal Berger, who runs Eagle’s View Asset Management, which invests in hedge funds and other vehicles. “Human beings tend not to react this fast and violently.”


That’s funny! 10 years of steadily rising “markets" driven by these algos and the WSJ was entirely unconcerned. Now that stocks have been shown to also go down, suddenly the impact of these algos is very concerning to the WSJ. No worries as long as these programs are whipping prices higher, but a lot of concern when they amplify the moves down.

Well, better late than never.

Our concerns about “markets” so dominated by trading programs are that they are too easily subject to (1) manipulation and (2) sharp sudden movements that could, someday, result in markets being shut down due to lack of participation because the algos found conditions “out of parameter” and they up and left in the literal blink of an eye.

If we needed any further confirmation of just how dangerously volatile the markets can be when driven by these automatic trading routines, then Christmas week certainly provided it.

On Christmas Eve the US stock markets dropped more than they ever had. Then the day after Christmas the Dow went up more points than it ever had.  The next day it swung an additional 900 points, and rather violently upwards mainly in the last 1.5 hours of trading.

From oversold to overbought to oversold to overbought all in 48 hours.

This is akin to what happens to a car that enters a skid and an inexperienced driver first over-corrects one way and then another with each oscillation become larger and less controllable. Eventually, the car lands in a ditch and the ride is over.

Is this happening now? We think so.

And it’s the perfectly natural and expected outcome of too many years of increasing central bank intervention aimed at preventing the very thing we now face.

Again, this chart explains everything we have been experiencing in financial “markets” (now so grotesquely distorted by such interventions that price discovery has been almost entirely destroyed):

In every case so far, every attempt to halt QE has resulted in a Wall Street hissy fit and a lot of crybabies in the investing world demanding that the central banks reverse course. And each time they did, and it worked for a little bit longer.

So here we are, and everybody wants to know what comes next.

That’s easy. Until and unless the central banks reverse course, once again, and make the next round of QE even larger and more bigly than any previously, we’ll see lots of declines in financial asset prices. Only this time? It won’t be constrained to falling stocks – it will envelop everything.

A Fed Too Far

Crass, and vulgar, and utterly indefensible. That’s the only way to describe the combined “leadership” of Ben Bernanke and Janet Yellen who conspired to throw an entire generation under the bus, along with the elderly on fixed incomes and savers too. 

Millennials were locked out of first time home buying by an interventionist Fed that decided all on their own that those already living in houses should be made to feel wealthier by virtue of rising home prices.

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