The Dow Peaked At 14,000 Before The Last Stock Market Crash, And Now Dow 24,000 Is Here

The absurdity that we are witnessing in the financial markets is absolutely breathtaking.  Just recently, a good friend reminded me that the Dow peaked at just above 14,000 before the last stock market crash, and stock prices were definitely over-inflated at that time.  Subsequently, the Dow crashed below 7,000 before rebounding, and now thanks to this week’s rally we on the threshold of Dow 24,000.  When you look at a chart of the Dow Jones Industrial Average, you would be tempted to think that we must be in the greatest economic boom in American history, but the truth is that our economy has only grown by an average of just 1.33 percent over the last 10 years.  Every crazy stock market bubble throughout our history has always ended badly, and this one will be no exception.

And even though the Dow showed a nice gain on Wednesday, the Nasdaq got absolutely hammered.  In fact, almost every major tech stock was down big.  The following comes from CNN…

Meanwhile, big tech stocks — which have propelled the market higher all year — were tanking. The Nasdaq fell more than 1%, led by big drops in Google (GOOGL, Tech30) owner Alphabet, Amazon (AMZN, Tech30), Apple (AAPL, Tech30), Facebook (FB, Tech30) and Netflix (NFLX, Tech30).

Momentum darlings Nvidia (NVDA, Tech30) and PayPal (PYPL, Tech30) and red hot gaming stocks Electronic Arts (EA, Tech30) and Activision Blizzard (ATVI, Tech30) plunged too. They have been some of the market’s top stocks throughout most of 2017.

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China Hits A Brick Wall: For First Time Ever, Record Chinese Credit Creation Fails To Stimulate Economy

We believe that exhibit 1 says a lot: it shows that despite a record level of new credit issued by China’s PBoC YTD through Oct. 2017 (which stands in stark contrast to government authorities continued statements that China is de-levering), China’s economic backdrop is currently experiencing:

(a) monthly construction new start (commercial + residential + office) growth slowing Y/Y (Ex. 2),
(b) monthly fixed asset investment growth slowing Y/Y (Ex. 9),
(c) monthly cement output slowing Y/Y (Ex. 5),
(d) monthly electricity production slowing Y/Y (Ex. 6),
(e) monthly M2 money supply growth slowing Y/Y (Ex. 7),
(f) monthly household loan growth slowing Y/Y (Ex. 8),
(g) monthly private fixed asset investment growth slowing Y/Y (Ex. 10), and
(h) monthly home price growth slowing Y/Y (Ex. 12) – in fact, select data points have turned negative Y/Y.

Stated differently, while the lion’s share of our client base continues to tell us, with respect to our bearish views on China… “President Xi Jinping will simply stimulate more if/when things get bad”, we would highlight, again as detailed in Ex. 1 below, China stimulated at a record pace in 2017, yet it did not resonate in improved economic activity (in fact, the exact opposite appears to be unfolding – i.e., economic growth is slowing across a number of data points).

Furthermore, underpinning our view that China’s debt stimulus was targeted specifically at the months preceding the 19th Party Congress in Oct. 2017 (i.e., when President Xi Jinping consolidated power to become the strongest Chinese leader since Mao Zedong), implying we may see a phase of debt fatigue, we note that in the first 10 months of 2016, incremental credit issued in China on a month-over-month (“M/M”) basis was negative three times (i.e., May, July, and Oct.), and averaged $189 billion on a monthly basis; yet, in the first 10 months of 2017, incremental credit issued on a M/M basis was positive in each month outside of Oct., and averaged $429 billion on a monthly basis (in Oct. 2017, the month the 19th Party Congress concluded, new credit issued fell by $11.9 billion M/M).

