volatility
by
charleshughsmith
Executive Summary
- Why global capital flows will determine everything
- What impact euphoria and fear wil have on liquidation and valuation
- The importance of debt denominated in other currencies
- What's likely as capital shifts from Risk-On to Risk-Off assets
If you have not yet read Part 1: Here's Why The Markets Have Suddenly Become So Turbulent available free to all readers, please click here to read it first.
In Part 1, we listed five interlocking trends that will severely limit the scale and effectiveness of official responses to the next recession. In effect, the world will not be able to “borrow and spend” its way out of recession.
In Part 2, we’ll examine the single most important dynamic in any asset value: capital flows.
The Tidal Forces of Capital
Let’s start with the most basic building blocks of supply and demand.
Capital flowing into an assets class (buying) in excess of capital flowing out (selling) increases demand and pushes prices up.
If supply increases even faster than demand, prices may decline despite rising demand.
If capital flows out (selling) in excess of inflows (buying), prices will decline.
Prices are set on the margin. If 5 homes out of a neighborhood of 100 homes sell for 25% below the previous price level, the valuation of the other 95 homes also drops 25%.
Risk on = seeking asset appreciation and taking on more risk in exchange for higher yields.
Risk off = seeking capital preservation and accepting lower yields in exchange for reduced risk.
Assets have two ways to appreciate/depreciate: the nominal price, and the underlying currency the asset is priced in.
If a Mongolian bond yields 7%, the owner earned a nominal 7% on the capital. But if the currency the bond is denominated in dropped 20%, the owner suffered a 13% loss when the investment is priced in other currencies.
The consequences of capital flows can be counter-intuitive.
For example, if the Federal Reserve creates $1 trillion out of thin air, our initial expectation would be…
What Happens Next Will Be Determined By One Thing: Capital Flows
PREVIEW by charleshughsmithExecutive Summary
- Why global capital flows will determine everything
- What impact euphoria and fear wil have on liquidation and valuation
- The importance of debt denominated in other currencies
- What's likely as capital shifts from Risk-On to Risk-Off assets
If you have not yet read Part 1: Here's Why The Markets Have Suddenly Become So Turbulent available free to all readers, please click here to read it first.
In Part 1, we listed five interlocking trends that will severely limit the scale and effectiveness of official responses to the next recession. In effect, the world will not be able to “borrow and spend” its way out of recession.
In Part 2, we’ll examine the single most important dynamic in any asset value: capital flows.
The Tidal Forces of Capital
Let’s start with the most basic building blocks of supply and demand.
Capital flowing into an assets class (buying) in excess of capital flowing out (selling) increases demand and pushes prices up.
If supply increases even faster than demand, prices may decline despite rising demand.
If capital flows out (selling) in excess of inflows (buying), prices will decline.
Prices are set on the margin. If 5 homes out of a neighborhood of 100 homes sell for 25% below the previous price level, the valuation of the other 95 homes also drops 25%.
Risk on = seeking asset appreciation and taking on more risk in exchange for higher yields.
Risk off = seeking capital preservation and accepting lower yields in exchange for reduced risk.
Assets have two ways to appreciate/depreciate: the nominal price, and the underlying currency the asset is priced in.
If a Mongolian bond yields 7%, the owner earned a nominal 7% on the capital. But if the currency the bond is denominated in dropped 20%, the owner suffered a 13% loss when the investment is priced in other currencies.
The consequences of capital flows can be counter-intuitive.
For example, if the Federal Reserve creates $1 trillion out of thin air, our initial expectation would be…
by
Adam Taggart
by
Chris Martenson
Executive Summary
- Liquidity is drying up
- Volatility is returning
- HFT has dramatically increased crash risk
- The key takeaways for investors
If you have not yet read Part 1: Credit Market Warning available free to all readers, please click here to read it first.
Financial assets are worth what someone will pay for them. A corollary of this is that you’d much rather be trying to buy or sell in markets that are deep and liquid. Thin markets provide bad prices at best, and no bids or offers at worst.
Low trading volumes are worrisome because they are usually accompanied by higher volatility. And those two can easily become dance partners that whirl each other ever faster.
There are numerous warning signs coming from all asset markets, but especially from the bond markets.
Low Liquidity
The issue of low liquidity really jumped out at me roughly a year ago with the news that the utterly broken Japanese government bond (JGB) market had gone an entire 36 hours without a single trade(!!).
Japan bond market liquidity dries up as BoJ holding crosses ¥200tn
Arp 15, 2015
The Bank of Japan’s massive purchases of government debt hit a milestone this week, sucking liquidity out of the market to such an extent that the benchmark 10-year bond went untraded for more than a day, the first time in 13 years.
The current 10-year cash bonds saw its first trade of the week yesterday afternoon, having gone untraded for more than a day and a half.
Trade volume in the benchmark cash bonds so far this month dropped to less than one trillion yen, down about 70% from the same period last year.
(Source)
Thus comes the law of unintended consequences. The main reason for buying JGB’s by the Bank of Japan (BoJ) was to inject a lot of liquidity into ‘the system’ in hopes that the Japanese economy would take off.
While that may have happened to some (slight) extent what also happened was that …
The Warning Indicators To Watch For Trouble In The Bond Market
PREVIEW by Chris MartensonExecutive Summary
- Liquidity is drying up
- Volatility is returning
- HFT has dramatically increased crash risk
- The key takeaways for investors
If you have not yet read Part 1: Credit Market Warning available free to all readers, please click here to read it first.
Financial assets are worth what someone will pay for them. A corollary of this is that you’d much rather be trying to buy or sell in markets that are deep and liquid. Thin markets provide bad prices at best, and no bids or offers at worst.
Low trading volumes are worrisome because they are usually accompanied by higher volatility. And those two can easily become dance partners that whirl each other ever faster.
