Doomsday clock for global market crash strikes one minute to midnight

Except that your fears are not being reflected in CDS spreads across the US HY, Emerging Market, European, or Asian complexes...
 
FlexibleAudio said:
All we need is the right precipitant. My guess is European bank failures. The question is when?????
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War has always been the tool of choice throughout human history. But the leverage ratios and massive numbers in play this time would indicate the scope of the war is going to have to increase significantly as well.
 
Vapor1 said:
HY CDS spreads have been screaming danger for the last 18 months!
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Yes they have been elevated for the last 18 months but the important thing to focus on is the direction and in the past month and 3 months the spreads have been tightening and the second derivative (the rate of change) in the spreads suggests that the perceived risk is waning. Furthermore, US HY Spreads have been elevated largely because of the stress/risk in the oil and gas space (20% of HY issues) which is a much more narrow/sector-specific issue. To be fair, the retrenchment in HY CDS spreads in the last month also has much to do with the firming up of oil prices in the same time period as well.
 
cmalak said:
Yes they have been elevated for the last 18 months but the important thing to focus on is the direction and in the past month and 3 months the spreads have been tightening and the second derivative (the rate of change) in the spreads suggests that the perceived risk is waning. Furthermore, US HY Spreads have been elevated largely because of the stress/risk in the oil and gas space (20% of HY issues) which is a much more narrow/sector-specific issue. To be fair, the retrenchment in HY CDS spreads in the last month also has much to do with the firming up of oil prices in the same time period as well.
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Correct the escalations have nothing to do with what I postulate. It is this lack of recognition that has allowed the condition to exist in the first place. If you don't see that you will have trouble with the entire concept. CDS's never predicts that which is unforeseen at the time they are priced, by definition. That is of little comfort that the condition does not exist. What were CDS's in December of 2006? Answer: Not to far off all time lows.
 
I'm not sure I'm buying into an over all crash, but I also do not see anything that will drive this market much higher. Earnings are blah, the election cycle is killing all optimism in the population, the dollar is too strong, etc.

I would certainly agree that it is probably time to trim some profits and raise your cash levels and wait for a fall before you put them back into the market.

The real question I have is 2 years out ... what the hell is on the horizon that we can look forward to that will move things upward from here?
 
FlexibleAudio said:
Correct the escalations have nothing to do with what I postulate. It is this lack of recognition that has allowed the condition to exist in the first place. If you don't see that you will have trouble with the entire concept. CDS's never predicts that which is unforeseen at the time they are priced, by definition. That is of little comfort that the condition does not exist. What were CDS's in December of 2006? Answer: Not to far off all time lows.
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It's amazing the amount of condescension in your posts. Trust me I have no problems understanding any concept. What you say is patently obvious. Bubbles deflating are by definition unforeseen otherwise the conditions for a bubble forming would not exist. While CDS rates do not predict the unforeseen as you say, what they do do is provide a "a slightly leading but mostly coincident" indicator of the market's level of perceived risk on a particular segment of the market, so while they were not flashing red at end of 2006, once the 2 Bear Stearns leveraged funds folded in 2007 they started flashing red in a big way and while we started seeing distress in stocks of various Financial institutions, there was a good year and a half of steady declines before the crap hit the fan in Q4 2008 and Q1 2009. So there was time to react to their signaling and yes CDS spreads only widened once market participants started recognizing the issues with the MBS and housing markets.

All I was saying above is that the CDS spreads in HY market have been narrowing on the margin in the past couple of months which indicates the market's perceived worries are waning.
 
BobM said:
I'm not sure I'm buying into an over all crash, but I also do not see anything that will drive this market much higher. Earnings are blah, the election cycle is killing all optimism in the population, the dollar is too strong, etc.

I would certainly agree that it is probably time to trim some profits and raise your cash levels and wait for a fall before you put them back into the market.

The real question I have is 2 years out ... what the hell is on the horizon that we can look forward to that will move things upward from here?
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Agreed. With current earnings estimates, markets feel fully priced. Wouldn't put new money to work here. There would have to be a meaningful upside revision to earnings in back half of 2016 for the market overall to move up much beyond 2100 on S&P from here. But also don't see a big crash either. We could easily have another 10-20% correction similar to Jan-Feb action if no positive earnings estimate revisions and another geo-political worry impacts the markets.
 
