Notes From Underground: Enduring the Doldrums of a Central Bank-Controlled Market Structure

Never has such calm winds cause so much turbulence. The markets have been grinding up and down during the last four weeks as traders and investors weigh the consequences of the Greek resolution and the Chinese intervention into their equity markets. ONE THING IS FOR CERTAIN, THE CHINESE EQUITY MARKET IS AN OXYMORON. If a government can set the price of individual stocks or the price of bonds it is not a MARKET but a plaything for the ruling party. The Chinese Government can try to mandate rising stock prices but ultimately it will take more than a mandate but actually spending of capital to support prices, or else invoking the fear of capital punishment for all short sellers of equities (PUN INTENDED). The talking heads are concerned that the Chinese weakness is causing selling in all global equity markets. The DOW JONES did close under the 200-day moving average last Friday and continued its downward path today. The SPOOs tested the 200-day and managed to save itself by the market close.

The downward pressure in the Chinese market also caused a 2 percent selloff in the DAX.Global equity markets are coordinated in a similar fashion to the relationship in March 2009 when the SPOOS, DAX, Nikkei and FOOTSIE all made coordinated lows from the effects of the financial crisis. Markets are in sync as the search for returns in a GLOBAL ZERO INTEREST RATE environment causes money to flow in syncopated, condensed patterns. The recent drop in commodity prices is causing some investors to perceive a downturn on the horizon as lower commodity prices connote slowing economic activity.But this is not a certain indicator in the world of SECURITIZATION since all goods are subject to be used as collateral as much for their utility value. COPPER is more than wires but has been collateral for many borrowers in China. The list is long for collateral usage but doubtful that food is used as collateral as it has a sell by date.

IF THE THEORY of securitization is correct then all the markets are subject to NEGATIVE FEEDBACK LOOPS, impacting the price of all investments. If you borrowed to buy stocks and used GOLD to secure the loan, falling stock prices give rise to selling GOLD in order to repay losses on overleveraged stock purchases. Leverage and collateral are great when the asset is trending in your favor, but when moving in opposition to a favored investment the pain trade can be one giant adverse feedback loop.

Global bond markets have suffered from the impact of state intervention as the FED, BOJ and ECB have destroyed the price barometer of global debt markets. The European debt markets have turned into a game of BLIND MAN’S BLUFF as market participants are guessing as to when, where and how the ECB will intervene in the market. The ECB is consigned to buy 60 billion euros of EU sovereign debt each month until September 2016 but the BANK said it can front-load the purchases at its choosing. Traders need to be careful as August approaches and EUROPE heads for the beaches. Speculators wishing to short EU sovereign debt have been warned as the ECB will punish the locusts feeding on the balance sheets of European central banks. Hell hath no fury like policy makers scorned!

***GOLD. This is a topic I have discussed in these terms: GREAT FUNDAMENTALS, TERRIBLE CHART PATTERNS. The fundamentals for GOLD are strong because interest rates are negative or ZERO for most of the world’s major economies. More importantly, GOLD is a haven against central bank irresponsibility in a world of FIAT MONEY. Those who argue that without inflation GOLD has no value are too simplistic. GOLD has value as long as central bankers fear DEFLATION and its nefarious effects. The Mario Draghi’s statement, WHATEVER IT TAKES TO SAVE THE EURO, is a prime example of central bank thinking. Since the whatever it takes and no taboos policy was implemented the ECB has grown its balance sheet and because the EURO economy has barely grown. It is what the ECB will do next that provides support for GOLD.

In the FT on July 21, there was an article titled, “ECB Easing Raises Fears on House Price Bubble.” It said: “The ECB’s QE programme risks fueling house price bubbles across several European countries….” The research was conducted by Anna Zabrodzka of Moody Analytics and noted that the “Bundesbank warned in late 2013 that average German house prices could be overvalued by as much as 10 per cent, and by 20 per cent in some cities…” The rise in real estate prices due to the ECB‘s monetary intervention will cause the key question to reassert itself. WHO IS THE ECB SETTING POLICY FOR? HOW  LONG WILL THE BUNDESBANK AND GERMAN VOTERS IGNORE THE INFLATIONARY IMPACT FROM THE QE PROGRAMS?

As for GOLD‘s technical picture it is lousy in terms of all currencies for even the significant support level of 7050 GOLD/YUAN has given way. (That was the level of GOLD/YUAN when INDIA bought 200 tons of gold from the IMF and China was unhappy as it wanted to purchase that IMF Gold). The U.S. DOLLAR price of gold for the Indian Central Bank Purchase was $1045. It’s merely a major price level in terms of central bank purchases. If it fails here the ultimate retest will be the 1980 high of roughly $880. In a world of algo trading reactions to headlines any move will be fast and furious, especially in times of the summer doldrums. Adverse feedback loops can cause ill-winds to blow. Be prepared by staying lean and mean not turning every trade into a position.

***There’s a story that’s to run tomorrow’s Financial Times titled, “ECB Urged to Use Firepower Aggressively,” by Peter Spiegel and Claire Jones. The article notes the release of an IMF report on the Greek crisis and possible contagion from political fallout. The story says the IMF advises:

  1. To manage contagion risks, policy makers should stand ready to deploy, and if necessary adapt, the full arsenal of instruments;
  2. Continued large account surpluses in Germany and the Netherlands were exacerbating imbalances in the Eurozone;
  3. “The IMF called for ‘countries with fiscal space’–a clear reference  to Germany–to use public money to spur investment, something Berlin has been loath to do because of political commitments to maintain a balanced budget.”