There are numerous warning signs coming from all asset markets, but especially from the bond markets.
Low Liquidity
The issue of low liquidity really jumped out at me roughly a year ago with the news that the utterly broken Japanese government bond (JGB) market had gone an entire 36 hours without a single trade(!!).
Japan bond market liquidity dries up as BoJ holding crosses ¥200tn
Arp 15, 2015
The Bank of Japan’s massive purchases of government debt hit a milestone this week, sucking liquidity out of the market to such an extent that the benchmark 10-year bond went untraded for more than a day, the first time in 13 years.
The current 10-year cash bonds saw its first trade of the week yesterday afternoon, having gone untraded for more than a day and a half.
Trade volume in the benchmark cash bonds so far this month dropped to less than one trillion yen, down about 70% from the same period last year.
(Source)
Thus comes the law of unintended consequences. The main reason for buying JGB’s by the Bank of Japan (BoJ) was to inject a lot of liquidity into ‘the system’ in hopes that the Japanese economy would take off.
While that may have happened to some (slight) extent what also happened was that …
by
Nomi Prins
by
Nomi Prins
Executive Summary
- Central planners are showing increasing signs of insecurity in their ability to maintain control
- Credit default risk is on the rise
- So are geo-political and economic risks
- Manipulation continues to muddy price discovery
- Crime & fraud have rotted the core our financial system
- How to tread carefully in these markets
If you have not yet read Part 1: 4 Factors Signaling Volatility Will Return With A Vengeance available free to all readers, please click here to read it first.
When stock markets keep racking up records, it’s hard to imagine steep downturns. Yet that’s precisely when caution is required, particularly when volatility is rising and risk factors are not subsiding. What I’m about to say is not to scare, but to help prepare, you.
Recall that two years after achieving a then historic high on October 9, 2007 of 14,164.53, the Dow plunged by more than half to a March 2009 12-year low of 6,547. The value of US stocks dropped from $22 trillion to $9 trillion. Why? Because of a confluence of risk-laden events pelting people and markets. From the housing market drop, to the failure of Bear Stearns and Lehman Brothers, to the unraveling of CDOs, to the obscene amounts of leverage and fraud everywhere, volatility escalated and liquidity and confidence dove. Banks entered self-defense mode, turning to governments and central banks for lifelines.
The fix of subsidized private banking was in. It still is – seven years later. There’s nothing comforting about that. It took another five years, until March 5, 2013 for the Dow to top 2007 levels. If you’re an individual, say with a pension or college tuition to pay, you’ve got to have an iron stomach to deal with that kind of chaos. You’re going to want to protect your money from the possibility of a next time. Now is a good time to start.
Today’s markets have not bubbled on organic or sustainable growth, they have been propped up by unprecedented, globally coordinated central bank policies that flooded the financial system with cheap money and like a giant financial vacuum cleaner hoovered up debt securities from big banks through massive (QE) easing programs.
Market volatility, though low compared to 2008 days, has nonetheless been inching up. It will continue increasing due to…
Navigating Safely In The Coming Era Of Volatility
PREVIEW by Nomi PrinsExecutive Summary
- Central planners are showing increasing signs of insecurity in their ability to maintain control
- Credit default risk is on the rise
- So are geo-political and economic risks
- Manipulation continues to muddy price discovery
- Crime & fraud have rotted the core our financial system
- How to tread carefully in these markets
If you have not yet read Part 1: 4 Factors Signaling Volatility Will Return With A Vengeance available free to all readers, please click here to read it first.
When stock markets keep racking up records, it’s hard to imagine steep downturns. Yet that’s precisely when caution is required, particularly when volatility is rising and risk factors are not subsiding. What I’m about to say is not to scare, but to help prepare, you.
Recall that two years after achieving a then historic high on October 9, 2007 of 14,164.53, the Dow plunged by more than half to a March 2009 12-year low of 6,547. The value of US stocks dropped from $22 trillion to $9 trillion. Why? Because of a confluence of risk-laden events pelting people and markets. From the housing market drop, to the failure of Bear Stearns and Lehman Brothers, to the unraveling of CDOs, to the obscene amounts of leverage and fraud everywhere, volatility escalated and liquidity and confidence dove. Banks entered self-defense mode, turning to governments and central banks for lifelines.
The fix of subsidized private banking was in. It still is – seven years later. There’s nothing comforting about that. It took another five years, until March 5, 2013 for the Dow to top 2007 levels. If you’re an individual, say with a pension or college tuition to pay, you’ve got to have an iron stomach to deal with that kind of chaos. You’re going to want to protect your money from the possibility of a next time. Now is a good time to start.
Today’s markets have not bubbled on organic or sustainable growth, they have been propped up by unprecedented, globally coordinated central bank policies that flooded the financial system with cheap money and like a giant financial vacuum cleaner hoovered up debt securities from big banks through massive (QE) easing programs.
Market volatility, though low compared to 2008 days, has nonetheless been inching up. It will continue increasing due to…
by
Adam Taggart
by
Adam Taggart
Few people understand the global economy and its (mis)management better than David Stockman — former director of the OMB under President Reagan, former US Representative, best-selling author of The Great Deformation, and veteran financier.
David is now loudly warning that events have entered the crack-up phase, which he predicts will be defined by the following 4 developments:
David Stockman: The Global Economy Has Entered The Crack-Up Phase
by Adam TaggartFew people understand the global economy and its (mis)management better than David Stockman — former director of the OMB under President Reagan, former US Representative, best-selling author of The Great Deformation, and veteran financier.
David is now loudly warning that events have entered the crack-up phase, which he predicts will be defined by the following 4 developments:
by
Adam Taggart
by
Adam Taggart
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