Sunday, August 25, 2019

"Economic Market Snapshot 8/25/19"

Gregory Mannarino, “8/24/19: Markets A Look Ahead”
MarketWatch Market Summary, Live Updates
CNN Market Data:

CNN Fear And Greed Index:
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"Transformational  Markets: History Being Made" 
Via Fasanara Capital

"No-Bond World And The Risk Of A Daily Liquidity Crisis: Rates hit new lows this month. Symbolically, the 50-year swap rate in Europe dived into negative territory. Bonds as an asset class are in extinction, a major shift in modern finance as we know it, inadvertently turning ‘balanced portfolios’ into ‘long-equity portfolios’. The ‘nocebo effect’ of enduring negative interest rates is such that negative rates are deflationary, hence self-defeating. Meanwhile, they have potent unintended consequences for systemic risk, which spreads around, leading the market into an historical trap. A ‘Daily Liquidity Crisis’ may result. All the while as markets get off the sugar rush of Trump rate cuts, and Europe has his banking sector at risk of implosion.

History Being Made: It must be a great thing to witness history being made during the span of your career, to find yourself in a market where so much happens for the first time in the history of finance, and close to everything else is at an extreme over the past decade. Nothing much is left around us which is trading regularly, or around historical averages.

In no particular order: the whole of the US interest rate curve dropped below 2% in mid-August, for the first time in history. The whole of the German interest rate curve dropped below zero. The Swiss, Swedish, Japanese curves are also negative for their entirety or whereabouts. The 10yr Swiss government bond yields a mind-blowing -1.2%, a sure bet to make no less than 12% in capital losses by maturity. Peripheral Europe joined in: the 10yr Portugal government bond is close to 0% yield now, about to dive in negative land too. Approx 20 junk bonds in Europe trade today at negative yields, including Altice, Nokia, Arena.

Mortgage bonds are trading negative in Denmark (10yr maturities) and Germany (5yr maturities). For the first time ever, the third largest bank in Denmark offered mortgages at -0.5%. For the first time in its history, UBS will charge the super-rich for cash deposits. For the first time in humankind, a supposedly dull invested in a AA-rated Government bond returned 80% in 8 months in price appreciation, 100% in ca. 2 years: the Austria 100yr 2.1% coupon bond, now yielding a generous +0.70%, for a prime government bond that raced faster than a penny stock at the IPO. And then, of course, for the first time in history, over ca. $16.4 trillions worth of bonds globally are trading at negative yields, approx. a third of all govies globally. We thought we had seen the bottom in yields in 2016, having recorded the lowest yields in 5,000 years, only for the record to be broken again in 2019!

Unlocked hot money, retail driven, passively managed: the daily liquidity risk is highly underestimated today. With it, the so-called ‘gap risk’, especially overnight gap risk. Which bring us to the real danger in markets these days being the market itself, which may implode under its own weight at a moment’s notice.

Liquidity, defined as the ability to get out of positions at times of market stress, is nowadays overestimated by the proliferation of passive vehicles and daily liquidity vehicles. Now more than at any point in the past decade, investors have the ability to fire-sell positions on any given day for full amounts. If a large-enough shock event takes place, the market system may find it hard to absorb selling flows, therefore leading to a snowball effect of more selling flows and large downside gap risks.

The risk of a $2 trillion daily margin call or redemption event in markets is no longer a theoretical exercise, it is indeed nowadays a workable assumption. When the top three US asset managers alone command a staggering $14trn of AuM, for the most part retail/daily/passive, the issue should be on every market regulator/participant table, and is not. Against that, there is no FED, ECB nor BoJ put together. A massive move overnight is then made entirely possible, by undiversified retail passive daily money.
Our blueprint for the next crisis is not 1987, 2000 nor 2008. But rather the ‘Quant Quake’ of August 2007. Also referred to as the ‘August factor’. At that time, renowned quant funds, including the famed Goldman Sachs QIS fund, lost 30% in short order: without any apparent reason - which itself tells a lot about market brittleness. Except this time around it may be 10-fold worse, insofar as it would not be isolated to quant funds but rather sprawling across fast through the undiversified passive expensive financial network."
 Full non-excerpted article is here:
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The Market Economy in 2020: a visualization exercise. 
"The Emergence of a New Monetary Orthodoxy" 
Something wicked this way comes...

"Everybody knows the plague is coming,
 everybody knows it's moving fast..."
Leonard Cohen, "Everybody Knows"

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