Kyle Bass, addressing Chicago Booth’s Initiative on Global Markets last week, clarified his thesis on Japan in great detail, but it was the Q&A that has roused great concern. “The AIG of the world is back – I have 27 year old kids selling me one-year jump risk on Japan for less than 1bp – $5bn at a time… and it is happening in size.” As he explains, the regulatory capital hit for the bank is zero (hence as great a return on capital as one can imagine) and “if the bell tolls at the end of the year, the 27-year-old kid gets a bonus… and if he blows the bank to smithereens, ugh, he got a paycheck all year.” Critically, the bank that he bought the ‘cheap options’ from recently called to ask if he would close the position – “that happened to me before,” he warns, “in 2007 right before mortgages cracked.” His single best investment idea for the next ten years is, “Sell JPY, Buy Gold, and go to sleep,” as he warns of the current situation in markets, “we are right back there! The brevity of financial memory is about two years.”
Leverage, as measured by NYSE Margin Debt, rose a huge 31.6% year-on-year (YOY) and 10.2% month-over-month (MOM) to $364bn in January, compared to the July 2007 peak of $381bn. Net Free Credits at -$77.2mm (essentially cash balances in margin accounts) have plunged to levels (and at a rate) that BofAML believes generates a sell signal and typically result in market correction. The last time a (2-standard-deviation) sell signal like this was generated was on April 2010 and the S&P 500 subsequently corrected by 16% in two months. While the US equity market has not responded to at or near overbought or contrarian bearish sentiment levels very recently (remaining overbought for weeks) BofAML also notes a tactical sell signal was just triggered that is similar to those from September 14 and April 27, 2012 – both preceded market pullbacks.
Margin Debt is soaring (as NYSE Cash balances collapse)…
Today King World News interviewed the man who oversees more than $130 billion, and who has won an unprecedented six Graham & Dodd Awards. Rob Arnott, Chairman of Research Affiliates, spoke with KWN about what is fueling the global markets, and also warned investors we are in a, “… very dangerous environment.” Here is what Arnott had to say: “The main thing that is pushing the market higher is liquidity. You’ve got the Fed monetizing the nation’s debt, buying practically all of the new bond issuance by the federal government.”
Rob Arnott continues:
“With the Fed monetizing the debt they run a risk of debasing the currency, but meanwhile that money has to go somewhere. People don’t want to put the money to work in start-ups and developing new enterprises. So what we have is the effort to prop things up is really just propping up the stock market, not the macro economy.
It’s wonderful when you see this kind of thing happening to just say, ‘Well, I’m going to be along for the ride and then I will get out of harms way before things unravel.’ But how do you do that?….
Gregory Mannarino: Technical Reversal Pattern(s) Indicate Stocks To Fall