Posts Tagged ‘Market Crash’

Soon the movie “The Big Short” will be released.

It talks about how a few made a great amount of money from the global financial crisis.

There are always “financial gurus” looking for the next Big Short.

I did some research in what they are looking for (in the US naturally) …and I found that they are looking into High Yield US Bond ETF and leveraged ETF.

What is almost as scary is that the SEC (the US regulator) is also looking into it (In December 2015 released an 600pages analysis on the issue dated August 15).

So what is the issue? In US there are now ETFs on everything The everything includes market that are by nature with poor liquidity….and now we have very liquid ETF trading.

The first hiccup appeared the 10 December when a Third Avenue High yield (junk) ETF had to froze redemption. It did not spell disaster as both Blackrock/iShares and Barclays were able to sustain heavy draw-downs…but it was kind of an alarm bell (I still remember the 2 hedge funds closed during the US spring preceding the 2008 collapse).

In simple word the issue is that some  highly liquid ETFs in US are trading in space that have really little liquidity.

There are already funds that exploit this issue and delivered stellar returns (+50%) in the last year.

Not to be scary…but this is a space to watch.


The Chinese issue

Posted: July 9, 2015 in Uncategorized
Tags: ,

Finally the media are starting to realize that what is happening in China could have much more effect on the world than Greece.

Is it a Global Financial Crisis number 2? It can’t be excluded, but the Chinese Government has the largest financial reserves in the world (on that side they already started dumping the US Treasury bonds they have – creating a different issue), it can impose rules on investors that cannot be imposed in a democratic society (they just forbade to sell share in a company to anyone with more than 5% stake in a company) and other measures.

Even if the Chinese Stock Market is quite closed, remember that China is now the economic engine of the world (for example is the number 1 market for BMW). And specially for Australia the consequences could be devastating.

But they are definitely panicking.

It is also interesting how the Chinese newspapers have started blaming foreign of short sale attacks (typical strategy of a non democratic state) and, at the same time, there has been a massive cyber attack on the New York Stock Exchange and Airlines (picture from Norsecorp thanks to Zerohedge).

Capture cyber attack

Until a year ago the Chinese market cap was hovering between USD $1 and USD $2 trillion. At the top, 12 June, was circa USD $11 trillion in little more than 1 year.

More importantly, before the Chinese stock market was a mixture of gambling, savings and very few investors as investments where passing through the State Sponsored Enterprises and the Government.

Now the stock market is at the centre of the strategy of PremierXi Jinping to transform China from a low cost -export led (so foreign market forces dependant like they learned in 2008) to a high tech – consumer led economy (think about Xiaomi, Tencents, Alibaba).

So it is almost driving the economy to an American model. But the American model brings also wild highs and great crisis, which usually the Chinese Government never tolerated.

So this market crash has a lot to do with internal politics and the “teenager years” of China.

Personally I do not think that China will collapse, it will more in an American Style Quantitative Easing induced rally – but China is very different from anything else and 80% of investors are  retail and momentum driven (flock like ducks).

So this needs to be watched much more carefully than Greece as pretending to be an expert on China and of what happen inside it is a pure fantasy.

The Greeks said NO to the referendum.

Two other times they said NO – in 1940 against the Axis powers (German, Italy and Turkey) and in 480 BC in the Battle of Thermopylae (the famous 300) against the overwhelming Persian force.


Markets logically will react badly. The first back stop for the ASX is 5,150 and then 5,000 and 4,800. SP500 1,970, 1950 and 1,870. At the moment 5,150 and and 1,970 are the most logic.

So A 10% drop is the worst case scenario. At the moment there is no sign of contagion. Gold and currency moved, but not in an alarming way.

US future (n a illiquid market since the holidays and the time) are down 1.35% at 2,035


Well everybody is scrambling. Already European Parliament President announced that there is no intention to immediately cut assistance to Greece.

The Greek banks are already running out of money (apparently they have just Euro 500 million of cash).

If money really runs out….or there is a bail-in Cyprus style (the Government seizing money) or a New Drachma (already it has forecasts to lose at least 40% of its value)

There are already emergency meetings scheduled all over Europe.

The Greeks will ask for debt forgiveness – which Germany will oppose. If it is a referendum is all it takes to have better conditions Portugal (election in October, Spain (election in November/December) will follow suit. And probably Italy too. Already the anti Euro parties in France, Spain and Italy are cheering.