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We Have Tripled The Number Of Store Closings From Last Year, And 20 Major Retailers Have Closed At Least 50 Stores In 2017

Did you know that the number of retail store closings in 2017 has already tripled the number from all of 2016?  Last year, a total of 2,056 store locations were closed down, but this year more than 6,700 stores have been shut down so far.  That absolutely shatters the all-time record for store closings in a single year, and yet nobody seems that concerned about it.  In 2008, an all-time record 6,163 retail stores were shuttered, and we have already surpassed that mark by a very wide margin.  We are facing an unprecedented retail apocalypse, and as you will see below, the number of retail store closings is actually supposed to be much higher next year.

Whenever the mainstream media reports on the retail apocalypse, they always try to put a positive spin on the story by blaming the growth of Amazon and other online retailers.  And without a doubt that has had an impact, but at this point, online shopping still accounts for less than 10 percent of total U.S. retail sales.

Look, Amazon didn’t just show up to the party.  They have been around for many, many years and while it is true that they are growing, they still only account for a very small sliver of the overall retail pie.

So those that would like to explain away this retail apocalypse need to come up with a better explanation.

As I noted in the headline, there are 20 different major retail chains that have closed at least 50 stores so far this year.  The following numbers originally come from Fox Business…

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Satoshi Secrets & Why Nearly 4 Million Bitcoins Are "Lost" Forever

According to new research from Chainalysis, a digital forensics firm that studies the bitcoin blockchain, 3.79 million bitcoins are already gone for good based on a high estimate - and 2.78 million based on a low one. Those numbers imply 17% to 23% of existing bitcoins, which are today worth around $9,000 each, are lost.

While others have speculated about the number of lost bitcoins, the Chainalysis findings are significant because they rely on a detailed empirical analysis of the blockchain, where all bitcoin transactions are recorded.

As the graphic above shows, Chainalysis’s conclusions rely on segmenting the existing bitcoin supply based on age and transaction activity. For some segments, the company used statistical sampling to determine the amount lost.

The segment “Mined Coins” reflects bitcoins mined in 2017 (which are presumed not to be lost), while “transactional” refers to those that have moved or spent in the last year—very few of which are lost. Likewise, the category of “Strategic Investors,” who have held their bitcoins for 1-2 years represent a very small share of the losses.

Here’s the data in another format, which shows how “Out of circulation” bitcoins - those mined 2-7 years ago and belonging to long-time investors known as “hodlers” - and those from the early days of bitcoin in 2009 and 2010 account for the vast majority of the lost coins:

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Gold Fund: Bitcoin Will Make Gold "Global Money" Again

The manager of Old Mutual Gold & Silver Fund, a precious metals fund with over $220 mln under control has said Bitcoin is “paving the way” for a global gold comeback.

Speaking to Bloomberg in an interview published today, Ned Naylor-Leyland said that the marriage of Bitcoin and gold was essentially a logical one given the characteristics and remit of both.

“Bitcoin was explicitly designed to be digital gold,” he said.

“So if you’re going to have a small proportion of a fund in Bitcoin, it should be in a gold fund because that’s exactly the point.”

As CoinTelegraph's William Suberg notes, the fund, which began in April this year, is aiming to allocate up to five percent to cryptocurrency, creaming off profits from price upticks to reinvest back into gold and silver.

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Chinese Stocks Plummet: Shanghai Tumbles Most In 17 Months As Bond Rout Spreads

The euphoria from the year-end melt up in Europe and the US failed to inspire Chinese traders, and overnight China markets suffered sharp losses, with the Shanghai Composite plunging 2.3%, its biggest one day drop since June 2016, over growing fears that the local bond rout is getting out of control. Both the tech-heavy Chinext and the blue chip CSI 300 Index dropped over 3%, as the sharp selloff accelerated in the last hour, as Beijing's "national team" plunge protection buyers failing to make an appearance. There were sixteen decliners for every one advancing share.

In addition to tech, consumer non-cyclical and health-care sectors, the hardest hit names were banks such as ICBC, Ping An Insurance and Kweichow Moutai. Over in Hong Kong, the Hang Seng Index slid 1 percent from a decade-high, one day after closing above 30,000.

