Must Read Message From The Convexity Maven: As Little As 4% Decline In One Day Could Start A Critical Crash”
Despite option theory being just the Physics of Money, I will not delve into Entropy and Enthalpy to prove my point. Instead I will skip to the conclusion that volatility stays low until it isn’t. A low volatility environment encourages more option selling (and more leverage) in a self-reinforcing feedback loop; a pattern that should presently seem familiar. However, once a destabilizing event occurs (adding heat to the system for you propeller heads), risk and leverage must be reduced in a similar, though opposite, feedback loop where asset selling begets more selling. This was how Portfolio Insurance exacerbated (but did not start) the 1987 crash. It is also how Index Amortizing Structured Notes (IANS) exacerbated (but did not start) the 1994 rate jump, and how Capital Structure Arbitrage exacerbated (but did not start) the sub-prime mortgage bond collapse a decade ago.
Instead, almost a year and a half from the trough of what was a serious global downturn, and now three years after its initiation, Yellen manages to deliver this pearl of wisdom: “I see roughly equal odds that the U.S. economy’s performance will be somewhat stronger or somewhat less strong than we currently project…” Thanks for clearing that up, professor. The media and the mainstream continue to frame monetary policy as a choice between hawkishness and dovishness; continued accommodation or its determined removal. This is the wrong way of contemplating what are going to be serious (psychological) changes. It starts with the state of monetary policy itself. As I wrote before in describing the true meaning of Humphrey-Hawkins, it relates to the evolution of money.
Hysteria among the media and Trump opponents over the prospect of “collusion” between the Trump campaign and the Kremlin may have hit its crescendo this week. That’s right: The wailing from the media and their allies about Donald Trump Jr.’s meeting with some “Kremlin-connected Russian lawyer” (whatever that means) may be the last gasp of this faux scandal. Good riddance.
“We’ve never had QE like this before, and we’ve never had unwinding like this before,” said JPMorgan CEO Jamie Dimon at the Europlace finance conference in Paris. “Obviously that should say something to you about the risk that might mean, because we’ve never lived with it before.”
The last two years of levering up have exacted rapid damage: earnings have fallen to less than six times interest expense, this during an era of unprecedented low interest rates. And as record non-financial debt as a percentage of GDP quickly approaches 50 percent, the share of income required to service this mountain is at a seven-year high. Should financial conditions tighten (the report was published in April prior to the Fed’s June rate hike), one-in-five firms are likely to default, which rises to 22 percent if rates continue to rise.A separate signal of distress flickers into focus when one considers the sectors most at risk. Add up energy, real estate and utilities and you get to about half of the at-risk debt. And we wonder why Boston Fed President Eric Rosengren is perturbed about commercial real estate (CRE) and the risks it poses to the banking system.
Either way, the resources used to build a new road or hire a new person must be taken away from other plans and programs set in motion by other people, who came by the resources honestly. The only possible way in which the economy, or the people as a whole, could benefit from shuffling resources from private use to public use would be if the feds were somehow better resource allocators. But the proposition is laughable. People invest their resources in many different ways. One wants a new car. Another prepares for his retirement. Still another remodels his home, moving his refrigerator closer to the TV screen so he won’t miss anything when getting another beer. The feds are completely ignorant about these investments. And completely inconsiderate of them. They just take the resources away… and use them for their own crackpot schemes.
In stories about her meeting with Donald Trump Jr., Natalia Veselnitskaya, the unlikely celebrity in the latest installment of the Trump-Russia story, is often described as someone with “connections to the Kremlin.” That’s misleading, although her involvement still says much about how power works in Russia.
It is hard to imagine that along with the catastrophe that has been inflicted on Syria for the past six years, another calamity is unfolding in Yemen of damning proportions while the whole world looks on with indifference. What is happening in Yemen is not merely a violent conflict between combating forces for power, but the willful subjugation of millions of innocent civilians to starvation……Seven million people face starvation, and 19 out of 28 million of Yemen’s population are in desperate need of humanitarian aid. Both the Saudis and the Houthis are restricting food and medicine supplies from reaching starving children; many of them are cholera-ridden, on the verge of joining the thousands who have already died from starvation and disease. More than 10,000 have been killed, and nearly 40,000 injured. UNICEF reports nearly 300,000 cholera cases, and a joint statement from UNICEF and the World Health Organization declares the infection is spreading at a rate of 5,000 new cases per day.
Well they “built it”, but in May, “no one came.” Wholesale Inventories rose a better-than-expected 0.4% MoM but sales tumbled worse-than-expected 0.5% (the 3rd monthly decline in a row).
But something has changed in suburbia. While offshoring and automation have destroyed millions of jobs across the country, the decimation of brick and mortar stores by online retailers has pounded the wealth base of suburbia. So much so, that there are more people living in poverty in suburbia than any other place in America.