January 15, 2015 Los Angeles, California Financial Markets and a collision of Outliers
I am writing my Annual report for our proprietary fund ignoring this intuitive feeling that we are on the door step of a financial contagion. January has started out fast and furious in the world with combinations of terrorism, and financial decay moving into what the main stream media paints as a healthy American Market. In the shadow of this booming market for “Market Makers” we have watched the wealthy become super wealthy and the middle class almost disappear. I live in California, a place of eternal sunshine, wearing shorts in December- January, where a sort of eternal optimism pervades and entrepreneurial capital flows. Everyone that lives around me is either a upper division public servant (police, homeland security, fire chief) or an Entrepreneur working their own business. The jobs for the public sector have been booming, the entrepreneurs have been letting people go and working themselves. Most of my acquaintances who were anti gun this past year have purchased their first guns. It is surprising in the sheer numbers of my semi conservative semi liberal middle of the road acquaintances have made this their middle of the road. This is the environment I am watching spread through wealthy neighborhoods close to me. You can’t even get range time reserved for shooting practice. Prices for practice have gone up and times are booked weeks in advance.
I can’t ignore my intuition when it is driven through facts, this is for my friends and my students.
I talk to people around me and notice they are so complacent about the war we have been in, and the perilous heights the markets have reached from bonds to the S&P500. The complacent think it is all taken care of, they have funded their pensions, everything is going to be alright. Smart people have a “plan B”
This is the complacency when “Market Makers” take advantage of the under wealthy class through “out liers”. I will out line a few of these which have a larger gross effect on financial markets and what is making the hair on the back of my neck tingle.
Butterflies are coming to Europe
The financial butterfly effect or outlier (from Chaos Theory), is the sensitive dependence on initial conditions in which a small change in one state of a deterministic nonlinear system can result in large differences in a later state.
1. The Swiss have bailed on the Euro. When the swiss unhooked their currency from the Euro the market shifted, almost shuddered in every financial product I was watching. The truth is out. Watch out for Margin Calls.
When the Swiss unhooked their currency almost instantaneously the market moved 20% against the Euro. The sheer number of margin calls in derivatives, options and leveraged ETF’s must be huge. Will their be a 5 day grace period (liquidation period) or are we going to see this unwind in to the weekend. Some funds are leveraged at 50 – 200 to 1. The fall out from this could last months and cost the Euro community 100’s of billions of dollars.
Net effect on financial market is dangerous. Time and Transparency – the less transparency the more time it will take to unwind. “Market Maker” trick.
Watch for further unhooking of the PEG to Euro or maybe even China and Hong Kong unhook from the US Dollar.
2. Russians are getting pissed at their economy. Oil is down 50%, the Ruble has lost its buying power and unemployment is skyrocketing.
Sanctions + Worthless Ruble + Oil cratering + 80% of people are concerned over food = Putin taking the off the ball with either “War” or “Aggression”
This outlier can unfold in many ways. With Pain coming from decreasing consumption from Europe in the form of Food, manufacturing and machine tooling from Germany coupled with financing from England….this is all changed. Especially with Oil prices about to collapse.
The next step is in progress – retaliation and here is the start. Russia shifts Exporting Natural Gas to Europe for Turkey. This is Huge. Also the Petro Ruble which will be used instead of the Petro Dollar trade.
3. Gold is rebounding from it’s bottom. Gold is the “Catastrophe Hedge” and even with the strength of the dollar it is going higher.
Gold trading in the derivatives market is leveraged and highly volatile. Most traders can’t afford to hold large positions. Volume has been increasing on this move up and we are seeing “Scared Money” come in strong this past week. “Fear drives Gold prices” Joel Wissing
Gold prices in the future reflected in dollar value, will be more relative to value of the dollar in international trade, and when trade moves away from the dollar, we shall see price increase. I expect to see it come into play in September 2015 when China, Russia and Saudi Arabia trade directly and move out of dollar oil trades. The velocity of this change will have the greatest net effect on the dollar gold values. I have always been of the mind that if the economy collapses to the point where you are going to have to use gold or silver then you might invest in firearms too, because you will need them to keep your gold. That being said, getting an ounce of physical gold on the dips could be a good idea. Just be careful how you keep it. There are plenty of prep-per websites for ideas. Picking up an ounce or two could be part of your “plan B” If you have so much that you can’t sleep it means you are holding too much. Refer to previous article on Gold. This is if it diverges from the dollar correlation. If not, then we will see it go to $1000 area.
Most people are watching for Greece to go, but like Lehmans, there are plenty of banks that could collapse, over leveraged financial institutions that have margin calls or even clients shifting assets. UBS richest clients just did a shift to the dollar.
I am not saying the dollar is a safe bet, but for now in the quagmire of financial reality(sh*t), it is going to be the last man standing if we collapse tomorrow.
Pressure on the Euro is coming from everywhere and this insurgency of clashing cultures is not dissipating it is accelerating. Plan B – hold a credit card or bank account in another country in a different currency, and hold another passport. Not everything unless you are the richest man in China he moved it to multiple currencies in the Cayman Islands.
5. US Markets could be reversing. Markets do not move rationally, as you can see with oil, the Swiss Franc, the Euro and more…..
The US is at a crucial juncture with many outside pressures that could correct the markets. A correction is normally 10%, but the problem is that there is so much complacency in the market that if a “Market Maker Sell” hits and no on is on the other side to buy, then the market can go into free fall. There are protections, but they can be short lived as more people after seeing the government “halt trading” have a tendency to panic and sell when the market opens.
The three small blue lines are unfilled gaps where the market has a tendency to come back and fill. These are down side targets on the chart. We have entered a choppy zone where the traders are indecisive and there could be many bounces back and forth until direction is found and the “Market Makers” Choose a direction.
“Plan B” Be able to short the market, Falling markets are where fortunes are made. Educate yourself and become financially literate.
Will it happen today? Will the market crash tomorrow? Will it crash in our sleep? I don’t know when or how but I do know to keep my eyes open to direction, stop listening to the talking heads. Read, investigate and find the ways to create your “Plan B”
There is a lot going on in the world and the main stream media is keeping most people fed with a mixture of fear “Ebola” and fixation “princes, religion, the web” . I am very fortunate that I have people around me that have educated me in economics, business and the way of the “Market Makers”. You too can take responsibility for yourself by starting a “Plan B” and gradually implementing it, step by step, to secure yourself and family and focus on your passions. It is the only way out.
For more on 2015 market prediction see this article especially on Central Banks and market volatility with currency.