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Markets Are Correcting Hard

An assessment of the risks of things getting worse from here
Friday, January 8, 2016, 1:41 AM

The long-awaited global financial market correction has arrived. We are seeing collapses in all major markets and across all major categories.

As usual, the pain has started at the edges, in the weaker elements (emerging markets, junk bonds, weak companies, etc.) and is rapidly spreading towards the center.

How far this goes before the central banks overtly step in (you can be sure they are covertly doing whatever they can to stem the damage) is anybody’s guess. Our assessment is “not too long" because the central banks are deathly afraid of the Frankenmarkets they have created.

They are worried that these grotesquely-inflated ""markets"" will begin to implode, gather steam, get further away from their control, and end up causing real damage to one or more major banks (the only entities that central banks actually care about). Or even possibly one or more small countries.

That is, they are afraid of a deflationary impulse destabilizing the $200 trillion edifice of debt they have carefully erected. Or perhaps we should say carelessly erected.

As we’ve always said: bubbles expand in search of a pin. As we look around for the pin to this one, it helps to ask: What was the trigger for this latest bout of global financial deflation?

It Begins With China

2015 ended weak but essentially where it started, with the US equity indexes just barely green for the year. There was no big Santa Claus rally, which was a bit of a bummer for the Wall Street year-end bonus crowd. But neither was there any big decline.

China’s market appeared more or less stabilized by the year end, however it began 2016 with a circuit-breaking wave of panic selling, losing -7% on the new year's first day of trading before the markets were simply closed by authorities.

(Source)

After a couple of days of very heavy-handed intervention, the Chinese stock market again broke down and was again shuttered for trading after tripping the daily circuit breakers.

The lesson here is that perhaps intervention and preventing people from selling does not calm their feelings of panic after all?

Well, consider how the circuit breaker actually works, and the answer is almost certainly “no”. Controls like these do not calm things down, they make them worse:

This week, China debuted a new "circuit breaker" system that was designed to bring calm to its ever-chaotic market and is accomplishing exactly the opposite. When shares on a benchmark index fall 5 percent, trading pauses for 15 minutes so everybody can stop to contemplate what's going on and maybe pop a Xanax.

After a 7 percent drop, buying and selling end entirely for the day. While this issomewhat similarto the way American markets work, the range within which stocks are being allowed to trade is apparently too small for China's markets, which are prone to big swings.

When stocks have started falling this week, investors have responded by rushing for the exits, knowing it might not be long until shares fall below the 7 percent mark and the door shuts on trading.

Once you account for Thursday's 15 minute breather, traders only had an EP-length14 minutesto sell, sell, sell. As one Chinese fund manager succinctly summed up the situation toBloomberg: This is insane.”

(Source)

Yes, if you only give people a window of just a few minutes to sell, then you probably are going to get a lot of selling during that time. It’s sort of the reverse of the Walmart Black Friday phenomenon where fights break out over rice cookers – people get crazy when they are exposed to conditions that provoke either extreme greed or extreme fear.

If we look back a little bit further, we see that the Chinese stock market is down 15% just since Dec 20th, 2015:

To put that in context, this would be similar to the US Dow losing 2,500 points over 3 short weeks; trading at 14,500 instead of near 17,000. Trust me, the Federal Reserve would be utterly in freak-out mode if that were the case, no different from their Chinese counterparts.

Now, the big question is: Why should the global markets in Europe, Japan and the US care if the Chinese stock bubble loses some air?

I think the answer is contained in the action we saw back in August 2015. Let’s remind ourselves of the near-crash the world had back then and what triggered it.

This high-volume swoon (circled in purple) in the equity markets seemingly came out of nowhere:

The origin of that swoon was, oddly enough, a surprise devaluation of the Chinese Yuan. While the devaluation was just 4% in size, that was enough to upset a whole host of carefully tuned computer trading algorithms:

(Source)

My favored interpretation of these events is that the entire world is now one interlinked set of trading algorithms and capital flows. A large number of these trading algorithms are based on 'correlation trading' which means they buy and sell things in related trades.

So it might be “buy the Yen, sell gold, and buy the Nikkei.” There are correlated trades like this being executed 24 hours a day, 365 days a year.

So when there’s a surprise, like a Chinese Yuan devaluation, it throws quite a few of these pair trades for a loop. As soon as something happens that is outside of their pre-established trading parameters, the computers simply close out their trades in the literal blink of an eye (actually, even faster).

The August surprise Yuan devaluation upset of a lot of carefully tuned trades and the rest is history. Markets all over the globe crashed quickly, and at heavy volume.

