If we had to summarize what’s happened in eight years of “recovery,” we could start with this: everyone’s been pushed into risky assets while being told risk has been transformed from something to avoid (by buying risk-off assets) to something you chase to score essentially guaranteed gains (by buying risk-on assets).
The successful strategy for eight years has been buy the dips because risk-on assets always recover and hit new highs: housing, stocks, bonds, bat guano futures–you name it.
Those who bought the dip in hot housing markets have seen spectacular gains since 2011. Those who bought every dip in the stock market have been richly rewarded, and those buying bonds expecting declining yields have until recently logged reliable gains.
The only asset class that’s lower than it was in 2011 is the classic risk-off asset: precious metals.
Investors who avoided risk-on assets–stocks, bonds, REITs (real estate investment trusts) and housing in hot markets–have been clubbed, while those who piled on the leverage to buy every dip have been richly rewarded.
Those who bet volatility–once a fairly reliable reflection of risk–would finally rise have been wiped out. By historical measures, risk has fallen to levels not seen since… well, just before the last Global Financial Meltdown.
Globally, financially assets have soared from a 2008 low around $222 trillion to over $300 trillion. Even in today’s financially jaded world, $80 trillion is an impressive number: over 4 times America’s GDP of $18 trillion annually, and roughly equal to global GDP.
Tagged with: risk
The unspoken claim of central bank policy is that risk can be extinguished by intervention/manipulation: once the Fed has your back, i.e. is supporting the market, risk disappears, and the easy profits flow to those who buy the dips with supreme confidence in the Fed’s ability to magically turn risk-assets into risk-free assets.
Unfortunately for the credulous investors who believe this, risk cannot be extinguished, it can only be transferred to others or to the system itself.
This confidence in central banks raises a pernicious systemic risk:
Thank goodness everything’s been fixed. Now that the bigshots in the Eurozone have given Greece the Humphrey Bogart treatment– When you’re slapped, you’ll take it and like it, Bogart’s line as he bullied Peter Lorre in The Maltese Falcon–and a chastened Greece is in line for another 17 billion, or is it 17 trillion, I’m losing track of the numbers … but anyways, it’s all fixed, and squeezing Greek pensioners was the trick needed to save Europe from itself.
Now everyone can get back to their summer vacations and the good life resumes. It doesn’t get much better than this.
In this article, renown financial system critic and best-selling author Nomi Prins identifies the 4 brewing risk factors that are swiftly propelling us into a new era of higher and more unpredictable price volatility in the financial markets.
The relative stability of the past half-decade is over, and those with capital invested in the system ignore the arriving turbulence at their peril.
The central bank high is euphoric, the crash and burn equally epic.
Just out of curiosity, I called up a few charts of key markets: stocks (the S&P 500), volatility (VIX), gold and the U.S. dollar (UUP, an exchange-traded fund for the dollar). Interestingly, all of these charts displayed some version of a wedge/triangle.
In a wedge/triangle (a formation with many variations such as pennants), price traces out a pattern of higher lows and lower highs, compressing price action into the apex of a triangle as buyers and sellers reach an increasingly unstable equilibrium.
As price gets squeezed into a narrowing band, the likelihood increases that price will break out of the triangle, either up or down, in a major move.
So which way will these markets break–up or down?
Tagged with: dollar
, technical analysis
So by all means, buy the dip now that the VIX soared in full-blown panic from 12 to 17.
One of the more remarkable features of the Bull market in stocks is the ascendancy of complacency and the banishing of fear. Take a look at this chart of the “fear index,” the VIX–more properly, a measure of volatility:
Can stocks keep hitting new highs even as sales and profits fall?
Given that we live in a world where a modest 3% decline in the stock market triggers panicky demands for more quantitative easing (QE 4), few observers expect much a correction, regardless of the souring fundamentals such as sales and profits.
A correspondent notified me of a Puetz “crash” window (based on the analysis of Stephen J. Puetz) opening in late March-early April. (Since I am not a subscriber to Puetz’s work, I can’t confirm this.) As I understand it, while these windows do not predict a crash/sharp correction, such moves tend to occur in these windows, which are based on cycles and events such as eclipses.
So I decided to look for any evidence that a sharp correction might be in the offing.
Is the New Normal of ever-higher stock valuations sustainable, or will low volatility lead to higher volatility, and intervention to instability?
Though we’re constantly reassured by financial pundits and the Federal Reserve that the stock market is not a bubble and that valuations are fair, there is substantial evidence that suggests the contrary.
The market is dangerously stretched in terms of valuation and sentiment, and it does not accurately reflect fundamentals such as earnings and sales growth.
Tagged with: bubble
, central bank intervention
, corporate profits
, Federal Reserve
, fundamental analysis
, New Normal
, stock market
, technical analysis
The individual or system that never experiences dissent, volatility or stress is systemically unhealthy and increasingly prone to sudden “gosh, I didn’t see this coming” collapse.
To say that volatility, stress, dissent are not just healthy, but essential for maintaining health sounds counter-intuitive. On an individual level, we try to avoid exertion, stress and crisis, and on a larger systemic level, our institutions devote enormous resources to minimizing systemic volatility and suppressing dissent.
In other words, the notion that stress and dissent are to be avoided is scale-invariant: it works the same for individuals, households, enterprises, economies, governments and empires.
Tagged with: cental state
, central bank
, Nassim Taleb
, scale invariance