Monday, December 28, 2015



100 years of history proves that the Fed is clueless. 

The mismatch between interest rates and risk today is absolutely insane. 

The whole global financial system based on this charade is going to blow sky high.

The Fed has essentially boxed itself into a corner from which it cannot escape without extremely negative consequences for the global financial system.

The situation in Syria seems like it's the biggest powder keg in the history of the world. We are being dragged into something that's just extremely foolish, it could easily be World War III.

Central banks, by unfairly inflating asset prices have compressed risk like a spring to unfairly tight levels. Unfortunately, the market is aware the price of risk is not correct, but they can't fight it, and everyone is forced to crowd into the same trade. By manipulating markets they have also reduced investors' inherent conviction by rendering fundamentals less relevant.

This then creates a highly unstable (fragile) situation that breaks violently when a sufficient catalyst causes risk to rise – overly crowded positioning meets a market with little conviction.

Catalysts can range from a "valuation scare" similar to Oct-14 or Aug-15 to a prominent investor stating that assets (e.g. bunds) are not fairly priced and are the "short of the century".

The unwinds from these crowded positions are violent, but almost equally violent in some cases are the reversals, which are driven from investors crowding back in when they realize central banks are still there providing protection.

Risk is not fairly priced based on fundamentals but rather is better explained by investors not wanting to stand in front of central banks as they provide ever more QE. Now that rates have begun to rise risks will also rise. 

A crisis is always contained – until suddenly it isn't.......


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