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Calling the crash in equities, red flags, warning signs; and theories for when the crash will hit
alonso
post Posted: Jul 24 2017, 10:33 AM
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In Reply To: triage's post @ Jul 23 2017, 06:37 PM

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If that is the case I think that the best that we can do is identify when the system becomes unstable, not when that unstable system will collapse.


That's obviously true but not a lot of help when the system has been unstable for a good while. But at least if you're proactive-minded you can get out ahead of time and be content with short forays into the market till things clarify.
September/October/November seem to be favourite times for major crashes.



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"The optimist proclaims that we live in the best of all possible worlds. The pessimist fears this is true"

"What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom." Adam Smith
 
nipper
post Posted: Jul 23 2017, 06:54 PM
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In Reply To: triage's post @ Jul 23 2017, 06:37 PM

I didn't get that 'orderly progression' sense, but it's right to look for the Minsky Moment. The omission of Brexit talk was a good point.

And, whilst it is dangerous to utter 'This time it's different', low interest rates make for a new element of the mix. A lot of capital has been reassigned waiting for the shake out.



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"Every long-term security is nothing more than a claim on some expected future stream of cash that will be delivered into the hands of investors over time. For a given stream of expected future cash payments, the higher the price investors pay today for that stream of cash, the lower the long-term return they will achieve on their investment over time." - Dr John Hussman

"If I had even the slightest grasp upon my own faculties, I would not make essays, I would make decisions." ― Michel de Montaigne
 
triage
post Posted: Jul 23 2017, 06:37 PM
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In Reply To: nipper's post @ Jul 23 2017, 05:49 PM

I make two points: first, Ambrose seems to suggest that there is an orderly procession into financial crisis which suggests a simple linear system. I'm not sure that is right, I tend to agree with the notion that the financial / economic system verges towards being an unstable complex system and that we can never predict which grain of sand dropped onto a sand pile will cause a collapse. If that is the case I think that the best that we can do is identify when the system becomes unstable, not when that unstable system will collapse.

https://www.farnamstreetblog.com/2017/02/ca...omplex-systems/

Secondly I saw no mention of Brexit which I would have thought should be front and centre for any pommy-based analysis. The poms may sail through the process or it may uproot the financial sector upon which the UK economy is heavily based, but surely is the most prominent iceberg on their horizon. Not sure how it would impact world or Australian markets but it seems remiss of ambrose not to acknowledge it in his analysis.



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"The market can stay irrational longer than you can stay solvent." John Maynard Keynes

"The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought." Rudiger Dornbush

Mozart fixes everything and Messi is a dog

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nipper
post Posted: Jul 23 2017, 05:49 PM
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Icarus trade continues, with the next global crisis further away than you think
- Ambrose Evans-Pritchard
QUOTE
Global economic expansions do not die of old age. Outside war or violent energy shocks, they are invariably murdered by central banks fearing inflation. The fact that the post-Lehman business cycle in the US is already the third longest since the mid-19th century tells us little.

The more relevant point is that consumer price growth has been falling relentlessly this year and has dropped to 1.4 per cent. The US future inflation gauge published by the Economic Cycle Research Institute has also rolled over, and this underlying indicator suggests that it will stay low for a long time. The US has turned Japanese.

Goldilocks growth might well continue for another two years or more, even though the cyclically adjusted price to earnings ratio of Wall Street equities has reached a vertiginous 30.12. This stock market metric is higher than in mid-2008 and is exactly where it was before the great crash in October 1929. These are disturbing thoughts. Yet it takes a catalyst to trigger such events.

Central banks are currently so frightened of market tantrums that they are treading with extreme care. The recent brief moment of resolve has already passed. The US Federal Reserve and the European Central Bank are rowing back.

"Calling business cycle tops is like playing a slot machine. To win the forecast jackpot you need three 'macro' cherries to drop at the same time," say Kevin Gaynor from Nomura.

None are yet in place. The output gaps in advanced economies have closed but are still far short of previous peaks. It may take another twelve months to get there. Nomura's gauge of investor exuberance is "flashing amber" but nothing worse. What is really missing is accelerating inflation. "This cherry is not yet anywhere near amber or red, and it ain't over until the last cherry drops," he said.

Michael Hartnett from the Bank of America fears the denouement may come sooner but it is not imminent. Janet Yellen, of the Fed, bought more time by "blinking" in congressional testimony earlier this month. "The Icarus trade can continue for a little while longer. The signals for a big top in risk assets are still not visible," he said.

Plenty of money remains on the sidelines. Investors have 5 per cent in cash. The sell-signal is not triggered until the ratio drops below 3.5 per cent. The bank's "Bull & Bear Indicator" of greed is the highest in three years but not yet extreme.

Whether Mrs Yellen really blinked is a cardinal question. She let slip that interest rates are already close to the neutral rate. This effectively reeled back the pace of monetary tightening. It was a concession that the Fed may have over-estimated inflationary pressures due to its reliance on the outdated Phillip's Curve model.