Syriza will have its own problems as the extremist wing of the party will be emboldened and a closure of banks and riots could make the Government fall, even with a chance for the military to take over.

The two most likely scenario are

–  Syriza will need to cut off the most extremist left wingers and form a new Government and agree with the Euro creditors on a new deal

– A Grexit.  Probably starting with a “suspension” until something is formalized (at the moment there is no legislation in regards to a Eurozone exit”

– The ECB will expand its QE program


Usually I try to keep personal opinions to myself. But not today.

Logically I am not happy about the market reaction, even if we took precautionary measures since April and our portfolios are in better position than ever to withstand this storm.

But this is the fair conclusion of a mad Greek debt binge sponsored by money crazy German lenders.

Disclosed and intercepted calls (from Reserve Banks speeches and Wikileaks) made it clear that the first Greek bailout was to transfer the Greece debt from the German banks to the European Central bank – so in reality was a German bank bailout.

Also other conversation pointed that since 2011 the EU leaders were aware that further austerity would not save Greece. As Marie Le Pens (Front Nationale, France) says it shows that that Europe is now dominated by a Financial Oligarchy that has very little in common with the concept of democracy.

Moreover, even in  economic theory (Fischer, 1933) austerity in a debt/deflation environment cannot work.

So why they did it? It was a easy way to keep the Euro down and help German exports, while kicking the can forever.

Until Syriza came into power which is not part of the Euro Financial Oligarchy.

As the  Game Theory (police versus 2 accomplishes) teaches….the game is successful for the police, unless the rules are changed. And the referendum changed the rule.

Europe will try to keep them in, as a Grexit could open the Gates of Hell for Europe, but now is just RED ALERT

What a day crash!

Good news, I checked the various markets and there is no sign of contagion “Lehman Brother” style.

This means that, at this stage, we are in for a serious bout of volatility, but not a 2008 style event.

Italian and Spanish market are off, but with no sign of crisis.

This is the hard part of the negotiations. PM Tsiparas knows that PM Merkel needs Greece in the Euro to keep the Euro weak (over 50% of German GDP is exports) and he is gambling the entire country on this.

What happens will depend a lot from Sunday referendum.

People say that Greece is little as Lehman Brothers was. A big difference is that Lehman Brothers debt was held by the private (whereas  now Greece debt is the EU or IMF) and Lehman Brothers was managing a great part of the world derivative market.

More to the point  in the US the Plunge Protection Team is at work, Draghi is thinking to increase the European QE (and more QE means devaluing the Euro – which would eliminate the problem of a stronger Euro provoked by a Greek exit….smart eh?).

Also China is now thinking QE.

At the end this could really the final bottom, for the mother of all rally, also for gold.

And on top of it….with this crisis the Fed first rate hike is likely to be pushed further out.

The jury is not yet out….but at this moment in time it seems we will have just a set back

A bit like “NASA says, Houston we have a problem”.

This was the week in which the FED was coming in all gun blazing to sooth the markets as they did all this year, and they failed. Vix closed at 18.62 (above 17.98/18.5) so the issue can be serious.

I studied a bit the DeMark indicator and this is what happen last time.

20 May 2008 it went off.

The market went down till July. Then went up till mid late September…and then we all know what happened.

I am not saying we are that point (the Fed was not meddling the cards), but I look at patterns. Let’s see.

About the FED. It is between a rock and a hard place.

Quantitative Easing will have to end this month. If it does not it will signal that the issues are bigger than it seems. If it does interest rates will start creep up in the US Bonds….bringing up the US Dollar (other time in similar situation the US Dollar had a swing up for 3 between 20 and 40%- the US economy cannot cope with that).

So the market saviour is trapped (NOT DEAD). And you see the consequences.


Well I think I found the main source of concern that caused the massive sell off.

A last minute averted bankrupcy in the coal sector in China, Shanxi.

Two of the major Chinese banks took over a shadow lending product of USD496 million of the Zenhfu Energy Compay (coal mining) that was expected to default the 31 January. 

Technically this is a step back from the supposed liberalisation of the market in China.

So this year the eyes on China are all linked to coal (coal, steel, shipbuilding) as they all have overcapacity and coal lost 16% YoY. The Government, as we saw, is prepared to step in, but the real danger is a systemic risk.

But this will be not this this year, I think