So fast forward to this past week (1/1/16 to 1/7/16) and what do we see? Not-so-surprisingly, we see a sudden drop in the Yuan that correlates with the drop in the Chinese stock market, which also correlates with the rest of the global market troubles:

(Source)

So as long as we are seeing these surprise and sudden Yuan devaluations, I expect the trading algorithms to have indigestion troubles. This 'indigestion' will manifest as widespread markets declines and strange air pockets in prices.

Now, there’s a very good reason for China to be in a heap of financial market trouble right now. Investor selling on the Chinese stock market makes perfect sense to me from a fundamental standpoint, as well as from a bubble dynamic point of view.

Overpriced stocks get sold when bubbles burst. That’s just the nature of things.

(Source)

As to the above chart showing just how badly over-valued the Chinese stock market remains, use it as a relative indicator, not an absolute measure. By a variety of measures that I prefer, the US stock market is also badly over-valued, and I think the above chart is using very optimistic estimates of forward price-earnings multiples to derive the western market levels. Those are inaccurate given the huge rash of earnings downgrades we’ve seen the past two months,.

But however we measure it, the Chinese stock market is still very badly overpriced and that’s even without accounting for the accelerating economic slowdown that is going to wipe out a large number of over-leveraged Chinese companies.

In Part 2: Why A Crash Is Likely, we explain the inter-linking of the world financial markets, and how the troubles in China are by no means unique to that single country. The recent market turbulence is but a preamble of much more dire volatility to come. And the system is in many, many ways, much less prepared to withstand these pressures than it was in 2008...and we all know how that turned out.

Things have been very easy for a long time -- longer than most of us realize. Everything is about to get start getting harder. How well prepared you are in advance will make all the difference.

Click here to read Part 2 of this report (free executive summary, enrollment required for full access)

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11 Comments

KennethPollinger's picture
KennethPollinger
Status: Platinum Member (Offline)
Joined: Sep 22 2010
Posts: 622
Yet MSM keeps pushing stocks in China

"GREAT opportunities."  "Buy NOW and wait for the upswing."  It's like leading sheep to the slaughter house. And there are MANY, many sheep who don't even know the IMF exists or what they are up to. Woe to the billions of world serfs.

On another note.  Grant Williams's video was excellent BUT.  When it goes from NOBODY CARES to EVERYBODY CARES, where will the 90% of the world's population get the $ to buy gold/silver???? Even if it was available. However, folks like us will do okay, no?  In fact how many lower class folks (72% of the USA) can even afford to subscribe to PP.com?  (I have a chart on this if you want to see my Combined Wealth-Income USA chart--I love charts!)

Another note: There seems to have been some discussions recently about the FEAR of property tax rising and thus confounding one's survival plans.  So, an alternative: Property tax in Costa Rica is 1/4 of 1 percent--really hard to take!!   Plus, GREAT weather: no need for A.C. nor heating, and even CHEAP electricity. The sun is an amazing plus, and Costa Rica is FOR SALE!!!

www.AwarenessCenters.com for some interesting info about that great country.  Enjoy Ken

KennethPollinger's picture
KennethPollinger
Status: Platinum Member (Offline)
Joined: Sep 22 2010
Posts: 622
Push THIS, not stocks in China
 

Instead of Goals or Resolutions, Try Creating Rules

Posted: 07 Jan 2016 08:28 AM PST

By Leo Babauta

I’m convinced that creating goals or resolutions is hardwired into us, because we can’t stop making them. Unfortunately, we’re not as equipped for making the goals come true, and the pattern most of us have seen is that we start a goal with optimism, only to be disappointed when we haven’t done much after the first week or so.

I’d like to suggest that you try creating rules that will make your goals happen.

A rule in this case is an action you do after a specific event happens, as consistently as you can, which will lead to your goal happening.

Some examples for different goals:

  • Write a book: When I turn on my computer, I will shut off the browser and all other programs but my text editor, and write for 20 minutes.
  • Learn Spanish: When I drive to and from work, I will listen to my Spanish tapes and practice.
  • Read more: When it’s 9:30 p.m., I turn off the computer, get ready for bed, and read my book.
  • Run a marathon: When my alarm goes off at 6 a.m., go out and do my run for today. Or stretch if it’s a rest day.
  • Lose weight: 1) When it’s breakfast, eat oats, cinnamon and berries. 2) When it’s lunch or dinner, eat black beans, brown rice, veggies, salsa and guacamole. 3) If I’m hungry in between, eat apples, carrots, or plain nuts. 4) Drink only tea or water, except a cup of coffee to start the day.
  • Be more mindful: When I wake up, I pee, drink a glass of water, then meditate for five minutes.

None of these rules will get you all the way to the goal, but they’ll get you much farther than you are now.