The current cycle is in any case unique. It is stretched longer because it has been so weak. The double-dip recession in the eurozone - caused by premature austerity - sent tremors through the whole global economy in 2012. It delayed the closure of output gaps. It led to deflation.

The Chinese recession in early 2015 - never acknowledged - led to a second dampening effect. Commodity prices crashed. Brazil and Russia slid deeper into slumps. The world has seen rolling regional recessions. These have been letting off steam intermittently.

There was a fresh mini-scare earlier this year when both the US and China slowed abruptly, in China's case because Beijing hit the brakes again, and in America because Trumpian stimulus fizzled.

That soft patch did not reach the point where it tipped into recession - though it could have - and ultimately allowed the US economy to catch its breath. It has stretched the cycle once again.

The forward-looking indicators are turning up. The coming surprise may be how strong the US economy proves to be by early 2018. The dollar may yet rocket.

There are bear traps all over the place of course. The Washington Post reports that Steve Mnuchin, the neophyte US Treasury Secretary, is "hurtling towards his first fiasco": a federal government shutdown when the money runs out in September. The country will default if the debt ceiling is not raised in October.

Bank of America says a dangerous game of chicken is developing. Hard-line Republicans in the House Freedom Caucus want to use these deadlines as a lever to force draconian spending cuts, claiming that the country is "drowning in debt".

President Donald Trump himself tweeted two months ago that: "Our country needs a good shutdown to fix mess."

Yet political risks cut two ways. Adam Posen from the Peterson Institute says the healthcare fiasco on Capitol Hill does not mean that Mr Trump's tax plan will fail as well. The Republicans now need an easy win, and nothing is easier than cutting taxes and dressing it up as fiscally neutral through "dynamic scoring".

If corporation tax drops to 25 per cent and incentives are offered to repatriate up to $US4 trillion of US corporate cash held offshore - tinder for stock buy-backs - you might see the sharemarket's price earnings ratio breaking the all-time high of the dotcom boom.

Whether any of this stimulus is wise is another matter. The Bank for International Settlements chides central banks for making a Faustian Pact long ago, rescuing markets every time there is trouble but letting asset bubbles run unchecked in the good times.

They have created "intertemporal" imbalances that require ever lower real interest rates with each cycle. The deformity is worse today than before the Lehman crisis after eight years of emergency stimulus. The global debt ratio is 40 percentage points higher at 327 per cent of GDP. Nobody knows what the sensitivity may be to even a modest degree of tightening.

Yet if the Sword of Damocles hangs ever over us, that does not mean it is about to fall. My humbling discovery after decades of amateur observation is that such episodes take longer to play out than you imagine. I was convinced that the global financial system was spiralling into crisis at least 18 months before Fannie Mae, Freddie Mac, and Lehman Brothers collapsed over those terrifying weeks of late 2008.

That was a bad call. Even disasters have their proper sequencing.
The Telegraph, London



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"Every long-term security is nothing more than a claim on some expected future stream of cash that will be delivered into the hands of investors over time. For a given stream of expected future cash payments, the higher the price investors pay today for that stream of cash, the lower the long-term return they will achieve on their investment over time." - Dr John Hussman

"If I had even the slightest grasp upon my own faculties, I would not make essays, I would make decisions." ― Michel de Montaigne
 
eBear
post Posted: Jan 11 2016, 11:34 PM
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Oh hum, patterns happening over and over again-now ...

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"Unfortunately China has a major adjustment problem and it has a lot of choices and it can actually transfer to the rest of the world its own problems by devaluing its currency and that is what China is doing," Soros said of the world's second largest economy.


http://www.news.com.au/finance/economy/wor...9db0b9299ab7c12
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Attached File  Dow.JPG ( 108.06K ) Number of downloads: 9

 




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"There is no present or future-only the past, happening over and over again-now"

- Eugene O'Neill
 
nipper
post Posted: Dec 16 2015, 07:30 AM
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In Reply To: eBear's post @ Dec 15 2015, 10:47 PM

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With the collapse in oil prices has come a reckoning. At least 18 of the newcomers have filed for bankruptcy so far this year, and many others are now struggling with debt servicing costs. Barclays predicts that the default rate for speculative-grade companies - increasingly made up of oil and gas firms - will double over the next year.

Standard & Poor's ratings service recently warned that an astonishing 50pc of US energy junk bonds are at risk of default, or $US180 billion in total. ...extrapolate this out (there is) $US2 trillion of debt sold globally by energy and mining companies since 2010..


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Carl Icahn, the US activist investor, has repeatedly pointed out, the parallels with 2007 are uncanny. Just as with mortgage-backed securities, there is virtually no liquidity left in corporate distress debt markets, which he likens to a "keg of dynamite that sooner or later will blow up".

To close observers of credit markets, warning signs of a high-yield bust to come have been evident for a long time now. All the old tricks have been present: companies funding special dividends to private equity owners by issuing debt; others issuing more debt just to pay for existing debt service payments; and commission-hungry investment bankers cynically selling the stuff to hapless investors while simultaneously shorting it themselves in anticipation of trouble to come. Many companies that don't deserve to exist have found it easy to get finance in the one time scramble for yield.

