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Ponzi World (Over 3 Billion NOT Served): Self-Imploding Capitalism

Ponzi World (Over 3 Billion NOT Served): Self-Imploding Capitalism.

“The problem with bubbles is that they force one to decide whether to look like an idiot before the peak, or an idiot after the peak” (ZH/Hussman/Faber)

Too late. I already opted for the first option years ago. It was a choice between a low return on capital or no return of capital, so I chose the former. Everyone thinks that they will be that one guy who gets out at the very top – you know, like Alan Greenspan. Fortunately, you don’t have to be a retiring Central Bankster to realize that a set of widely ignored factors have coalesced to make meltdown inevitable.

Capitalism taken to the logical extent possible will inevitably self-implode with extreme dislocation.

Unbeknownst to the Corporatized Borg at large, the self-destruct sequence has already been inadvertently activated as follows:

Carry Trades Unwinding 
First off, carry trade unwind risk was always the greatest risk created by Quantitative Easing and despite the rolling dislocations in Emerging Markets, it’s still being ignored. These various high risk Emerging Market countries were primary beneficiaries of Fed largesse as it temporarily propped up their currencies and their debt markets. Now during the unwind phase, the currencies are collapsing and interest rates are rising. Meanwhile, investors are just starting to realize that these trade deficits (current account balances) are totally unsustainable. In a desperate attempt to stabilize its currency, Turkey raised interest rates by 4% overnight which of course will kill the economy. This is all just deja vu of the 1997 currency crisis which started in Thailand and spread throughout Asia.

Don’t Worry. Be Happy
“China is being engulfed in a financial crisis that might end up in its own version of the credit crunch. There are running battles on the streets on Bangkok and Kiev as authoritarian regimes totter. Turkey is sinking, and may soon not be able to fund its current account deficit. Argentina is going through another currency crisis. There is no shortage of drama coming out of the emerging markets. And there is no shortage of reasons for the markets to work them themselves up into a panic.” (“Why An Emerging Markets Crash Wouldn’t Matter”)

Key Stock Market Risks


It starts with the buy-the-dip (BTFD) and buy-the-all-time-high (BTFATH) rote mentality that got us here. Investors have been programmed by Central banks, to buy every dip automatically. They are now doing so on auto-pilot.
Loss of Leadership
As we saw with Apple last year, eventually even the most beloved of stocks gets played out and rolls over. Notwithstanding cogent arguments around cash on hand and relative valuation, that stock is still wallowing well below its all time high. Currently, the momentum stocks which have been leading the advance since 2008 have been getting hammered recently on heavy volume. Meanwhile, as we see below, the ratio of small caps (R2K) to blue chips (Dow) is rolling over, indicating a rotation to safer names.
Massively Overbought
The problem with sector rotation is the fact that as I have shown too many times (see: “Aw Fuck, Not this again!”), all sectors are highly correlated, therefore blue chips are as played out as growth stocks. This is all manifesting itself in a market that is using up buying power to go nowhere. As we saw today, the TRIN which usually trades in a range between .5 and 5, was at a rock bottom .5. However, the market was only up nominally. Low readings indicate heavy buying.
Zero Hedge
Without sector rotation as a viable alternative, investors can hedge using options, which makes sense since as I’ve also shown too many times to mention (see: “Slowly at First, Then All At Once”), hedging using index options has gone out the window. Central banks killed market volatility and without volatility, options expire worthless, ergo no option hedging.
Volatility Will Explode: Making Hedging Impossible
If all investors reach for options protection at the same time, a couple of things happen. First, buying at-the-money put options forces market makers to short the market lower to hedge their put selling. If I buy an at-the-money QQQ March put option at a current price of $2/option, I have achieved 43:1 leverage given that the price of QQQ is $86. With $5,000 of options, I can control ~$200,000 of underlying capital. Place that in the context of institutions buying millions of dollars worth of put options and you see that buying puts is a massively leveraged form of short selling. Anyone who says that buying puts is not shorting the market, doesn’t understand how the options market works. Market makers who sell the puts HAVE to short to keep their book neutral. Therefore, given that all investors are currently under-hedged, once prices are pushed lower, and demand for options increases, then option implied volatility will sky-rocket as the cost of at-risk capital goes up commensurately. At some point hedging with options will not be cost feasible. Buying options in the middle of a sell-off is like trying to buy fire insurance when the house is already on fire. Too late.
Legalized Gambling
Let’s not forget about margin risk. NYSE margin is at an all time high, meaning speculators are massively leveraged. Therefore as their positions move against them, margin clerks will sell down their holdings which is what we saw during Y2K wherein the selling was relentless as selling begat selling as prices moved lower. It was non-stop liquidation for weeks on end.
Self-imploding Capitalism
Everything Gets Privatized Including the Market Itself
Once you take rotation and hedging off of the table, the only alternative left to protect capital is selling. That’s where it gets really interesting, because the underlying structure of the market has changed radically since 2007. All of the major stock exchanges became publicly traded companies between 2002-2010 which is why they adopted the High Frequency Trading model – i.e. to boost commissions. Ever since then, real human investor volumes have been drying up, while HFT algos duke it out with each to front-run the remaining trades. Taken together and stock market volumes are at a 15 year low. Therefore, when large scale investors get serious about selling down their positions, it’s highly unlikely there will be anyone or anything on the other side of the trade. HFT bots are not programmed to lose money or take outsized risks. They are programmed to jump in and out of the markets on a millisecond basis and otherwise maintain a neutral book.
And that’s the anatomy of a meltdown. 
Russell/Dow Ratio 
aka. Risk Appetite

