Rick Bookstaber — Not Wages. Not Inflation. Volatility. ETFs.

The recent tumble in the market is being attributed to the wage report, a rise in interest rates, and concern about inflation. A reassessment of economic conditions does not lead to such a violent reaction. It might give a push, but then gravity does the rest. For the markets, gravity is the technicals -- how leveraged or overextended investors are, how concentrated, and how much liquidity there is in the face of a flood of selling.

This is just a quick recap of a couple of posts I have done over the past months that relate to technicals behind the current market downturn.

Rick Bookstaber Blog

Not Wages. Not Inflation. Volatility. ETFs.
Rick Bookstaber | Chief Risk Office for the Office of the CIO at the University of California

See also

While the labor share - the part of national income paid to workers—has recently continued its decades-long decline, US corporate profit margins have risen further to historic highs, especially for the most profitable firms. Over the last two decades, most industries have also become more concentrated with a few large firms earning a larger share of revenue, potentially shifting the bargaining power from consumers and workers to firms and employers.

As the chart above shows, average wage growth has fallen from 3.5% in 1985-2007 to 2.1% in 2008-2017. While much of the weakness in wage growth over the last decade relative to pre-crisis norms can be attributed to cyclical labor market slack and soft price inflation, longer-run declines in trend productivity growth and in the trend labor share are currently still weighing on wage growth.…

Zero Hedge

Goldman Exposes America's Corporatocracy - Wage Growth Is Slowing, Not Rising

Tyler Durden

also

The VIX scam.

Armstrong Economics
VIX Losses Feeding Collapse

Martin Armstrong

also

• The last day of trading for VelocityShares Daily Inverse VIX Short-Term exchange-traded note (XIV) will be Feb. 20, according to Credit Suisse.
• The XIV security, which had fallen roughly 85 percent in after-hours Monday, resumed trading Tuesday afternoon down 89 percent before being halted again.

CNBC
Credit Suisse says it will end trading in the volatility security that's become the focus of this sell-off

Thomas Franck

Schwab — "New Accounts Are At Levels We Have Not Seen Since The Dot Com Bubble" As Millennials Rush Into Stocks

The dumb money.

Zero Hedge

Schwab: "New Accounts Are At Levels We Have Not Seen Since The Dot Com Bubble" As Millennials Rush Into Stocks

Tyler Durden

Andrew Sheng and Xiao Geng — China’s Live Stress Test

China’s economy has succeeded through trial and error – and the country's recent stock-market collapse should be viewed as part of that process, to be used to drive the next phase of economic reform. One key lesson is that Chinese stock markets remain structurally biased toward state ownership and guidance.

No, China is not going to implode.

Though the blame game is ongoing, the historian Charles Kindleberger’s 1978 book Manias, Panics, and Crashes offers the perfect explanation for what China is experiencing. The economy has undergone a standard cycle of displacement, overtrading, monetary expansion, discredit, and revulsion, all in a matter of less than 12 months.…

This episode proved, once again, that highly leveraged markets are unstable and unsustainable. Financial crises have repeatedly been spawned by inadequately regulated financial innovation, with the combination of market greed and regulatory silos and blind spots enabling booms and busts.

Enter the Austrians.

In China’s case, the government interventionist approach is exacerbating the problem. Though market intervention may limit the scope of losses in the short term, it undermines markets’ ability to self-correct, not to mention the credibility of the Chinese authorities as neutral regulators.

Comes the walk back.

The problem was that retail investors were not equipped to judge the valuation of listed companies like Alibaba, yet they could use margin loans to engage in speculation. This was a dangerous combination – one that would have led to socially unacceptable losses to the retail sectors had the government not intervened. 

Project Syndicate
China’s Live Stress Test
Andrew Sheng, Distinguished Fellow of the Asia Global Institute at the University of Hong Kong, member of the UNEP Advisory Council on Sustainable Finance, former chairman of the Hong Kong Securities and Futures Commission, and currently an adjunct professor at Tsinghua University in Beijing, and Xiao Geng, Director of the IFF Institute and a professor and senior fellow of the Asia Global Institute at the University of Hong Kong

Edward Lambert — Stall Speed for the Stock Market

The research on effective demand has been saying for a year that real output would reach its natural limit in 2014. When real output reaches its natural top level, output tends to slow down and monetary momentum is directed into increasing prices. So the economy does not naturally want to climb anymore. Yet, it need not fall either if enough speed can be maintained at the top limit.