The latest bust should none the less serve as the loudest possible of wake-up calls. Swamping the system with cheap money may have saved the world economy from a depression, but by pumping up asset prices afresh to unsustainable levels, it has also made the system more vulnerable to financial crisis, not less so. The world economy has never been more awash with debt. In this sense, the high-yield squall may well be a harbinger of much worse to come.

Jeremy Warner

The Telegraph, London



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"Every long-term security is nothing more than a claim on some expected future stream of cash that will be delivered into the hands of investors over time. For a given stream of expected future cash payments, the higher the price investors pay today for that stream of cash, the lower the long-term return they will achieve on their investment over time." - Dr John Hussman

"If I had even the slightest grasp upon my own faculties, I would not make essays, I would make decisions." ― Michel de Montaigne

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eBear
post Posted: Dec 15 2015, 10:47 PM
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QUOTE
You had to see this one coming.

Warnings of a high-yield bust were plentiful: The shale driller that missed its first payment. The clothing manufacturer and the software maker among the many companies that issued debt, payable in more debt, earmarked to reward managers who'd already loaded them up with debt.

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Barring a big rally in the next three weeks, the junk-bond market will post its first annual loss since 2008. That has triggered a wave of redemption requests from fund investors. Lucidus Capital Partners said Monday it liquidated its entire portfolio and plans to return $900 million to clients next month. Funds run by Third Avenue Management and Stone Lion Capital Partners have halted cash redemptions as investor demand drained their liquid assets.


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.American Eagle Energy Corp., a Littleton, Colorado, oil producer, defaulted on its debt in March, less than seven months after raising $175 million in junk bonds. American Eagle Energy is in Chapter 11 bankruptcy and its debt was trading for less than 5 cents on the dollar Monday.


http://www.bloomberg.com/news/articles/201...-junk-bond-rout



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"There is no present or future-only the past, happening over and over again-now"

- Eugene O'Neill

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nipper
post Posted: Dec 11 2015, 07:26 AM
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In Reply To: eBear's post @ Dec 11 2015, 07:11 AM

but isn't High Yield just a polite term for Junk, which is sub-BBB or sub-investment grade ? And aren't there something like 7000 Bonds in the universe covered by S&P?

Yes, the yield chasers have pushed out into these assets, the spreads between junk and quality have narrowed. One observation from the last time around, 2009 is mentioned, was that the 'gun managers' aiming for a bit of alpha, achieved that by polluting the quality of their book. Notional returns are great until you come to turn them into real returns, and find there are no buyers. Know what you own.



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"Every long-term security is nothing more than a claim on some expected future stream of cash that will be delivered into the hands of investors over time. For a given stream of expected future cash payments, the higher the price investors pay today for that stream of cash, the lower the long-term return they will achieve on their investment over time." - Dr John Hussman

"If I had even the slightest grasp upon my own faculties, I would not make essays, I would make decisions." ― Michel de Montaigne
 
eBear
post Posted: Dec 11 2015, 07:11 AM
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QUOTE
.......
Normally, central banks would be tightening when the economy was growing strongly. But the high-yield markets also tell us that these aren’t normal times. Defaults, which were running at 2.1pc last year, have inched up to 2.6pc so far in 2015. Worse, they could jump to 4.6pc next year, according to Edward Altman, the finance professor who invented a widely-used formula that predicts defaults. That doesn’t sound like a huge leap but the 30-year average is 3.8pc and hasn’t been breached since 2009, in the immediate aftermath of the credit crunch.

So far this year there have been 102 high-yield defaults around the world, according to Standard & Poor’s, up from 62 in the whole of 2014. Moody’s has 37pc more companies on its “distressed list” than it did this time last year. Rising corporate defaults are usually a pretty accurate harbinger of coming recessions.


http://www.telegraph.co.uk/finance/economi...ashing-red.html



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"There is no present or future-only the past, happening over and over again-now"

- Eugene O'Neill
 
eBear
post Posted: Dec 11 2015, 06:55 AM
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QUOTE

72% of metals, mining companies are distressed
Of course, it's not just oil companies under financial duress. S&P said a whopping 72% of the bonds in the metals, mining and steel industry are now distressed.

That makes sense given the fact that prices for raw materials like copper, iron ore, aluminum and platinum have recently plummeted to crisis levels. It's so bad that a key Bloomberg index of commodity prices is now sitting at its lowest level since 1999


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Corporate defaults are already on the rise. S&P said defaults recently topped 100 on the year, the first time that's happened since 2009. Almost one-third of 2015's defaults have come from oil, gas or energy companies.


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At a time when oil and natural gas prices are super low, there's more bad financial news for these companies -- a change in the interest rate environment. The U.S. Federal Reserve is expected to raise interest rates next week for the first time in nearly a decade, a move that will likely hurt demand for risky assets.



http://money.cnn.com/2015/12/10/investing/...-bond-defaults/



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"There is no present or future-only the past, happening over and over again-now"

- Eugene O'Neill
 
 


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