Royal Bank of Scotland to investors: 'Sell everything'

There are a multitude of reasons why there is buying today. But if that is all that story said, it missed the story of the night. The BOJ (Bank of Japan) went to negative interest rates last night when it announced its rate decision. So the carry trade is back on (borrow cheaply with the weak currency out there, and speculate with the money) for the time being.

I don't think it is going to hold. Since the stock market started getting pummeled at the beginning of the year, Mario Draghi (head of the ECB) has jawboned about how loose monetary policy is going to be Haruhiko Kuroda (head of the BOJ) jawboned the markets and last night unleashed negative rates. And the Federal Reserve didn't raise and sounded a bit more dovish in its statement following their decision on Wednesday.

At the same, China is propping up its currency which is under assault, but because capital is trying to flee, they are going to have to do a massive devaluation. So at the end of the day, we are in a world of currency wars.

That has supported stocks -- particularly the U.S. stock market. But it's coming to an end. The more they did to devalue their currencies--particularly with asset buying -- the more they have needed. And they are running out of ways and time. That is why I know whatever short-term rally we get within the sell off is not going to hold. The BOJ has done more asset buying than even the U.S. They have not only been the biggest bond buyer, they actually have been hamhandedly propping up their stock market by buying equity ETFs. They didn't scale back when they announced last night, but the expectation was that they were going to increase their buying -- negative rates weren't on the table. The fact that they didn't, probably signals that they are running out of things to buy. Which means that they are going to have to be even more reckless to come up with new ways to prop up their house of cards.

This doesn't end well -- and likely is going to end up in a major crisis. The dollar is getting driven up due to Japan and Europe and China and other emerging markets, and our own central bank's mishandling of its communication. That kills everyone, because so much trade is done in dollars. The dollar isn't strong relative to those currencies because of anything fundamental about the U.S. Our GDP print this morning was less than 1 percent. We are not growing and may actually already be in a recession. The dollar is strengthening because there is a major currency war going on. The U.S. shit all over the dollar with 3 (really 4) rounds of quantitative easing and interest rates near zero for a decade. Japan has been shitting on the yen even longer than that. And Europe is playing catch up. In the mean time, the insane amount of worldwide debt that makes them have to do this to prevent a collapse is not going away -- and in fact, these "policies" are encouraging more and more debt.

Without the asset buying, though, U.S. stocks are not going to go anywhere. This is a giant bubble and it is already leaking air. UNLESS there is more quantitative easing or something equivalent that floods yet more liquidity into the markets -- and it is going to have to be an even crazier amount than the $4 trillion worth they have already done loading up their balance sheet -- there is only one way from here, and it is down. By a lot.

 

Another VERY rough day for U.S. equities. Particularly the momentum names that have led the way higher and higher -- and which have propped up the market even while 95 percent of the market has already been in a stealth bear market for months.

The Nasdaq 10o Index is down 3.65 percent with an hour and a half left in trading for the week. All of the momos (momentum stocks) are getting hammered -- there is a run for the exits. Tesla is getting killed -- it has been for a while, and another huge selloff today -- down more than 9 percent so far on the day. Facebook is getting plowed -- down close to 6.5 percent. Netflix down another 8 percent, continuing its recent selloff. Biotech continues to get hit.

The most stunning move has been LinkedIn. It reported earnings last night and it actually did fairly well, but it gave weak forward guidance. ... the stock is down 45 percent just on the day! It is an absolute bloodbath in the stock.

 

U.S. equity futures have taken another pretty good leg down over the last 2 hours, and Friday's sell off that I posted about is very, very, very likely going to continue into this morning. This one should have legs, and will likely test the 1810 to 1815 level on the S&P 500 VERY soon. If it doesn't hold there this time, I think more people are going to start to take notice. Even during Friday's bloodbath in the big Nasdaq stocks and the momentum stocks that people have gotten carried away with, it didn't yet feel like "capitulation" selling. We are still a ways away from outright panic selling. I do think that unless the central banks (particularly the Fed), which are the only thing that matter anymore to these markets, step in with something that blows more air in the balloon, the U.S. equity market has just one way to go and it that is down.

