by Mark St. Cyr
Suddenly the narrative that “everything is awesome” is showing to not be as “awesome” as it was first proclaimed. Merely a few months have passed since the ending of QE and praises of awesomeness everywhere are morphing into questions more akin to “Oh no: not again!” And with that we are now watching those who pushed, pulled, and levitated that narrative scramble desperately to push another narrative back onto the stage that worked so many times before: “Every sell off over the last 6 years has shown to be a profitable buying opportunity.” i.e., Just buy the dip (JBTFD). Yet it would seem these dips; are far different.
Just for context, over the past week, if you were one of the few remaining “home-gamers” still watching CNBC™, you would have been delighted to see once again their host Jim Cramer go through great pains to explain why he discounts the idea that we’re in a bubble to once again like ringing a bell (he uses buzzers and gongs I believe) the indexes sell off in dramatic fashion bringing back memories of Bear Sterns. As of today any gains for the year have been quelled. But not too worry, for he also contends you should have “dry powder” at the ready. i.e., Be ready to “JBTFD.”
My thoughts? “Investing” isn’t going to be so easy this time. Why? Let me be so bold to use the same meme touted by the likes of those who sold it: Because, it truly is – different this time. Without QE, not only is there no one buying. What’s far, far, far, (did I say far?) worse is: There’s no one to sell too!
Effectively through the interventionist policies over the last 6 years via the QE program what the Fed. has accomplished, whether intentionally, or merely complicit in the results were: to systematically exterminate the dreaded “Short sellers.” Today everybody is currently on one side of the market. And that side is: long.
The dreaded “Bears” that would even out the markets taking positions on the other side are all about gone. Every empirical statistics, every indicator measured whether it be Investor Intelligence™ data and the like shows, historically – they’ve never been so lopsided. Ever! But that’s only the beginning.
During this month another note worthy point in history is celebrating its first anniversary; the release and uproar to Michael Lewis’ Flash Boys: A Wall Street Revolt (March, 2014 W.Norton & Company)
Here was when the public at large first heard about what a lot of us have been trying to both articulate, as well as warn about. Here for the first time on the media’s big stage the parasitic nature plaguing the financial markets via high frequency trading (HFT) was brought under lights. It sent many of these firms scurrying for cover.
It was shown in great detail if you did try to mount a defense of why they (HFT) were “good for the markets” you would only dig a deeper hole to bury both your reputation, as well as dignity. This was demonstrated with the shameful, as well as lie exposing public display of the then CEO of BATS™ during a televised skirmish with Brad Katsuyama of Flash Boy’s fame. Showing everyone just how broken the integrity of the markets had become. Both functionally, as well as ethically. He vacated his position in disgrace weeks later, but the HFT parasitic machine has since only grown ever larger. So much so the only thing left for this beast to feed upon might in turn be – its brethren.
Now it being reported one HFT firm is suing another for “Egregious Manipulation.” You just can’t make this stuff up. Nonetheless what you can “up” is the level and lengths to which one HFT firm will pursue to have the advantage to
front run “provide liquidity” quicker than its competitors because; they’re upping their game with the advent of lasers in an all out arms race to see just who will be faster to the “average investors” blood supply. Why? Easy…
Lasers are faster than microwaves. And when the game is to “view” the other fellows hand before they can blink: You win! Because trading is not about fair play – it’s about winning. Just ask a company like Virtu™. A HFT firm that’s had only 1 (no that’s not a typo) losing trading day in 1485 (neither is that one) trading days and counting. Who knew legitimate, ethical trading could be so “awesome!” I ‘ll bet dollars to doughnuts Bernie Madoff muses: “My 12% returns set off alarm bells and here I sit? WTF!”
But the HFT story along with the Fed. have created another unintended consequence that might prove far greater than the “riding the tiger” analogy invokes. What they’ve created may have more in common with a laboratory monster that becomes uncontrollable, precisely at the wrong time turning on its masters. For the once vast legion of (human) veteran traders who spent their lives on the floors of the exchanges and in the “pits” are all but gone.
What was once possibly the greatest “buffer” as to understand and take positions for, or against irrational selling or buying behavior has disappeared. Much of it stems with the advent of HFT fueled by QE money. But there have also been other issues right alongside running in concert that forced many human traders out of the markets. Not only was there the sheer onslaught of mechanized stop running prevalent that human traders needed to be concerned with. They could also wake to find the company that held their resources for those positions goes “poof” in the night. e.g. The MF Global™ debacle under then CEO Jon Corzine. Is it any wonder why volumes are so anemic?