Confirming our report from last week, that traders were stunned by an official warning from Beijing that some stocks - in this case Kweichow Moutai, one of the most popular stocks among investors  - had risen "too far, too fast", Ken Peng, strategist at Citi private bank, told CNBC Thursday that over the weekend he had heard views about particular Chinese stocks having moved too fast. He also said that Thursday's downward move was impacted by "relative tight liquidity conditions in financial markets overall, because of a more stringent liquidity policy by the central bank."

"The decline in Moutai has triggered selloffs in some of this year’s best performing stocks," said Zhengyang Shen, Shanghai-based analyst at Northeast Securities. "When those giant stocks fall, retail investors will follow to sell their holdings. The ChiNext stocks do not have much support from the national team, so they fell even more," he said, referring to state-backed funds.

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Tech Giants Look to WTO to Entrench Their Monopoly Powers and Profits

In the early 1990s, transnational corporations (TNCs) in the agriculture, services, pharmaceuticals, and manufacturing sectors each got agreements as part of the WTO to lock in rights for those companies to participate in markets under favorable conditions, while limiting the ability of governments to regulate and shape their economies. The topics corresponded to the corporate agenda at the time.

Today, the biggest corporations are also seeking to lock in rights and handcuff public interest regulation through trade agreements, including the WTO. But today, the five biggest corporations are all from one sector: technology; and are all from one country: the United States. Google, Apple, Facebook, Amazon, and Microsoft, with support from other companies and the governments of Japan, Canada, and the EU, are seeking to rewrite the rules of the digital economy of the future by obtaining within the WTO a mandate to negotiate binding rules under the guise of “e-commerce.”

However, the rules they are seeking go far beyond what most of us think of as “e-commerce.” Their top agenda is to ensure free ― for them ― access to the world’s most valuable resource ― the new oil, which is data. They want to be able to capture the billions of data points that we as digitally-connected humans produce on a daily basis, transfer the data wherever they want, and store them on servers in the United States. This would endanger privacy and data protections around the world, given the lack of legal protections on data in the US.

Then they can process data into intelligence, which can be packaged and sold to third parties for large profits, akin to monopoly rents. It is also the raw material for artificial intelligence, which is based on the massive accumulation of data in order to “train” algorithms to make decisions. In the economy of the future, whoever owns the data will dominate the market. These companies are already being widely criticized for their monopolistic and oligopolistic behaviors, which would be consolidated under these proposals.

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Bank Of America Analyst: A ‘Flash Crash’ In Early 2018 ‘Seems Quite Likely’

Is the stock market bubble about to burst?  I know that I have been touching on this theme over and over and over again in recent weeks, but I can’t help it.  Red flags are popping up all over the place, and the last time so many respected experts were warning about an imminent stock market crash was just before the last major financial crisis.  Of course nobody can guarantee that global central banks won’t find a way to prolong this bubble just a little bit longer, but at this point they are all removing the artificial support from the markets in coordinated fashion.  Without that artificial support, it is inevitable that financial markets will experience a correction, and the only real question is what the exact timing will be.

For example, Bank of America’s Michael Hartnett originally thought that the coming correction would come a bit sooner, but now he is warning of a “flash crash” during the first half of 2018…

Having predicted back in July that the “most dangerous moment for markets will come in 3 or 4 months“, i.e., now, BofA’s Michael Hartnett was – in retrospect – wrong (unless of course the S&P plunges in the next few days). However, having stuck to his underlying logic – which was as sound then as it is now – Hartnett has not given up on his “bad cop” forecast (not to be mistaken with the S&P target to be unveiled shortly by BofA’s equity team and which will probably be around 2,800), and in a note released overnight, the Chief Investment Strategist not only once again dares to time his market peak forecast, which he now thinks will take place in the first half of 2018, but goes so far as to predict that there will be a flash crash “a la 1987/1994/1998” in just a few months.

That certainly sounds quite ominous.