So, do we see inflation rising? Even though wage inflation is still flat at 2.1%, inflation is ticking up. Today the core CPI rose to 2.0% from a previous trend at 1.6% to 1.8%. However, inflation will not rise toward 3%, because wage inflation is low and consumption by capital income will back off....

So, what will happen next? The stock market gets nervous at stall speed. The stock market is not designed for a steady state mentality. It needs movement to know how to adjust its prices and feed the adrenaline junkies. Yet, over the ensuing quarters, the market will be heading down.

So, we will see some erratic movements fairly soon as the stock market gets jittery in stall speed. It will try to speed up or change its angle of attack. But the jitters will not lead to any big movements. The bigger movements will come in a couple quarters. Then an economic contraction will start forming around the beginning of 2015. We will see increasing policy attempts to forestall the contraction.

Angry Bear
Stall Speed for the Stock Market
Edward Lambert

John Jansen — Central Banks Plowing into Equities

Central banks around the world, including China’s, have shifted decisively into investing in equities as low interest rates have hit their revenues, according to a global study of 400 public sector institutions. 

“A cluster of central banking investors has become major players on world equity markets,” says a report to be published this week by the Official Monetary and Financial Institutions Forum (Omfif), a central bank research and advisory group. The trend “could potentially contribute to overheated asset prices”, it warns.

Across the Curve
Central Banks Plowing into Equities
John Jansen

Rob Wile — GRANTHAM: 'The Next Bust Will Be Unlike Any Other'

Grantham blames the Fed for driving asset prices (equities) higher than they would be otherwise through low rates and QE without it resulting in a corresponding increase in capital expenditure. He sees a huge correction in the works. He has previously predicted the bursting of a commodity bubble. That would be a double whammy.

Business Insider
GRANTHAM: 'The Next Bust Will Be Unlike Any Other'
Rob Wile

Philip Pilkington — Stock market wags economy, or not?

If the above analysis is correct then the US economy is even more reliant on the gains made in the stock market than people think. The wealth effect relies on the perception of rising wealth which then leads well-off people with positions in the stock market to spend more money.

So maybe the Fed was right about QE and the wealth effect, i.e., driving risky assets higher than they would be otherwise by reducing the volume of safe assets — Treasuries and agencies — by paying more than they are perceived to be worth. It seems that some of the gains in equities may have spilled into increased consumption by the wealthy.

FT Alphaville
Stock market wags economy, or not?
Philip Pilkington

The Financial Times has announced that FT Alphaville is free with registration, so I am linking to Alphaville but not the Times proper, which remains behind a paywall.

Jeff Cox — The Market Is Not the Economy: What the Fed Misses

"We've made rich people richer," Dallas Fed President Richard Fisher told CNBC in a Monday interview.... 

"This is great for the (Warren) Buffetts and for others who can take advantage of this multiple of great money and cheap money that's been available," he added. "The question is, what have we done for the working men and women of America?"....

As for the "wealth effect" the Fed had hoped to achieve by boosting the stock market with $85 billion of money creation every month, it indeed, as Fisher suggested, has been skewed to upper income levels....

A skeptic on the current Fed approach, Fisher said the tide won't turn until government fiscal policy complements Fed monetary policy.

CNBC NetNet
The Market Is Not the Economy: What the Fed Misses
Jeff Cox | Senior Writer

Jeff Cox — Who's Afraid of QE Ending? Not the Bond Market

..the stock market sold off at the slightest notion that the Fed might pull the plug.

"Equity markets seem to think of asset purchases as magic pixie dust," Cloherty said. "They just make everything fly. No one has a transmission mechanism for how that works, they just know it does."

The Standard & Poor's 500 lost 1 percent following Wednesday's Fed release and was on pace to add to that decline Thursday.
The bond market, though, was humming along even though a Fed exit from bond buying would seem likely to decrease demand and thus put upward pressure on yields.

