CLOSING THE DIVERGENCES

Following the biggest (and only) market correction in years, the biggest weekly surge in the VIX ever, the second wholesale market flash crash in history coupled with the first ever limit down trade in the Nasdaq and the E-Mini, not to mention the biggest intraday bearish reversal since Lehman, it would appear that the "smart money" actually was aptly named.

"This Is Not A Correction .. It’s The Beginning Of The Global Bubble Unwind

DOUG NOLAN LINK HERE to the essay

Doug Noland explains how contemporary international finance is a complex network of "faith-based networks" .. sees most the finance as being based on IOUs which depend on confidence, faith & trust ..  "Over recent years too much of global finance has been underpinned – directly and indirectly – by concerted efforts of the world’s central bankers. Trillions of newly minted government finance have been validating tens of Trillions more of private-sector obligations and asset prices. Now, faith in the almighty power of central bank Credit and fiscal deficits, unquestioned for far too long, has begun to dim. The unfolding global crisis of confidence expanded and accelerated this week."

EGON von GREYERZ LINK HERE to the commentary

Egon von Greyerz explains the gravity of the current situation in the international financial system .. "Since the start of the Great Financial Crisis the bubble economy has now properly spread to the world’s second largest economy – China. China has had exponential growth in debt from $2 Trillion to $28 Trillion this century. A major part of this debt has financed 'white elephant' projects and ghost cities. It would be surprising if the total Chinese bad debts were below $10 trillion before all of this is finished ..  The bubble contagion has also totally infected most emerging markets .. The Great Financial Crisis will now transcend into the Great Financial Catastrophe. This could very well involve a total reset or more likely a collapse of the world economy, financial system and world political system. And it won’t be orderly. It is likely to take a very long time and will involve bankruptcies of major parts of the financial system as well as many major nations. It will also lead to social unrest, escalation of wars, major poverty and famine with the world population going down significantly. [Cliff Note: WOW]

CHARLES HUGH SMITH LINK HERE to the essay

Charles Hugh Smith* ponders whether there are any factors which are better than the onset to the financial crisis .. 

1. Then: Markets and central banks feared inflation, as WTIC oil had hit $133 per barrel in the summer of 2008.
Now: As oil tests the $40/barrel level, markets and central banks fear deflation.
2. Then: China had a relatively modest $7 trillion in total debt, considerably less than 100% of GDP.
Now: China's debt has quadrupled from $7 trillion in 2007 to $28 trillion as of mid-2014, an astonishing 282% of gross domestic product (GDP)
3. Then: Central banks had a full toolbox of unprecedented monetary surprises to unleash on the market: TARP, TARF, BARF (OK, that one is made up) rescue packages & credit guarantees, quantitative easing (QE), zero interest rate policy (ZIRP) & direct purchases of mortgages, to name just the top few.
Now: The central bank toolbox is empty: every tool has already been deployed on an unprecedented scale. 
4. Then: Central banks had a relatively clean slate to work with. Interventions in the market and economy were limited to suppressing interest rates in the post-dot-com meltdown era.
Now: Central banks have never stopped intervening since the financial crisis .. 
5. Then: Interest rates had rebounded from the post-dot-com lows in 2003. 
Now: The Fed Funds Rate has been screwed down to .25% for years--an unprecedented period of near-zero interest rates.
6. Then: The average 30-year mortgage rate was above 6%.
Now: Mortgage rates have been under 4% in 2015.
7. Then: The U.S. dollar only soared in financial crises as capital flowed to safe havens. 
Now: The U.S. dollar began a 20% increase in mid-2014, in the midst of what was generally perceived as a solid global expansion.
8. Then: The U.S. dollar fell sharply, boosting the overseas profits of U.S. corporations that account for 40% to 50% of total multinational corporate profits.
Now: The rising dollar has crushed the overseas profits of U.S. corporations. The soaring USD has also crushed emerging market currencies and stock markets, forced China to devalue its currency, the the RMB (yuan)--a devaluation that triggered the current global meltdown in stocks.
9. Then: The global boom was widely viewed as a tide that raised all ships.
Now: Central bank policies are recognized as engines of inequality that have widened income & wealth inequality.

FINANCIAL REPRESSION

SocGen: "Markets Have Lost Faith In Monetary Policies"

"Clearly, markets have lost faith in the ability of unorthodox monetary policies to kick start the economy over time. This also fits the findings of academic literature suggestion diminishing returns from subsequent rounds of QE."

10Y Slides Back Under 2%, Precisely What Goldman Said Could Not Happen

Remember trade #2 from Goldman's list of top trade recommendations for 2015, the one which said "10-year US Treasuries  above 3% but not below 2% in  mid-2015, through cap and floor spreads at zero cost."  Um, yeah.... well, moments ago the 10Y just dropped below 2% for the first time since April.

Global Trade In Freefall: Container Freight Rates From Asia To Europe Crash 60% In Three Weeks

Three weeks ago, "something just snapped." Now, it is getting worse by the day.