Just so that there is no confusion, let me give you his exact quote…

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“The Medical Cost Reduction Act of 2017”

Law #1 – Establish A National Fee Schedule for Emergency Procedures
For unscheduled hospital admissions and surgeries, patients cannot realistically “consent” to provider charges.

The documents that patients must  sign to “pay whatever is charged”  or to “ pay whatever your insurance does not cover” are what legal scholars call ‘procedurally unconscionable.’

The patient must agree to the terms of the providers.  The only way to receive desperately-needed care is to accept whatever charges are assessed. The patient is simply assumed to have provided informed consent to any procedure, and to any fee from any provider. This is not normal commercial practice…..instead it is naked force. And it must change, with the following new rules:

In emergencies, the charges to an uninsured or ‘out of-network’ patient must not exceed 150% of the lowest basic charge in the Medicare fee schedule. (i.e., no upcoding)
Hospitals can no longer use their “chargemaster” rates to bill the uninsured.
Doctors called in for emergencies cannot charge 800% of Medicare, as they often do today.
Any provider who tries to bill above the allowed rates, for patients who are clearly unable to provide informed consent, will be considered guilty of consumer fraud. Not only will their bills be uncollectible, they could be charged criminally in the most egregious cases.

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Fed Hints During Next Recession It Will Roll Out Income Targeting, NIRP

In a moment of rare insight, two weeks ago in response to a question "Why is establishment media romanticizing communism? Authoritarianism, poverty, starvation, secret police, murder, mass incarceration? WTF?", we said that this was simply a "prelude to central bank funded universal income", or in other words, Fed-funded and guaranteed cash for everyone.

On Thursday afternoon, in a stark warning of what's to come, San Francisco Fed President John Williams confirmed our suspicions when he said that to fight the next recession, global central bankers will be forced to come up with a whole new toolkit of "solutions", as simply cutting interest rates won't well, cut it anymore, and in addition to more QE and forward guidance - both of which were used widely in the last recession - the Fed may have to use negative interest rates, as well as untried tools including so-called price-level targeting or nominal-income targeting.

The bolded is a tacit admission that as a result of the aging workforce and the dramatic slack which still remains in the labor force, the US central bank will have to take drastic steps to preserve social order and cohesion.

According to Williams', Reuters reports, central bankers should take this moment of “relative economic calm” to rethink their approach to monetary policy. Others have echoed Williams' implicit admission that as a result of 9 years of Fed attempts to stimulate the economy - yet merely ending up with the biggest asset bubble in history - the US finds itself in a dead economic end, such as Chicago Fed Bank President Charles Evans, who recently urged a strategy review at the Fed, but Williams’ call for a worldwide review is considerably more ambitious.

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BoE Deputy Governor Gives Crazy Speech Warning Markets Have Underestimated Rate Rises

On 2 November 2017, the Bank of England raised rates for the first time in a decade and Sterling’s initial rise was promptly sold off by forex traders as we discussed.

The 7-2 vote by the Monetary Policy Committee was not the unanimous decision some had expected, while Cunliffe and Ramsden saw insufficient evidence that wage growth would pick up in line with the BoE’s projections from just over 2% to 3% in a year’s time. Ben Broadbent, MPC member, deputy governor and known to be a close confidant of Governor Carney, gave a speech today at the London School of Economics (LSE) in which he warned markets that Brexit issues didn’t necessarily mean that interest rates have to remain low.

Bloomberg reports that Broadbent stated that the Brexit impact on monetary policy depends on how it affects demand, supply and the exchange rate.

"There are feasible combinations of the three that might require looser policy, others that lead to tighter policy."

Which sounds alot like he doesn't know, although he stuck to the central bankers trusty tool, reassuring LSE students the Phillips Curve "still seems to have a slope".

According to the FT.

The deputy governor of the Bank of England has warned that financial markets have underestimated the chance of further interest rate rises. In a speech at the London School of Economics on Wednesday, Ben Broadbent said markets had placed too much emphasis on the idea that interest rates needed to be kept low in the face of Brexit uncertainty. The deputy governor said it was “uncertain” and “complex” to anticipate how Brexit would affect inflation. But he rejected the assertion that Brexit “necessarily implies low interest rates”.