Within that group of displaced traders (in my opinion) is the one set you’ll need more than anyone in a bull-run going bad: Shorts who need to buy as to cover their positions.
After 6 years of this incessant rewarding to JBTFD with free money supplied by the Federal Reserve fueled with the ever parasitic nature of HFT, the vast majority of this once prominent group; has been all but annihilated. Today, no longer are there “people” to help slow or quell a sell off. Only machines.
What I also find both fascinating as well as frightening is the sheer fact that HFT and all it entails is both manned as well as programmed by math aficionados – not veteran traders. It has been a well-known fact if you are a “veteran trader” looking for work – you need not apply. If you’re a math Ph.D with no trading experience (or even right out of school) the HFT world is your oyster.
Let me ask you this dear reader: Just how well do you think all this HFT and program trading is going to perform when it’s been both formulated, as well as only tested, in a “bull” market environment that was fueled with “free” money? Along with the people creating these programs and orders for execution quite possibly – have never witnessed a true sell off. Ever! Welcome to the pinnacle of “the rise of the machines.”
Remember that immortal line from Trading Places (June, 1983 Paramount Pictures) when the Duke’s were losing their fortune “Turn those machines back on!” Will we need to do the exact opposite when the machines suddenly sell into an empty “pit” of buyers when as its been documented by NANEX™ liquidity vanishes? So much for “providing liquidity” when that liquidity is their own fortunes bleeding from the screens. Plugs will be argued (if not begged) too be pulled.
And that’s just the start of why “this time it’s different.” Monetary policy on a global scale is now becoming unhinged and the carry trades associated within the currency markets are just beginning to show their distress.
Today the Euro is not falling – its plunging. Plunging in a way that is reminiscent of a monetary policy that is coming unglued. The so-called “smart crowd” all professed how the weakening of a currency helps, not hurts a country for both its exports as well as its competitiveness on other fronts. So how can all this “good” be so bad you ask? Easy, when it does exactly what it was expressed it shouldn’t do. Plunge – in what has all the appearance of an uncontrollable rout. You’ll know it’s fully off the rails if we here reports supermodel Gisele Bündchen no longer wants to be paid in Euros. But I digress.
China’s economy is showing contraction. Central Banks around the globe have cut and are still cutting interest rates. 24 to date, and that number is expected to grow because everywhere there was supposed to be growth – is contracting, if not out right falling off a cliff. e.g. Look to Australia as just the latest example.
Mario Draghi’s latest “bazooka event” is shaping up to be a total disaster of unforeseen consequences. The where, what, and how all that buying spree of “whatever it takes” is now showing far more concerns than the irrational exuberance everyone envisioned when they had to guess what a true “Full Monty” was going to reveal. Now that it’s been shown, it seems it’s not going to perform as well as anticipated. Well imagine that. Who’da thunk it?
The list goes on, and on. But (and it’s a very, very big but) just when you think it couldn’t get any more narrative busting than the above portends, you have the Federal Reserve’s FOMC meeting this coming week. Here is where everything (and I do mean everything) can come unglued, unravelled, _____________. (fill in your own favorite descriptor)
This meeting is probably more important than any meeting since former chairman Bernanke’s famous (some of us still view it as infamous) Jackson Hole speech of 2010 where he announced the implementation of QE2 and implied QE4ever. And the markets haven’t looked back (or down) ever since. However this time “it’s different.”
The Fed. as of today has pulled the plug on QE, and implied it’s time to raise interest rates. All at a time the global economy is showing just how addicted it truly was to the Fed.’s QE policy of “free” money along with near zero interest rates leaving the Fed. with the difficult choice of exactly which policy are they to enact. For both will have dramatically different results.
One is to go back on all they’ve said, admitting they got everything wrong via the signaling that not only will interest rates not be raised; but in addition the possibility for more QE is at the ready, sending critics of the Fed. spiraling into a concerted effort demanding both an audit as well as hearings. Or…
They stick to their guns, signal the intent to raise rates sending the global economy and markets into a tail spin of unraveling carry trades, currency wars and quite possibly a full-blown currency based Armageddon.
Who knows what will transpire. But one thing is certain: This time is – truly different.