Janet Yellen testifies before Congress during the middle of the week, so we'll see if she suddenly reverses course and sprinkles her bullshit with dovish overtures -- of course pretending it is all some complicated and mystical "data dependent" thing she does, rather than a Mr. Magoo act. I just think that at this point, they have run through their whole manpulation-of-markets toolbox, so half measures are not going to be enough to prop up the mess they made. There is just too much debt out there and too many credit problems created by all of the debt. And their answer is never going to be to step away and accept that they fucked things up bad. They will encourage more debt in the name of "stimulus" and pray that somehow everything works out OK at some date in the future.

Negative interest rates, if they end up there in 6 months or 9 months (although how they do that heading into an election is beyond me), let's say, won't be nearly enough. The announcement will give a short-term boost and then get lost in the currency wars of everyone competing to beggar they neighbor by devaluing their own currencies. It's why the move down in the Japanese yen fizzled really quickly after Kurado did his surprise move to negative rates -- but not more asset buying (what the markets really wanted). I will not be surprised if we see more quantitative easing (QE4) from the Fed. They have backed themselves into a corner, so it would look silly to do it tomorrow. But they want to so badly, at this point and it is that panic move that will just make the fallout yet worse in the future -- more of the same. The problem is, that each round of asset buying needs to be bigger than the last to keep the bubble inflated. If they come in hard -- let's say even start outright buying U.S. equities (via ETFs) to prop up the stock market (don't laugh -- Japan has done this) -- then they could reinflate the stock market bubble and everyone could go out and buy their Netflix and Facebook and Tesla stock again and not fight the Fed. But even if they keep the house of cards propped up for the time being somehow, how much longer can they keep the phoniness going? They have absolutely killed any chance at economic recovery by mortgaging the future (basically robbing savers to create debt today). And they just keep at it. They have taken requisite pain as the payback for all that Alan Greenspan and Ben Bernanke did to juice things, and and they have and made it into a permanent malaise and keep doubling down.

One last thing. There are credit problems in so many areas due to the massive amounts of liquidity they created via interest rate manipulation, that it would be nearly impossible to figure out where the first crack that actually brings about the next crisis will come from. We keep seeing the areas -- whether it is various European sovereigns that can't meet their obligations or high-yield corporate bonds of shale oil producers in the United States that gorged on cheap credit and flooded the market with oil supply into a soft economy. It goes on and on. There is a student loan bubble in the U.S. that is more than a trillion dollars. A subprime auto loan bubble. And that is just in the U.S. The shadow banking system in China is seeing massive writeoffs of loans that were thrown around willy nilly with no collateral -- trillions of dollars -- and their economy and currency is under assault as a result as things are starting to collapse. European banks with exposure to commodities firms have balance sheets that are crumbling. No one knows just what Deustche Bank's derivative exposure is, other than the whispers, but its earnings crashed in the fourth quarter and the stock is trading like it is distressed.

My sense tells me we are going to see another credit event somewhere relatively soon -- and that is what is underlying what we are seeing in U.S. equities. I just don't know exactly where it is going to come from. It could be any of those things. You never know until they can't control the news anymore -- for example, no one knew how bad Bear Stearns was until the day AFTER it went bankrupt.

 

An hour left in the trading day. The sell off did continue, although it has not intensified this afternoon. We'll see if it bounces a bit into the close.

Today the big money center banks are getting hammered. Well, everything is getting hammered, but JP Morgan, CitiGroup, and anything banking related etc. is getting killed. Citi is down close to 39 percent since its highs last July. JP Morgan is down more than 20 percent since then. There is a lot to it, probably, including questions about their balance sheets -- markets are waking up to a reality they chose to ignore for a few years -- when the mantra was "Don't fight the Fed -- and now people are worried about anyone who has been in the business of lending when various central banks saw to it that credit worthiness considerations were thrown out the window. The European banks, which are hugely exposed to what may be a ton of bad debt related to the commodities breakdown, are looking particularly vulnerable. Deutsche Bank's stock is down 57 percent off its highs last year. Deustsche Bank credit default swaps have really ballooned as investors question the bank's ability to fund itself. The chart is scary.