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Venezuela Defaults On A Debt Payment – Is This The First Domino To Fall?

Did you know that Venezuela just went into default?  This should be an absolutely enormous story, but the mainstream media is being very quiet about it.  Wall Street and other major financial centers around the globe could potentially be facing hundreds of millions of dollars in losses, and the ripple effects could be felt for years to come.  Sovereign nations are not supposed to ever default on debt payments, and so this is a very rare occurrence indeed.  I have been writing about Venezuela for years, and now the crisis that has been raging in that nation threatens to escalate to an entirely new level.

Things are already so bad in Venezuela that people have been eating dogs, cats and zoo animals, but now that Venezuela has officially defaulted, there will be no more loans from the rest of the world and the desperation will grow even deeper…

Venezuela, a nation spiraling into a humanitarian crisis, has missed a debt payment. It could soon face grim consequences.

The South American country defaulted on its debt, according to a statement issued Monday night by S&P Global Ratings. The agency said the 30-day grace period had expired for a payment that was due in October.

A debt default risks setting off a dangerous series of events that could exacerbate Venezuela’s food and medical shortages.

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Emerging Market Junk Debt Issuance Surges To New Record As The "Search For Yield" Intensifies

It seems that the never-ending "thirst for yield" from the world's massive pension funds, combined with the ever-present "cash on the sidelines" problem, is driving the creation of yet another global financial bubble in emerging market junk bonds.  Alas, as the FT points out today, the world's largest fixed income investors can't seem to get enough of the risky paper as bond issuance by the most financially vulnerable countries has suddenly spiked to a all-time high of $75 billion just as spreads are tightening to all-time lows.

Junk-rated emerging market sovereigns have raised $75bn in syndicated bonds so far this year, up 50 per cent year on year to the highest total on record, according to figures from Dealogic, a data provider.

The increase has buoyed the total volume of debt-raising by developing economies; non-investment grade issuance has made up 40 per cent of the new debt syndicated in EM so far in 2017.

These rare and new issuers have been lured into the market by attractive pricing — strong investor demand for EM debt has pushed pricing up and yields down, making it one of the best-performing assets globally in 2017.

According to Bloomberg Barclays indices, EM’s local currency-denominated sovereign debt has returned 10.4 per cent since the start of this year, while dollar-denominated debt has returned 7.6 per cent. By contrast, US Treasuries have returned 2.5 per cent while European nations’ debt has returned 0.9 per cent.

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This Is What A Pre-Crash Market Looks Like

The only other times in our history when stock prices have been this high relative to earnings, a horrifying stock market crash has always followed.  Will things be different for us this time?  We shall see, but without a doubt this is what a pre-crash market looks like.  This current bubble has been based on irrational euphoria that has been fueled by relentless central bank intervention, but now global central banks are removing the artificial life support in unison.  Meanwhile, the real economy continues to stumble along very unevenly.  This is the longest that the U.S. has ever gone without a year in which the economy grew by at least 3 percent, and many believe that the next recession is very close.  Stock prices cannot stay completely disconnected from economic reality forever, and once the bubble bursts the pain is going to be unlike anything that we have ever seen before.

If you think that these ridiculously absurd stock prices are sustainable, there is something that I would like for you to consider.  The only times in our history when the cyclically-adjusted return on stocks has been lower, a nightmarish stock market crash happened soon thereafter…

The Nobel-Laureate, Robert Shiller, developed the cyclically-adjusted price/earnings ratio, the so-called CAPE, to assess whether stocks are likely to be over- or under-valued. It is possible to invert this measure to obtain a cyclically-adjusted earnings yield which allows one to measure prospective real returns. If one does this, the answer for the US is that the cyclically-adjusted return is now down to 3.4 percent. The only times it has been still lower were in 1929 and between 1997 and 2001, the two biggest stock market bubbles since 1880. We know now what happened then. Is it going to be different this time?