Instead, yields fell and a popular exchange-traded fund, the iShares Barclays 20+ Year Treasury Bond fund, gained nearly one percent.

CNBC — US Markets
Who's Afraid of QE Ending? Not the Bond Market
Jeff Cox | Senior Writer

Israel to invest portion of reserves in US equities

The Bank of Israel will begin today a pilot program to invest a portion of its foreign currency reserves in U.S. equities.

The investment, which in the initial phase will amount to 2 percent of the $77 billion reserves, or about $1.5 billion, will be made through UBS AG and BlackRock Inc. (BLK), Bank of Israel spokesman Yossi Saadon said in a telephone interview today. At a later stage, the investment is expected to increase to 10 percent of the reserves.

Read it at Bloomberg
Israel to Begin Investing Reserves in U.S Equities Today
by Alisa Odenheimer

Numerian — Just One Last Bubble, Please!

Read it at The Economic Populist
Just One Last Bubble, Please!

Submitted by Numerian

Paul B. Farrell summarizes Gary Shilling

In short, expect a very rough decade for the economy, the market, and the taxpaying public. Here’s Shilling’s history of past cycles that run 15- to 20-year log bull and bear cycles the past 60 years:

•1949-1968: 19-year secular bull market

The great Post-WWII expansion: “The 1949-1968 secular bull market was driven by postwar economic growth, fading deflation fears, low inflation, the institutionalization of equity and the resulting leap in P/Es.” For me a great time: high school, Marines, Korea, plus a great education on the GI Bill.

•1968-1982: 14-year secular bear market

Shilling says “inflation caused by huge Vietnam and Great Society spending dominated the 1968-1982 secular bear market as it pushed interest rates up and P/Es and productivity down.” Remember the oil crisis, recession and a long sideways stock market for over a decade. I was on Wall Street with Morgan Stanley working on troubled banks, corporate and developer restructurings. Evaluated the collapse of the Federal New Towns Development Program for HUD. Long recession. No fun for most investors

•1982-2000: 18-year secular bull market

With Reaganomics: “The unwinding of inflation generated the 1982-2000 secular bull market, aided by the consumer spending spree and, finally, dot-com speculation,” says Shilling. And oh how we loved stocks with 30%-plus returns, some even posting 300% annual returns. We went crazy. “This time it was different.” Barbers offered investment advice and neighborhood barbecues were abuzz with early retirement plans.

•2000-2020: Yes, a 20-year secular bear market till 2020

Shilling says “the speculative investment climate spawned by the dot-com nonsense survived. It simply shifted from stocks.” Our retirement, “pension and endowment funds have been increasing their exposure to alternative investments such as commodities, foreign currencies, hedge funds, private equity, emerging-market equity and debt and real estate” in recent years. Yes, the ‘90s insanity did survive, like Frankenstein, transplanted in a new body by the White House, Treasury, the Fed, Wall Street, and our dogmatic, self-destructive conservative politicians obsessed about tax-cuts-for-the-very-rich.

Shilling sees “a secular bear market really started in 2000 and may persist for a decade as a result of slower GDP growth,” yes, persist till 2020 “with 2% to 3% deflation.”

Read the whole post at MarketWatch
Very slow growth 2012 then long bear to 2020

by Paul B. Farrell

Pimco's equity strategist, Neel Kashkari, wants to leverage the firm's "macoreconomic ability"

Remember Neel Kashkari? He was Hank Paulson's "right hand boy" running the Troubled Asset Relief Program (TARP).

Well, he was hired by Pimco to run their fledgling equities division, where he says...

You're not going to see us launch some plain, old U.S. large cap fund or just tell people to go buy the S&P 500 500," he revealed to the paper. Instead, the Pimco products will leverage the firm's abilities in currenices and macroeconomics to remiove volatility from portfolios based on well-researched stock picking.

That awesome macroeconomic ability sure helped Bill Gross figure out the Treasury market earlier this year, didn't it? Remember their brilliant short bet and "who's gonna buy them now?"

I can't wait to see the performance of Kashkari's portfolio. His current macro view is that interest rates "can't go lower." I guess we can infer from that comment that he means stocks can only go up? Maybe someone should send him a chart of the Nikkei.

Another Goldman "genius" unleashed.