Here's Why The Market Could Crash - Not in Two Years, But Now

Markets crash not from "bad news" but from the exhaustion of temporary stability.

Yesterday I made the case for a Financial Singularity that will never allow stocks to crash. We can summarize this view as: the market and the economy are not systems, they are carefully controlled monocultures. There are no inputs that can't be controlled, and as a result the stock market is completely controllable.
 

Today I make the case for a crushing stock market crash that isn't just possible or likely--it's absolutely inevitable. The conceptual foundation of this view is: regardless of how much money central banks print and distribute and how much they intervene in the markets, these remain complex systems that necessarily exhibit the semi-random instability that characterizes all complex systems.
 

This is a key distinction, because it relates not to the power of central banks but to the intrinsic nature of systems.

One of the primary motivators of my work is the idea that systems analysis can tell us a great deal about the dysfunctions and future pathways of the market and economy. Systems analysis enables us to discern certain pathways of instability that repeat over and over in all complex systems--for example, the S-Curve of rapid growth, maturation and diminishing returns/decline.
 

One ontological feature of complex systems is that they are not entirely predictable. An agricultural monoculture is a good example: we can control all the visible inputs--fertilizer, seeds, water, pesticides, etc.--and conclude that we can completely control the output, but evolution throws a monkey wrench into our carefully controlled system at semi-random times: an insect pest develops immunity to pesticides or the GMO seeds, a drought disrupts the irrigation system, etc.
 

The irony of assuming that controlling all the visible inputs gives us ultimate control over all outputs is the more we centralize control of each input, the more vulnerability we introduce to the system.

Those arguing that central banks (and their proxies) can control the stock market have the past six years as evidence. Those of us who see this heavy-handed control as increasing the risk of unpredictable instability have no systems-analysis model that can pinpoint the dissolution of central bank controlled stability. As a result, we seem to be waiting for something that may never happen.
 

Despite its inability to predict a date for the collapse of stability, I still see systems analysis as providing the most accurate and comprehensive model of how complex systems function in the real world. If the economy and the market are indeed systems, then we can predict that any level of control will fail no matter how extreme, and it will fail in an unpredictable fashion that is unrelated to the power of the control mechanism.
 

Indeed, we can posit that the apparent perfection of central-bank engineered stability (i.e. a low VIX and an ever-rising market) sets up a crash that surprises everyone who is confident that central-bank monocultures never crash. In the real world, manipulated stability is so vulnerable to cascading collapses that crashes are probabilistically inevitable.
 

That raises the question; why not crash now? After all, all the good news is known and priced in, and all the bad news has been fully discounted. Why shouldn't global stock markets crash big and crash hard, not in two years but right now?
 

Markets crash not from "bad news" but from the exhaustion of temporary stability. The longer that temporary stability is maintained by manipulation, the greater the severity of the resulting crash.
 

As I noted in The Coming Crash Is Simply the Normalization of a Mispriced Market, this line from songwriter Jackson Browne captures the ontological falsity of permanent market stability: Don't think it won't happen just because it hasn't happened yet.

Sourced from Charles Hugh-Smith of Of TwoMinds blog,

"Printed" Money For Nothing

World GDP growth expectations just hit their lowest in two years... and stocks didn't

Nickel hits 7-week high as Philippine news spurs speculators

Nickel prices climbed to their highest in seven weeks on Thursday as speculators returned to the market on worries that the Philippines could follow Indonesia in banning unprocessed ore exports.

Three-month nickel on the London Metal Exchange soared to a session high of $19,498 a tonne, its strongest since July 14, driven by buying from commodity trading advisers (CTAs) and macro funds, traders said.

The metal later pared gains to end at $19,395 a tonne, up 1.7 percent. It is up nearly 40 percent so far this year.

Nickel hit a 27-month peak of $21,625 a tonne in May after top exporter Indonesia banned unprocessed ore shipments to stimulate its domestic processing industry.

Prices jumped 2.8 percent on Wednesday on the news that a Philippine senator had proposed a ban on raw materials exports. 

"We've taken away Indonesian nickel ore and if you also take away Philippines as well, you can wave goodbye to the nickel pig iron (NPI) industry in China," said Nic Brown, head of commodities research at Natixis in London. "So this is clearly a big deal. That's why the market is taking it so seriously."