I get a kick out of people talking about market fundamentals these days, like they have a damn thing to do with the trajectory. All that matters is quote stuffing algos and Central Banks. If they remain in control we continue upward, if they lose control 2008 looks like a speed bump.
 
Vapor1 said:
I get a kick out of people talking about market fundamentals these days, like they have a damn thing to do with the trajectory. All that matters is quote stuffing algos and Central Banks. If they remain in control we continue upward, if they lose control 2008 looks like a speed bump.
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I think you're ideologically too hamstrung by the belief that it's all rigged and controlled by algos gone wild and Monetary Policy easing.
 
You know that all the fundamental rules don't apply how?

When MSFT lost 6% yesterday because it missed and put out subdued guidance, that was not the fundamentals at play? Same with Alphabet (Google) yesterday? Have you worked in the Investment Management field? You guys crack me up.

Anyway, I seem to always get drawn into these nonsensical Exchanges about the markets. I will respectfully drop out at this point. Best to you all.
 
cmalak said:
It's amazing the amount of condescension in your posts. Trust me I have no problems understanding any concept. What you say is patently obvious. Bubbles deflating are by definition unforeseen otherwise the conditions for a bubble forming would not exist. While CDS rates do not predict the unforeseen as you say, what they do do is provide a "a slightly leading but mostly coincident" indicator of the market's level of perceived risk on a particular segment of the market, so while they were not flashing red at end of 2006, once the 2 Bear Stearns leveraged funds folded in 2007 they started flashing red in a big way and while we started seeing distress in stocks of various Financial institutions, there was a good year and a half of steady declines before the crap hit the fan in Q4 2008 and Q1 2009. So there was time to react to their signaling and yes CDS spreads only widened once market participants started recognizing the issues with the MBS and housing markets.

All I was saying above is that the CDS spreads in HY market have been narrowing on the margin in the past couple of months which indicates the market's perceived worries are waning.
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You know I have got to be more careful in how I write my stuff. I am hearing that a lot lately and I don't mean it to be as such. I think I have poor social skills and I tend to write how I talk but I will try to be more careful. I can be a prick. I apologize.

I completely agree with your above post regarding the current state of the CDS market. I certainly am not saying my fears are a certainty, I was trying to express that the absence of high CDS prices imo does not have a correlation to my fears in the short run and I belive this fact is the foundation of the environment that has spawned the problem to begin with. What I was trying to point out is that if the market was seeing what I fear the current behavior would not continue as such. It does not and I would not expect it to at this point as it has often missed these things in the past.

What I fear may happen tomorrow or it may take 5, 10 or 20 years. I have no idea and did not mean to imply we are on the precipice of anything. I fear that when you look at the metrics below we are in a global economic state that we have never experienced in our history and many of the metrics, if continued in there current direction, have the makings of a disaster by any analytic measure. As you know, markets often do not react to these conditions in a linear fashion as they evolve but rather in belated extreme recalibration.

Consider these over a 20 year time frame.

--Debt by any measure to Income or GDP be it by capita, municipality, state, country, continent or globally.

--Pro Forma debt service ratios using even a modest regression toward the historic mean give the debt levels referenced above.

--Money velocity for all of the globes the major currencies.


When the globe consumes 50 years of income over a 20 year time frame by borrowing forward that income, capacity by definition will have been built to meet this temporary demand and must be purged from the system once the ratio of debt-to-income reaches its theoretical limit. For political expediency, rather then letting this process take its course (which will be painful) we are printing money at insane levels (negative interest rate are you kidding??) trying to keep the overbuilt capacity running. This process, left unchecked, may not only eventually make the necessary capacity contraction worse but may also break a currency or two.

Of course I could be completely wrong. We may just thread the needle and find a way to grow ourselves out of this condition through technology break throughs and such, but the fact we have never done this before has my attention.

Sorry again about my crassness and /or being so pedantic.
 
cmalak said:
You know that all the fundamental rules don't apply how?

When MSFT lost 6% yesterday because it missed and put out subdued guidance, that was not the fundamentals at play? Same with Alphabet (Google) yesterday? Have you worked in the Investment Management field? You guys crack me up.

Anyway, I seem to always get drawn into these nonsensical Exchanges about the markets. I will respectfully drop out at this point. Best to you all.
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Now don't do that; you have a lot of good commentary here. I don't know what all of us do for a living but you clearly are at the pulse of the markets. Its good for guys like us that sit around and worry about the sky falling to have a grounding rod to react to our (at least my) paranoia.
 