Since the market bottomed out in early 2009, the S&P 500 has been on a historic run.  If this rally had been based on a booming economy that would be one thing, but the truth is that the U.S. economy has not seen 3 percent yearly growth since the middle of the Bush administration.  Instead, this insane bubble has been almost entirely fueled by central bank manipulation, and now that manipulation is being dramatically scaled back.

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"Lull Before The Storm" - Will China Bring An Energy-Debt Crisis?

It is easy for those of us in the West to overlook how important China has become to the world economy, and also the limits it is reaching. The two big areas in which China seems to be reaching limits are energy production and debt. Reaching either of these limits could eventually cause a collapse.

China is reaching energy production limits in a way few would have imagined. As long as coal and oil prices were rising, it made sense to keep drilling. Once fuel prices started dropping in 2014, it made sense to close unprofitable coal mines and oil wells. The thing that is striking is that the drop in prices corresponds to a slowdown in the wage growth of Chinese urban workers. Perhaps rapidly rising Chinese wages have been playing a significant role in maintaining high world “demand” (and thus prices) for energy products. Low Chinese wage growth thus seems to depress energy prices.

(Shown as Figure 5, below). China’s percentage growth in average urban wages. Values for 1999 based on China Statistical Yearbook data regarding the number of urban workers and their total wages. The percentage increase for 2016 was based on a Bloomberg Survey.

The debt situation has arisen because feedback loops in China are quite different from in the US. The economic system is set up in a way that tends to push the economy toward ever more growth in apartment buildings, energy installations, and factories. Feedbacks do indeed come from the centrally planned government, but they are not as immediate as feedbacks in the Western economic system. Thus, there is a tendency for a bubble of over-investment to grow. This bubble could collapse if interest rates rise, or if China reins in growing debt.

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New Potential Credit Risk Bombs: Exotic, ‘Nonlinear’ and Private Transactions

The Wall Street Journal has a story today on a new type of credit market transaction described as “nonlinear finance”. That label alone should send off alarms, since one assumes it is truth in advertising, a rare commodity in Big Finance. “Nonlinear” says that under certain scenarios, the price of the instrument goes “nonlinear,” as in behaves in a radically different, ungraceful manner or can be expected to have its price gap out if particular conditions are met. That would also suggest the instrument would be hard to hedge.

One of the reasons I can’t be as specific as I’d like, as Wall Street Journal readers pointed out, is the actual article is thin on details. However, that isn’t as surprising as it should seem. These trades sound a lot like the old CDOs, the ones that blew up so spectacularly in the crisis. Technically, those were asset-backed securities, or ABS CDOs.1 If you were reading the financial press before the crisis, the only reporter who recognized the importance and riskiness of CDOs was the Financial Times’ Gillian Tett, who doggedly kept after them and managed to ferret out critical bits of information. CDOs also became large enough as a product that there was some aggregate data, but it wasn’t terribly reliable (one huge problem was the potential for double-counting).

And it also makes sense that financiers would find a new bottle for the old CDO wine, since any investor would probably have a lot of ‘splaining to do if he were to invest in something that was sold as a CDO, even if that was a straight up description.

First to the critical bits of the Journal story, then more discussion as to how worried to be about this development. From the Journal:

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The World's Biggest Bubbles

We recently discussed (see here) Alberto Gallo’s (portfolio manager of Algebris Macro Credit Fund) shot at the $64,000 (more like trillion) question in his report “The Central Bank Bubble: How Will It Burst?”.

As we said at the time, one of our favourite parts of the report was “The Money Tree” infographic which explains how QE has benefited a plethora of investment strategies and created the bubble to end all bubbles.

Having outlined four scenarios which could prick the central bank bubble, Gallo has done some further work in which he identifies what he thinks are the fourteen largest bubbles in the world today. Helpfully, he also ranks them. From the Financial Sense website.