After nickel's May peak, prices drifted lower and many speculators closed long positions, but the market is likely to extend gains as they re-enter the market, Brown said.

"We expected to see prices above $20,000 a tonne at some point in Q4 going into Q1 next year. But we could get there rather sooner than we expected and even $25,000 is not unreasonable if you take Philippine ore out of the equation."

COPPER GAINS

Copper rebounded from two-week lows and other metals also rose after the European Central Bank cut interest rates to new record lows to support the stagnating euro zone economy. 

More accommodative monetary policy could free up liquidity for industry and investors, supporting metals prices.

ECB President Mario Draghi said if inflation looked like staying too low for too long, the ECB Governing Council was unanimous in its commitment to using other "unconventional instruments" - a phrase taken as code for printing money as the U.S. Federal Reserve and Bank of England have. 

LME copper closed 0.4 percent higher at $6,930 a tonne after falling 1 percent in the previous session when it reached a two-week low of $6,882 a tonne.

Dimming copper's price prospects, however, were mine supply bottlenecks being cleared and beginning to feed into the market.

Newmont Mining Corp signed a deal with Indonesia that will allow for the resumption of copper concentrate exports next week, the head of the firm's local unit said, ending an eight-month tax dispute.

Aluminium closed 1.3 percent higher at $2,105 per tonne, zinc ended 1.4 percent higher at $2,398 per tonne, lead closed 0.8 percent higher at $2,225 per tonne and tin closed 0.7 percent higher at $21,500 per tonne.

Zambia abandons the emotive rule on copper exports

From September 8th, the rule which instructs the companies to submit documents from destination countries in order to receive tax refunds, will be no longer required. This will end the cat fight over the 600 million dollars, gathered tax refunds, which have been a threat to Zambia’s mining industry.

The announcement was made just a few days after the chamber of mines notified that most of the copper mining companies in the country are facing a harsh financial crisis due to the blockage of tax refunds from the government, which is creating deficiencies in output and also alarming job cut offs in the country.

Ivan Glasenberg, the chief executive of Glencore stated that, the deduction would help to strengthen the company’s expectations to expand the company’s unit in Zambia. Glencore is planning an expansion worth 323 million dollars at the company’s Nkana copper mine, which would extend the lifetime up to a time period of 30 years.

Copper demand in China hangs on the power sector

Last year, more than half of copper demand of China came out from its power sector, but this year there has been a decline. The constant diminishing of the demand in power sector might cut down the rate of China’s import, which is a determining factor in international market prices.

According to the industry sources, this year, the investment in power sector had been expected to gain a 10 percent hike, but instead the sector had to cope with .6 percent drop in the investment compared to last year’s demand; shows the reports of China Electricity Council.

A senior analyst of Antaike Information Development Co; a state supported research firm, Yang Changhua stated that if there would be no rise in the investment of power sector, the consumption forecast of the 2014 should be adjusted down. The research firm had already forecasted the country’s copper consumption, which said that the consumption would have 6.7 percent hike, which will be an increase of 8.7 million tones.

The dominant in the investments in power networks in the country, the State Grid Corp of China stated that, it was being audited in May, and catching this phrase, industry source states that, the reason behind the sudden decline of demand in the power sector might be due to the audit, of which the reason is still unknown.  

Goldman Sachs: Gold will drop $200 by end of year

On the Comex division of the New York Mercantile Exchange, gold futures for December delivery on Thursday continued to drift lower, trading at a near 3-month low.

In afternoon trade gold was changing hands for $1,266.00 an ounce, down more than $4 an ounce compared to yesterday's closing price.

The latest retreat in the price pares the metal's gains for the year to under 5%.

The 2014 low for gold is $1,244 reached June 2, but many analysts believe the gold price has much further to fall.

On Thursday Goldman Sachs said it's sticking to its original forecast of gold at $1,050 an ounce by the end of the year.

CNBC quotes chief commodity strategist at the investment bank Jeffrey Currie as saying safe haven buying on the back of the Iraq and the Ukraine-Russia crisis and money printing due to economic weakness in Europe and Japan have been supporting gold somewhat, "but prices are being pressured by Federal Reserve policy."