Ponzi World (Over 3 Billion NOT Served): Primed for the Globalization Death Blow

Ponzi World (Over 3 Billion NOT Served): Primed for the Globalization Death Blow.

Primed for the Globalization Death Blow

The events of 2008 couldn’t kill the globalized (wage) slave trade. Policy-makers reached down into the toilet of history and rescued the globalized ponzi scheme from itself. It never once occurred to them that it’s logically impossible to indefinitely sustain a system that is inherently imbalanced with respect to supply and demand. However, it’s the actions taken since then that are critical in setting up the final death blow to globalization. The squandering of fiscal and monetary resources, the mass outsourcing of remaining jobs and industries, the renewed speculation and risk taking. It had to be this way. Had policy-makers made any incremental attempt to “reform” the system post-Lehman, they very likely could have nursed this globalized fiasco for another decade or more. However, given the renewed vertically manic disposition of markets, there is minimal chance of that happening now. 2008 weakened the foundation, and the past five years squandered all support. Now will come the death blow…

All In At Dow Casino (Yes, again)
I will be the first to admit, that exactly five years ago near the depths of the post-Lehman collapse, I would have said that the probability of new stock market highs in five years was zero. Yet here we are, new stock market highs, new highs in margin debt, new highs in risky loans, new housing bubbles, new IPO speculation, new highs in global debt levels, new high in billionaires. It’s unbelievable. After the 1929 crash my grandparents’ generation never touched debt or stocks again in their entire lifetime.  All of which means that this current generation didn’t learn one thing from 2008. Therefore what comes next will teach these amoral dumbfucks a lesson that they will never, ever, ever, forget.
A Binary Catastrophe
Central Banks have created a one-way rally for five years, which means that we face a one-way collapse. As Prechter pointed out recently, there is no easy exit from a bubble. There is no easy wind-down and gentle landing. Bubbles implode, leaving faint remnant of their existence. They are inherently hollow and therefore not based upon tangible asset values or collateral. Bubble valuations are premised upon what the next fool is willing to pay and therefore when the supply of fools with money are exhausted, assets experience “discontinuous price discovery”, which is accompanied by “soiling of the underwear”.
Proximate Risks
The initial catalyst for the global collapse could begin anywhere. Social mood has been manipulated higher by Central Banks so we have no idea when the masses will realize that they are all in at the casino and about to lose their asse(t)s yet again. In addition, the artificial suppression of volatility – economic, financial and social has suppressed geopolitical risk as well, so we should expect a major flaring of geopolitical tensions to occur concurrently with a market collapse.
Carry Trade Risks
The highest risks, as I’ve said before are the carry trades – borrowing in one currency and lending in a higher yielding currency and leveraging up 10x. The key to these trades are the funding currencies – Japanese Yen and U.S. dollar. Therefore if these currencies rally, the carry trades will have to come off, which means the nations being funded by the carry trades will experience higher interest rates and more than likely a credit “event”. So we need to keep an eye on currencies.
Interest Rate/Asset Reallocation Risk
That said, the other major risk is interest rates. The U.S. Treasury rate(s) are considered the risk free rates and therefore are baked into every financial calculation on the planet. So if the current rise in interest rates continues or accelerates, then that would bring about asset reallocation and put an end to the Central Bank drip feed levitation trick now supporting risk markets.
Ten Year Treasury Yields (Interest Rates) are at a two year high
Albeit, sadly and pathetically they are still lower than they were in 2009 during the depths of the recession, reflecting the deflating state of the real economy; however, if these interest rates continue to rise, they will likely continue rising until the wheels come off of the bus aka. a “Risk Off” event:
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