Al the momentum names that have propped up the market since last summer are getting killed some more. Facebook is down another 5.5 percent on the day, Amazon down 4.6 percent on the day and is down more than 31 percent since the highs it made aa few months ago. Nike is down 5.75 percent on the day. Tesla is down another 9 + percent on the day, and is down more than 48 percent from its highs last year. Netflix is holding up relatively well -- only down another 1.5 percent on the day, but down more than 38 percent off its highs a few months ago.

 

His name is Mike Burry. He is a supersmart guy.

He's not shorting water -- he doesn't think water is overvalued. It's the opposite. He looks for ways to invest in it, not short it. There are a number of people like him who have scoped out various hydrocommerce trades. The thesis behind it makes GREAT sense, but mind you, I have been reading this stuff for years. Yes, part of the thesis does relate to central banks and how they have fucked up the global economy. It also relates to a number of other things, too. ...

But what you need to know about the "water" trade is that water is very difficult to invest in. You can invest in water or water treatment, but for the most part, transporting water isn't economical -- or politically easy to do. So no one has figured out a good "water" trade. If anyone has looked at it in ways that most people wouldn't be able to focus on, though, I would bet it is Mike Burry. He is an interesting guy.

That is not a "collapse all at once and get paid a gazillion dollars" kind of trade, a la the movie you saw. If anything, it would be trend that plays out over time,. What a lot of those guys, including Burry and Jim Rogers (another smart guy who looks at the world this way), are looking at is. ... farmland. ... as a way to play a water trade. The most practical way to invest in water might be to buy farmland in water-rich areas, and use the food as the means to transport the water. This plays into the central banks, because they can not manipulate the debt markets forever -- and they have created a world that is going to see escalating crises until there is a major crisis. When they cause a currency crisis (and they will eventually), hard assets are where you will want to be. Water, via agriculture, will likely go gonzo. The price of that farmland could become very valuable, even as other real estate potentially crashes. I actually do believe that there is going to be a marked shift over the next decade or two -- where many of these kids being pushed to useless colleges to get useless liberal arts degrees and drown themselves in debt in the process (horrible monetary AND fiscal policy has created that piece of the credit bubble) . ... figure out that actually having a trade or some useful skill that is always in demand (for example, growing food) makes more sense. Jim Rogers' joke is that those kids should become farmers. ... or at least own the lamborghini dealership near all of the farmland.

FYI, the markets did get a small bounce in the last hour and finished off the lows from when I posted earlier.

 

FYI, the Nikkei Index (Japanese stocks), got clobbered overnight. More than 5 percent down.

This is happening despite the BOJ having done its negative rates thing more than a week ago.

Two years ago, that would have sent stocks flying higher and it would have held. In fact, Japan shitting all over its currency is one of the things that created the carry trade that drove up asset prices in the first place and created the bubbles that are now deflating.

In this environment, it is clear that markets have turned. ... and FINALLY are acting as if the central banks have overplayed their hands and have lost control of the mess they created. When I posted that I didn't think the rally negative rates brought would hold, I didn't think markets would shrug it off THIS quickly. It barely gave a day's boost. And the Japanese yen has actually surged over the last week -- counterintuitively to what the BOJ wanted. And global equities are now taking another leg down.

The game is over. Just announcing negative interest rates is not enough. ... To keep the bubbles they created from rapidly deflating, they are going to have to go beyond the loose policies that created the mess in the first pace. It will be the wrong thing to do in the long run -- more punishing of savers, more mortgaging the future, an even bigger credit crisis in the future. Just short-sighted panicked market manipulation to try to avoid paying a price for all the monetization of debt they have done.

But if they behave the way they always do, you are going to see the various central banks panicking and coming in with massive doses of asset buying. If equity markets crash, that will likely happen sooner rather than later. It is going to take something massive this time, to calm markets. And even if that happens, it is the absolute WORST thing to do. ... as it has been throughout the credit cycle they have created with their stupidity.