FlexibleAudio...thank you for both your posts. I just got triggered by the tone in one of your posts and overreacted. I appreciate all the structural impediments that you are clearly focused on. There is no question that there has been a major transfer of leverage from private to public balance sheets in the wake of the financial crisis and ever since those public balance sheets have been growing at an alarming rate ever since the Fed embarked on QE (the printing press writ large) and the ECB and BoJ followed suit. Is there going to be a comeuppance at some point? If global GDP does not reaccelerate back towards a 5-6% type nominal growth rate (India and China are the key drivers there and currently China is decelerating) then we may very well not grow back to where GDP comes back into a normal relationship to debt levels, interest rates will spike, a few fiat currencies (principally the Euro) may go by the wayside, and we may have another massive deflationary spiral. That is a real possibility. But so is the possibility that China works off its excesses, transitions to a Consumption-based economy, and in conjunction with India's solid growth trajectory can help reaccelerate global growth in the coming years back up to that 5-6% level. With hundreds of millions of people in each country transitioning from poverty to "middle class" consumers, we could yet grow into the current debt levels over time.

I have no idea. What I do know is I have been reading folks like Peter Schiff, David Bianco, Rick Santelli, and others call for the end of the world for so long, it has gotten to me because many people I am sure were persuaded by their arguments and missed the ability to build back their portfolios post '08/Q109 in one of the biggest come back rallies in the markets in a generation (off of one of the worst declines...I get that part too). Anyway, that's neither here nor there.

I think your concerns are very valid and whether we see financial Armageddon 2.0 once again, I don't know and I concede it is quite possible. And as I say, I am not a fan of the markets now at these levels. But I have worked in the markets long enough to know to be humble and to be flexible and not to be too rigid or too ideological with my investment theses one way or the other.

Thanks again for your posts above.
 
cmalak said:
FlexibleAudio...thank you for both your posts. I just got triggered by the tone in one of your posts and overreacted. I appreciate all the structural impediments that you are clearly focused on. There is no question that there has been a major transfer of leverage from private to public balance sheets in the wake of the financial crisis and ever since those public balance sheets have been growing at an alarming rate ever since the Fed embarked on QE (the printing press writ large) and the ECB and BoJ followed suit. Is there going to be a comeuppance at some point? If global GDP does not reaccelerate back towards a 5-6% type nominal growth rate (India and China are the key drivers there and currently China is decelerating) then we may very well not grow back to where GDP comes back into a normal relationship to debt levels, interest rates will spike, a few fiat currencies (principally the Euro) may go by the wayside, and we may have another massive deflationary spiral. That is a real possibility. But so is the possibility that China works off its excesses, transitions to a Consumption-based economy, and in conjunction with India's solid growth trajectory can help reaccelerate global growth in the coming years back up to that 5-6% level. With hundreds of millions of people in each country transitioning from poverty to "middle class" consumers, we could yet grow into the current debt levels over time.

I have no idea. What I do know is I have been reading folks like Peter Schiff, David Bianco, Rick Santelli, and others call for the end of the world for so long, it has gotten to me because many people I am sure were persuaded by their arguments and missed the ability to build back their portfolios post '08/Q109 in one of the biggest come back rallies in the markets in a generation (off of one of the worst declines...I get that part too). Anyway, that's neither here nor there.

I think your concerns are very valid and whether we see financial Armageddon 2.0 once again, I don't know and I concede it is quite possible. And as I say, I am not a fan of the markets now at these levels. But I have worked in the markets long enough to know to be humble and to be flexible and not to be too rigid or too ideological with my investment theses one way or the other.

Thanks again for your posts above.
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I think you characterize the situation well. Our hope is wealth generation in developing countries and technological paradigm shifts along with some level of restraint at the central banks down the road to move back toward normalcy before velocity is zero. ;)

Believe it or not even with my doom I am 90% equity (a big portion of witch is my private company) and real estate, but were the heck else are you going to push cash to work; certainly not the long end of the bond curve. I guess the essence of my feelings is over the 35 years I been playing in wall street we always have our boogie men and dark clouds but this one just seems a little (or a lot) more freighting under the downside cases.. Anyway thanks for the insights.
 
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