Implementing the Rules

Of course, a rule is great in theory, but much harder to put into practice. So I’d like to make a few suggestions:

  1. Implement one at a time. When you’ve done one for a week or two, then implement another, but never have too many going at once. I’ve found that five fairly new ones are my max.
  2. Make each one small (5-20 minutes for something hard, up to 30 minutes for something easy).
  3. Don’t expect perfection — allow yourself to mess up, but try to do better.
  4. If you keep messing up, set up some accountability, or change your environment so it’s easier to implement.
  5. Don’t start with food rules. Food is the hardest, because we’re not really aware of all the things going on, like emotional eating or parts of our brain sending hormones to make us really hungry. When you do food rules, do one at a time, and try to change your environment so that there aren’t tempting foods all around you. If you can’t get rid of the foods, don’t go where they are very often.
  6. Mindfulness rules are the best to start with, because they make following the other rules easier.
  7. Set computer or phone reminders, or put up visual reminders like notes wherever the rule is supposed to happen.

What you’ll find is that the rules need adjusting as you figure out what works for you and what doesn’t. You’ll find that you forget at first — in which case you should set reminders. You’ll find that some rules really need a change in environment, others might need accountability. What you’ll learn is that this is an incredible learning process, as you start to understand how you work best.

Rules are small steps that add up to huge changes over time, and they’re ones that you’ll actually make happen. What one rule can you create today that will have a big impact on your life?

Some Great Programs

If you’re looking to create your best year ever, I’d like to give you three options to consider:

  1. Sea Change Mindfulness Course: This is my habit program that consists of six-week video courses with four quarterly focuses — mindfulness, health, simplicity, and creativity. Try it free for a week (it’s $29 after that).
  2. A Simple Year – 12 Months of Guided Simplicity: I’m a contributor to this year-long course designed to help simplify your life. You’ll learn something new each month and focus on what matters most with a simplicity author that specializes in topics like travel, food, money, relationships and work. Registration is now open.
robie robinson's picture
robie robinson
Status: Diamond Member (Offline)
Joined: Aug 25 2009
Posts: 1012
Electrons

As long as the central banks move available electrons to their terminal attraction, equities, I see no reason for equities to fall.

We farm, and in a particular fashion, because it makes us happy. The farm provides alot of resilience, some of which could be traded for electrons. We aren't happy with the electrons molested by the banks, so they are worth less in trade. An extension, linear or not, approaches worthless.

simple enough? robie, rambling thoughts while waiting for the Veterinarian 

KugsCheese's picture
KugsCheese
Status: Diamond Member (Offline)
Joined: Jan 2 2010
Posts: 1236
S&P 500 Futures > 25 move

S&P 500 Futures > 25 move just before market open AGAIN.

Mark_BC's picture
Mark_BC
Status: Gold Member (Offline)
Joined: Apr 30 2010
Posts: 387
robie robinson wrote: As long

robie robinson wrote:

As long as the central banks move available electrons to their terminal attraction, equities, I see no reason for equities to fall.

That's the thought always in the back of my mind. Why can't the CB's just hook the stock markets up to their electronic printing presses and inject whatever they need in to prevent a crash, anywhere they want? Maybe that's what the circuit breakers are for, to allow them to get that set up? Eventually theoretically no one actually has to be in the stock market, the fed will paint whatever picture it wants and point to that to show how well the markets are doing. How would we know if they do or do not do this?

KugsCheese's picture
KugsCheese
Status: Diamond Member (Offline)
Joined: Jan 2 2010
Posts: 1236
Unintended Consequences

Mark_BC wrote:

robie robinson wrote:

As long as the central banks move available electrons to their terminal attraction, equities, I see no reason for equities to fall.

That's the thought always in the back of my mind. Why can't the CB's just hook the stock markets up to their electronic printing presses and inject whatever they need in to prevent a crash, anywhere they want? Maybe that's what the circuit breakers are for, to allow them to get that set up? Eventually theoretically no one actually has to be in the stock market, the fed will paint whatever picture it wants and point to that to show how well the markets are doing. How would we know if they do or do not do this?

Yes, this would work if humans were not part of Nature.  Someone whispered "unintended consequences".

Mark_BC's picture
Mark_BC
Status: Gold Member (Offline)
Joined: Apr 30 2010
Posts: 387
KugsCheese wrote: Mark_BC

KugsCheese wrote:

Mark_BC wrote:

robie robinson wrote:

As long as the central banks move available electrons to their terminal attraction, equities, I see no reason for equities to fall.