Many economists believe that it’s impossible to recognize bubbles before they pop. However, Alberto Gallo of Algebris Investments has compiled a list of the largest potential bubbles around the world today, ranked by degree of risk based on size, duration, percent appreciation, valuations, and the types of irrational behavior driving them higher. Financial Sense spoke with him…to discuss his research, the areas he believes are highest at risk, and how he's approaching the current investment environment…Right now, the risk is high in a variety of assets around the world. “We’re in a world where most assets are overvalued,” Gallo said, which means “in a world where almost everything looks like a bubble, the definition of a bubble has to be changed.”

Besides valuation, Gallo lists another ten characteristics which are “typically present” in today’s bubbles. These are:

This time is different
Fear of missing out
Sky is the limit
Flipping
No credit, no problem
Buy the dip
Borrow while you can
Bidding wars
The trend is your friend
Financial engineering

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Goldman's Asset Arm Takes Big Hit On Venezuelan Bond Bloodbath

The fallout from the Venezuelan bond restructuring has claimed a major victim in Goldman Sachs Asset Management, or rather some of the “muppets” who trusted Goldman to invest their money. However, the route which led Goldman to losing a chunk of client money wasn’t just a case of bad judgement, being riddled with the usual mixture of greed, questionable ethics and government intervention. As we detailed in “Goldman Accused Of Funding Maduro’s Dictatorship”.

Goldman controversially purchased $2.8 billion of 2022 bonds in May 2017 in the state-owned oil producer PDVSA, for about $865 million - or about 31 cents on the dollar. This prompted Julio Borges, President of the National Assembly and head of Venezuela’s opposition, to accuse Goldman of “aiding and abetting the country’s dictatorial regime.” Borges threatened that any future democratic government would not recognise or pay on the bonds. In true Goldman fashion, however, the deal was just too lucrative to pass up, or so it seemed at the time, as Goldman paid a then 30% discount to other Venezuelan bonds with a similar maturity.

Goldman’s ”defence” was that it did not buy the bonds directly from PDVSA, consequently it did not transfer funds directly to the Venezuelan regime.

To make matters worse, when the Trump White House extended sanctions against Venezuela over the Summer, including a ban on trading Venezuelan debt, Goldman’s bonds were mysteriously exempt. As we argued here.

“the logic is that if Goldman was forced to liquidate the bonds, or worse was stuck holding them as Venezuela went bankrupt, it would take a huge hit on the nearly $3 billion notional position. As such, Goldman's advisors to Trump made it quite clear that any sanctions against Venezuela would have to be Goldman Sachs revenue neutral first and foremost. That's precisely what happened.”

We have to acknowledge, however, that the next comment of ours was only half correct.

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The Federal Reserve Has Just Given Financial Markets The Greatest Sell Signal In Modern American History

Why have stock prices risen so dramatically since the last financial crisis?  There are certainly many factors involved, but the primary one is the fact that the Federal Reserve has been creating trillions of dollars out of thin air and has been injecting all of that hot money into the financial markets.  But now the Federal Reserve is starting to reverse course, and this has got to be the greatest sell signal for financial markets in modern American history.  Without the artificial support of the Federal Reserve and other global central banks, there is no possible way that the massively inflated asset prices that we are witnessing right now can continue.

The chart below comes from Sven Henrich, and it does a great job of demonstrating the relationship between the Fed’s quantitative easing program and the rise in stock prices.  During the last financial crisis the Fed began to dramatically increase the size of our money supply, and they kept on doing it all the way through the end of October 2017.

Unfortunately for stock traders, the Federal Reserve has now decided to change course, and that means that the process that has created these ridiculous stock prices is beginning to go in reverse.  In fact, according to Wolf Richter this reversal just started to go into motion within the past few days…

On October 31, $8.5 billion of Treasuries that the Fed had been holding matured. If the Fed stuck to its announcement, it would have reinvested $2.5 billion and let $6 billion (the cap for the month of October) “roll off.” The amount of Treasuries on the balance sheet should then have decreased by $6 billion.