"Our target at the end of this year is $1,050, really driven by the view that we think that the Fed will ultimately be the dominate force here and put more downward pressure [on prices]," Currie told CNBC's "Squawk Box" on Thursday. "Gold is a hedge against a debasement in the U.S. dollar." He said he'd recommend shorting gold.

Nickel surges on Philippine ban proposal, options expiry

* Philippine senator urges unprocessed ore export ban

* Nickel options expiry helps boost prices-analyst

* Tin falls to lowest level since January

Nickel prices jumped to a four-week high on Wednesday on news that a Philippine senator had urged a ban on unprocessed mineral ore exports and also following an options expiry in London.

 

Copper fell on higher exchange stocks and as investors downplayed signs of progress towards peace in eastern Ukraine while tin slid to a eight-month low on worries about oversupply.

 

Three month nickel on the London Metal Exchange raced 2.8 percent higher to close at $19,075 a tonne, the highest since Aug. 7.

 

Prices, which are up by around one-third in the year to date, were bolstered by news that a Philippine senator had filed a bill urging a halt to exports of unprocessed mineral ores. 

 

The proposed halt is similar to a ban introduced by Indonesia from January that led to a sharp spike in nickel prices and cut other ore exports.

 

Most analysts expect a deficit in nickel next year, and so the Philippines news worried investors, but some analysts were wary of the gains since.

 

"This is one senator introducing what we would call a private members bill. It's far too early to say whether it will gain traction," BNP Paribas analyst Stephen Briggs said.

 

Analyst Edward Meir at broker INTL FCStone was also sceptical. "Instituting a ban will result in foregoing massive amounts of revenue, not to mention the fact that buyers may very well have found other suppliers in the interim," he said in a note. "We would therefore not be jumping on this particular rally in nickel."

 

Many investors have been exposed to nickel through the options market, and the expiry of September options was also a factor in the surge in prices, analyst Leon Westgate at Standard Bank said.

 

"With options declaration rolling off, some of the recent gravitational pull of the $18,500 level has vanished," he said in a note.

 

Open interest in September call options was concentrated at the $18,500 strike. 

 

 

OTHER METALS SLIDE

 

In other metals, copper slid 1 percent to finish at $6,904 a tonne, its lowest level in two weeks. Prices have struggled to gain headway in recent weeks as expectations of fresh supply have dampened investor interest.

 

Daily LME data showed stocks rose by 7,000 tonnes to 154,825 tonnes, their highest since July 22 after two weeks of near straight increases. 

 

"Copper took a hit when LME stocks (data) came out. If the surplus is going to become more visible through exchange stocks, that would be meaningful. It's too early to say," Briggs said.

 

Markets were wary of news about the Ukraine conflict.

 

Russian President Vladimir Putin said a deal to end fighting in eastern Ukraine could be reached this week, but hopes of peace were clouded by Western concerns that the announcement was timed by the Kremlin to wrong-foot NATO on the eve of a summit.

 

"This news about Russia and Ukraine, the immediate impact you're more likely to see through oil andprecious metals for one, and secondly, it's not clear what it means," Briggs said.

 

Some investors hoped for further policy action at the European Central Bank meeting on Thursday after data showed euro zone retail sales slowed in July, while business activity grew at the slowest rate this year in August. 

 

Looser policy in Europe would cheapen liquidity for industry and investors, who may raise their holdings of hard assets, which tend to hold their value when paper currency depreciates.

 

Aluminium shed 1.3 percent to end at $2,079 a tonne, moving away from last week's high above $2,100, which was the most expensive since February 2013.

 

A partial closure of capacity at an aluminium smelter in China helped drive up domestic prices of the metal by as much as 4 percent this week as investors scramble to compensate for an expected shortfall in supply.

Caroline Bain, senior commodities economist at consultancy Capital Economics, said its forecasts for aluminium had recently been revised.

 

"We are anticipating a small deficit of just over 100,000 tonnes this year, but we have the market back in surplus next year as we expect China's production to keep growing," she told the Reuters Global Base Metals Forum.

 

Zinc closed 0.5 percent weaker at $2,365 a tonne, having struck a four-week top of $2,391.25 in the prior session, while lead shed 1.4 percent to $2,208.

 

Tin fell 0.8 percent to end at $21,350, the lowest level since January, as analysts and investors scratched out their previous forecasts of a deficit this year due to more supplies than expected and soft demand.