That's the thought always in the back of my mind. Why can't the CB's just hook the stock markets up to their electronic printing presses and inject whatever they need in to prevent a crash, anywhere they want? Maybe that's what the circuit breakers are for, to allow them to get that set up? Eventually theoretically no one actually has to be in the stock market, the fed will paint whatever picture it wants and point to that to show how well the markets are doing. How would we know if they do or do not do this?

Yes, this would work if humans were not part of Nature.  Someone whispered "unintended consequences".

I don't disagree that it will fail, but for the short term they could use it to cover up the collapsing economy and extend it a little bit longer. Who knows, maybe they did that a few years ago and it's the only reason things haven't crashed yet.

garimpiero's picture
garimpiero
Status: Member (Offline)
Joined: Apr 10 2014
Posts: 4
The Good Fairy and Other Fairytales

"Trust me, the Federal Reserve would be utterly in freak-out mode if that were the case, no different from their Chinese counterparts."  Unless, of course, the Fed, whose trading desk is as big as anyone's, has positioned itself to clean up by pulling the plug. Does everyone really believe they are the Good Fairy?

Adam Taggart's picture
Adam Taggart
Status: Peak Prosperity Co-founder (Online)
Joined: May 26 2009
Posts: 2357
Today's Market Face-Melter

Boy, for those long stocks, today's across-the-board plunge must feel at lot like this:

The Dow is down over 500 points at the moment, the S&P is well below its 1900 support level and the Russell has cracked below 1,000. Oil is down over 5% and is a whisker away from dropping into the $20s. Yipes!!

As an FYI, I did just get off the phone with our endorsed advisers at New Harbor Financial. Their maniacal focus on risk-management is paying off as hoped so far. While the market has dropped nearly 10% since the end of last year, their general portfolio has remained flat. This is exactly why we've been stressing building cash and hedging so loudly over the past year.

BK524's picture
BK524
Status: Member (Offline)
Joined: Jul 31 2012
Posts: 10
New Harbor Financial & TD Bank N.A.

I was looking into New Harbor Financial (PP's endorsed financial advisors) and found something that seems odd/contradictory to me. Perhaps someone can set me straight.

I believe New Harbor Financial uses TD Ameritrade as the custodian of their clients' assets. I believe TD Ameritrade has a deposit account arrangement with TD Bank N.A., which is on the list of banks that Chris says he avoids.

So, given that, why would I want to invest with New Harbor? Maybe I am misinterpreting their relationship with TD Ameritrade / TD Bank?

cmartenson's picture
cmartenson
Status: Diamond Member (Offline)
Joined: Jun 7 2007
Posts: 4711
Brokerage vs Bank

BK524 wrote:

I was looking into New Harbor Financial (PP's endorsed financial advisors) and found something that seems odd/contradictory to me. Perhaps someone can set me straight.

I believe New Harbor Financial uses TD Ameritrade as the custodian of their clients' assets. I believe TD Ameritrade has a deposit account arrangement with TD Bank N.A., which is on the list of banks that Chris says he avoids.

So, given that, why would I want to invest with New Harbor? Maybe I am misinterpreting their relationship with TD Ameritrade / TD Bank?

TD Bank (which happens to be my commercial bank...funds don't stay there long though...) is a different entity from TD the brokerage.  The "TD" comes from an acquisition Ameritrade made in 2006.

The relationship is one of equity ownership only, as I understand it.  From Wiki:

On January 24, 2006, Ameritrade Holding Corporation acquired TD Waterhouse USA from TD Bank Financial Group.[6] Following the acquisition, it renamed itself TD Ameritrade.

TD Ameritrade is one of the largest online brokerages, with 6.3 million funded client accounts and $663 billion in client assets.[7] Revenue and net income are expected to increase to $1.8 billion and $557 million, respectively.

TD Bank now owns 39% of TD Ameritrade, and purchased Ameritrade's Canadian brokerage operations for $60 million cash.

As part of the acquisition, Ameritrade investors received a special one-time $6 dividend, funded from Ameritrade borrowings and excess cash contributed to TD Waterhouse USA by TD Bank. TD Bank will limit their ownership of TD Ameritrade to 45% for up to ten years after the acquisition

(Source

So if TD the bank gets in derivative trouble or not, there's no direct financial connection and certainly no co-mingling of funds to worry about.  The worst that could happen is that TD bank could be hard up for cash and it dumps its equity holdings of TD Ameritrade on the market crushing the price of that stock.  So if you are an equity holder you might feel the pain.

As with any brokerage, you have to understand the what the protections and risks are and how the SIPC insurance works.

Here's a good starting point: http://www.mymoneyblog.com/e-trade-go-splat-basics-of-sipc-brokerage-insurance.html

The basic advice is to keep good records on your end.

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