What is made clear from the IMF report is that the political crisis and thus economic crisis in Europe is far from over. Also, the IMF is a major creditor to Greece and therefore its research and advice are tainted in its efforts to be repaid at any price. The Germans, especially Chancellor Merkel, are not going to happy about putting the German credit card further into the debt relief for all of EUROPE. Oh, back to floating in the sea waiting for the winds to bring relief from the doldrums. In looking at China I am left wondering about Mao’s statement about an East Wind Prevailing Over the West.

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19 Responses to “Notes From Underground: Enduring the Doldrums of a Central Bank-Controlled Market Structure”

  1. Rob Syp Says:

    From Jim Grant Friday post Zero Hedge

    http://www.zerohedge.com/news/2015-07-25/jim-grant-financial-prices-should-be-discovered-not-administered

    Yra: Do you ever post on Zero Hedge or any other site? Is that something that interests you? Or are you glad to be a one man army at Notes

  2. yra Says:

    rob syp–i see sometimes he picks up some of what i write as do others—after my summer break i will get more aggressive.But I like your thinking.Last Wednesday I was on the new Wall Street Week with Scaramucci and Gary Kaminsky–not sure when it will air but willl let everyone know

  3. an american limey Says:

    “East Wind Prevailing Over the West” was in 1957 and all about how Russia ( China’s pawn sacrifice one) would be the poster child for the overthrow of the west. Hmm, not sure that happened…

    China was the new great hope for the overthrow of team America and that is going as well as Mao’s little gardening experiment (65 million dead).

    SO perhaps the only things that this will teach us is that IF you bet against capitalism you will lose and trying to tame it is a fools errand OR Bet against America and you will lose.

    I understand that we are not at our best right now because the lads on K street want to be financial engineers BUT they are are getting an excellent lesson from the “east wind” of what happens in a “planned” economy.

    As my grandfather taught me, learn from other people’s mistakes not your own.

    An excellent column Trotsky and remember, you post to ZH and the crazies will flood your comment box with vitriol, do you really want to spend your day filtering that?

  4. yra Says:

    rob syp–the Jim Grant piece was published in the FT which is where I read it

  5. Rob Syp Says:

    Zero Hedge republished it and they said it that at the top of the article.

    Since deflation is their (central bankers) worst nightmare isn’t all their actions causing it? Instead of be careful for what you wish for more like be careful for what you don’t wish for.

    Sure seems like everything is screwed up everywhere.

  6. arthur Says:

    “One principle for sure would be: get out of anything that falls below the 200-day moving average.” Paul Tudor Jones

  7. yra Says:

    arthur–I read Tudor’s twenty rules—actually worth posting here if you would

  8. asherz Says:

    “The SPOOs tested the 200-day and managed to save itself by the market close.”
    The only question I have is the word “itself”. Do perspicacious observers have any doubte that we no longer have free markets but regular interventions? China broadcasts it. Japan announces it. The ECB proclaims it. The Fed or their minions are much more subtle. Was QE and ZIRP not intervention.? Was the Long Term Capital market rescue a deax ex machina? Were the conversations between the Treasury Secretary in the 2008 conflagration with the crony capitalists idle talk? Is yesterday’s 12 point SPOO decline and todays futures 11 point rise the normal bobbing in a calm sea? Is gold trading on its technicals or does the dramatic shift in the Commitment of Traders positions relling us something about that controlled market?
    Lots of questions. The reader can supply his own answers.

    • Chicken Says:

      Assuming Bernanke’s salary really is paid in gold, why hasn’t this removed a large percentage of supply from the market?

  9. arthur Says:

    Paul Tudor Jones Trading Rules
    http://charts.stocktwits.com/production/original_37384976.?1432658237

  10. arthur Says:

    http://charts.stocktwits.com/production/original_37384976.?1432658237

  11. yra Says:

    thanks arthur–really helpful for readers

  12. yra Says:

    asherz–absolutely right and as you rightfully state let the readers supply their own answers but as the theme of the post says–markets have been manipulated into the doldrums but red sky at night sailor delight ,red sky at morn sailors take warn

  13. ShockedToFindGambling Says:

    Yra, as I recall the Hunt Bros were using Gold and Silver as collateral for their Gold/Silver trades at Comex. Exacerbated the fall,
    but still marked the top in those markets for decades.

    You get the FT a day in advance? No wonder your trading is so good.

  14. yra Says:

    Shocked–you can get the next day’s electronically–and sometimes being early is not a benefit and as you know it is all in the analysis and then respecting market action

    • ShockedToFinfGambling Says:

      Yra – I was joking. With the FT a day in advance, you would have the European closing prices a day in advance…..even I could make money with that.

    • Chicken Says:

      Where do I sign up for 24 hour advance trading prices, I’d actually pay for that.

  15. Chicken Says:

    Inflation, yet uber-low rates….. a match made in heaven.

  16. Alex Says:

    Interesting that Tudor Jones mentions CONCENTRATION.

    That to me if the KEY to this game, maximum concentration.

    Give me a weak strategy and maximum concentration and I’ll beat everyone who has a great strategy and lousy concentration.

    (Granted, time period comes into play,if playing the daily/weekly then concentration is not so much of an edge.)

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