And that’s what happened. This chart of the Fed’s Treasury holdings shows that the balance dropped by $5.9 billion, from an all-time record 2,465.7 billion on October 25 to $2,459.8 billion on November 1, the lowest since April 15, 2015

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Visualizing How Billionaire Investors Hedge Against Geopolitical Black Swans

Sometimes this risk flies under the radar and isn’t as pronounced as it probably should be. However, as Visual Capitalists's Jeff Desjardins notes, in other cases, the topic of risk can catapult to the forefront of discussion. There can be specific events or signals unfolding that give investors the jitters – and during these times, investors will make adjustments to their portfolios to avoid getting caught off guard.

HOW BILLIONAIRES ARE HEDGING

In the following infographic from Sprott Physical Bullion Trusts, we explain the particular geopolitical risks that have the world’s most elite investors concerned today – and what moves they are making to protect themselves from black swans.

The world isn’t predictable at the best of times – but after unanticipated occurrences such as Brexit and the election of Trump in 2016, the geopolitical tea leaves are getting even more difficult to read.

The world is approaching a major inflection point and the intense amount of global angst we’re experiencing now stems from deep, structural forces that have been building over decades. – Reva Goujon, VP Global Analysis of Stratfor

According to Reva Goujon, VP Global Analysis of Stratfor, we are experiencing the perfect storm of “-isms”: nationalism, nativism, protectionism, and isolationism.

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Trump Picks Powell To Be Next Fed Chair

The White House has notified Federal Reserve governor Jerome Powell that President Donald Trump intends to nominate him as the next chairman of the central bank, according to a person familiar with the matter.

The president spoke with Mr. Powell on Tuesday, according to another person familiar with the matter who couldn’t describe what they discussed.


Mr. Trump said in a video last week that he had “somebody very specific in mind” for the job.

“It will be a person who hopefully will do a fantastic job,” Mr. Trump said in a video posted to Instagram, adding, “I think everybody will be very impressed.”

Modest reactions for now in USDJPY and gold...

However, WSJ notes that while President Trump had settled on Mr. Powell by Saturday, but people familiar with the process had cautioned that he could change his mind.

WSJ summarizes Powell's views as follows...

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Why Today's Big Fed Risk Is A "Dovish Surprise": One Trader Explains

In our preview of today's FOMC, we said there is virtually no way the Fed could surprise on the hawkish side, especially with Trump set to unveil Jay Powell as the new head of the Fed: after all, the December rate hike is over 80% priced in at this point. But what about the opposite - can the Fed surprise on the dovish side? That, according to Bloomberg macro commentator and former Lehman trader Mark Cudmore is the biggest risk today. As he writes, "growth is solid, but not spectacular. It would be a brave stretch for the committee to upgrade its outlook. The strong advance 3Q estimate was distorted by the impact of hurricanes on net exports and inventories. Far more probable is that the comments on inflation are tweaked to account for the fact that CPI is picking up slower than anticipated, while the preferred core PCE measure remains close to six-year lows."

Perhaps, but one also has to consider the possibility of a hawkish Fed surprise on Thursday, one in which Trump ignores the consensus and goes with Taylor, or Warsh. The good news here is that according to Morgan Stanley, no matter who the next Fed chair is, any pronounced market moves are to be faded.

But before we get there, we have to go through today's FOMC decision, which is why here is Cudmore's full Macro View preview of the only possible way Yellen can surprise markets:

There’s much greater potential for rates to fall than rise in reaction to the Fed decision and statement on Wednesday. 

The base case is for no major reaction in either direction. A December hike is already more than 80 percent priced with six weeks to run until the decision. There’s little room for a hawkish surprise to impact rates markets.

Fed officials won’t pre- commit, nor do they have any desire to unnecessarily lock themselves on a set path. They won’t guarantee a December rate rise.

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