From ‘Seismic’ to Systemic Catastrophes

Do robots dream? That’s one of those questions that begets a different answer every time. Here’s something we do know: when they are awake in the “markets” they control it. Humans are the ones that can go back to dreaming as if their trading matters. Why?

Because they don’t. Or said differently: It’s their world now – you just happen to live in it.

The rise of algorithmic bots in the market was suppose to ensure greater efficient markets with tighter spreads for buying or trading stocks. And for a while it did just that.

But today what was once seen as “efficient” seems to have morphed into something more along the lines of parasitic. And that’s just the start of it.

Another side of this new phenom is this: Yes – they can buy, sell, hold or sit out. But (and it’s a very big but) can they truly interpret? i.e., can they really tell when a false positive or negative is truly false or positive?

This is where things begin to get tricky. And it is here that the “market” seems poised to find out – whether it wants to, or not.

Currently the bots or quants (i.e., systematic strategy allocations) are dominating the “market” buying anything with a ticker symbol backed via a buyback schedule. All while the humans (i.e., discretionary investors) have been cutting back.

What’s at issue here is whether or not this lines up with any skillful interpretation of true “market” front-running vs real future economic insight. Or is it purely: if A = B then C?

You can count me in on the latter.

What’s quite ironic about the above is it’s also “code” for one of the most telling signs that should signal danger to those knowing how to interpret. i.e., It’s called: herding. And it now seems the bots are taking on their own persona of “Electric Market Cowboys.”

Does this pose a systemic issue? It could, and here’s why…

As I insinuated in the title we are already experiencing seismic like ripples throughout the global “markets.” If this appears to be news to you, don’t be surprised, because the only thing that’s made “news” over the last few weeks is the verbal contortions of logic being spewed to explain why record setting market highs signal the need for rate cuts. But here’s the stuff that really matters…

China’s economy is not just showing signs of stress, but rather, it too is showing systemic concerns. Banks are beginning to fail, yes fail. China’s Baoshang Bank fell at the end of May, but the shock waves are still reverberating throughout its funding channels.

Speaking of “banks,” have you heard the tremors rippling across the ocean from one of Germany’s biggest, also known as Deutsche Bank™? If not, let’s see if I can sum it up…

So far this month they let go about one fifth (18,000) of their work force; their stock seems to be nosediving ever further and faster towards “rescue” territory; Oh yeah – and they have $49 Trillion worth of derivative exposure (aka “risk”) that most of our own “too big to fail” banks are exposed to in one form or another. Not to mention 401K’s, pension funds, etc., etc., etc. But I digress.

Again, that’s $49,000,000,000,000.00 give or take a few billions, I would imagine. Because with numbers like that, billions are just chump change, right?

I say that because when you see (or don’t see) the amount of press such a situation is getting, one has to be thinking “What, me worry?”

For those who work better with visuals. Here’s a “picture” that says far more than words can summarize. To wit:

(Chart Source)

Then we have what can only be described as “getting in to the meat of things” such as: earnings.

Since I brought up “meat” it’s probably a bit nerve rattling that we have more of those “FANG” stocks coming out this week. For if Netflix™ is any guide – someone better ready the Novocain® dispensers. Or better yet, maybe the gas will be more appropriate.

Again, speaking of “laughing gas.” Did you hear the one about how maybe Netflix might need to add commercials to become profitable? You know, just like the industry it decimated with its more “superior” model. I mean, who needs anesthesia when you have “insight” like that, right? And we all thought the dentist/stock broker jokes were all but dead. Who knew! What’s next, commercials on Spotify™? Wait…

Then there’s the IPO darlings that either can’t stop falling or can’t stay above their IPO price. i.e., Slack™, Uber™. All I’ll say to them is this: Don’t feel bad – at least you’re not WeWork™. Or what is it now, something like “The We Company” or something like that?

Before it IPO’s the Co-Founder is reported to have already cashed out for, wait for it… $700 Million. And no, that’s not a typo. But hey, that’s what being a Silicon Valley disrupter is all about, right? Get yours – get out. Who cares about ethics, optics, or anyone else. “Cha- ching!!”

Remember: for every cash-burning “wonderling” that IPO’s – more often than not – that great “exposure to growth” stock suggsted and supplied via some broker is probably in someones mature 401K retirement plan or pension fund. Think about it. You know, to make sure they were covered for any “inflation expectations.”

And never forget: when it comes between you eating dog food in retirement and a fund managers stock bonus today? Be thankful you bought an electric one when times were good, just sayin’.

Last, but surely not least, during all this we get ready for what could portend to be “plate shifts” that make the San Andreas fault look down right miniscule. Or would a mechanical bull in a china shoppe be more fitting? Hmmm…

Then, of course, you have the Fed. decision coming forth a week from Wednesday, where three things take place also.

First: It (the Fed announcement) falls directly on the month end. If you like “market” shenanigans? Month-end is where the “pros” play, and for real. A disappointment or, buy the rumor – sell the news event, in conjunction will make things interesting, to say the least.

Second: More earnings like Apple™ the day before the Fed. decision. Did I just feel a tremor? Probably nothing, right? Right?

Third: Another jobs report the following Friday. Wait, what was that…?

“So what’s the kicker here?” you may be asking. Good question, and it is this:

Throughout the entirety of next week, with everything going on. How are the machines going to interpret what to do next? Because when it comes to the “markets,” remember what I said earlier: It’s their world now, we just live in it.

What if they decide the best strategy, as described in the movie “WarGames” (1983/United Artists™) is: “Not to play?”

Tremors can go from seismic waves, straight to systemic contagion all in the blink of an L.E.D.

© 2019 Mark St.Cyr