But I wouldn't bet on either Mireille or moi enjoying the big break any time soon. They are enjoying the party while it lasts. The Fed must remain ultra-loose near zero rates, while upholding the perception that Yellen, Dudley & Co. will adhere to Bernankes doctrine of pushing back against a tightening of financial conditions (aka market risk aversion). Corporate debt markets, at the brink of serious liquidity issues on Monday and Tuesday, bounced back by weeks end. I saw no convertible debt issues this week. At least six local-government financing vehicles had continuing plans into next year for dollar-denominated bond offerings, and more were pursuing inquiries into the viability of such issues. Best known for his endurance tricks, in 1999 Blaine was entombed for seven days in an underground plastic box buried six feet deep under a three-ton tank filled with water in New York City. One of these days the markets may break lower when there are large quantities of bearish hedges in the marketplace. Global risk markets traded this week tick-for-tick with the yen. Eventually markets break abruptly lower, at least partially as a result of widespread hedging of market risk.
And these risk distortions ensure booming markets and the availability of cheap and liquid risk insurance. Over the years Ive used the analogy of selling flood insurance during a drought. All bets are off, however, when torrential rains eventually arrive. Money pours into risk markets based on the notion of abundant liquidity and policymaker backstops. The reinsurance market immediately dislocates as speculators attempt to dump risk and hedge insurance theyve sold. It is also clear that the hedge fund industry is really struggling in this market environment. That is the scenario where delta hedging would see lower prices force additional selling (to hedge derivatives written) - that would then see lower prices and only more self-reinforcing selling. Short squeezes then quickly provide impetus for bullish panic buy the dip trading. Markets then reverse higher, with a large amount of put options and bearish derivatives expiring worthless. Most EM currencies and markets rallied sharply.
Bloodbath was used repeatedly to describe Mondays action throughout EM currencies and securities markets. Faith has been broken that EM central banks retain the resources required to stabilize their currencies and ensure liquid securities markets. Markets disregard unfolding trouble for as long as possible. Doesnt make much of a political statement but its the best way to stay out of trouble. Its been a repeating cycle. They amount to this cycles government-directed finance unleashed to jump-start a global reflationary cycle. The notion of cheap and liquid insurance - so integral to boom-time finance - is invalidated. Products built to provide insurance for investors came up short. But I say very short commentary can be great. Target and mission/extra/photo Objectives can be marked as complete by clicking them. Intended for PC Streamers to easily switch between generating Roulettes and playing the game with the generated objectives on screen for the viewers. Theres always been a game aspect to this trading dynamic. After trading up to 54 (high since the financial crisis) on Monday, the VIX (equities volatility) index had been cut in half (to 26) by Fridays close. After trading slightly below 118 on Monday, the yen weakened back to 121.71 (to the dollar) to close out the week.
Moreover, Chinas recent devaluation badly undermined the perception of a strong and well-managed Chinese currency tied securely to the US dollar. And importantly, China must be resolute in defending its currency peg to the dollar. Similarly, the ECB must convey that it is willing to boost and broaden its securities purchase program as necessary, also pushing back to suppress euro rallies. Importantly, ECB and BOJ officials stated their willingness to do more as necessary. The BOJ must continue with its massive QE program, ready to push back hard against a strengthening yen. Chinese officials must be willing to adopt whatever it takes fiscal and monetary stimulus to sustain their faltering expansion - economic activity essential to the overall global economy.learn more Importantly, confidence that Chinese officials have their markets, Credit system and economy under control has evaporated. A housing recovery was expected to work wonders on the financial sector and real economy. A key dynamic has been repeatedly instrumental to market recovery and bull market resumption: global players respond to risk off upheaval by buying derivative insurance protection and boosting short positions and other hedges. This onslaught of buying power in the past spurred the global securities market bull to lunge upward.
