Nonlinear math/Chaos theory suggests markets can and will do whatever they want, whenever they want, warns Jeff Greenblatt.
Last week I reviewed the material from Zero Hedge concerning the repo market. I’m sure you’ll agree it was a real eye opener. Hopefully you’ve had a chance to check out the article. The major theme they brought up was they anticipated a financial system meltdown during the Christmas season.
Is this even possible?
I don’t think anyone has the answer to this question but let’s just say if there was a crash during the holidays, it would be the first time in modern history. Long term market observers know markets can top at any time, but financial disasters usually happen in September or October. Predicting crashes is bad for the business of the one doing the predicting since they are such a low probability event in the first place. In this day and age, one has to wonder if the one doing the predicting has an agenda. Perhaps the individual doing the predicting, the man who built the foundation of the repo market in the first place, Zoltan Pozsar, just wanted to wake people up.
If that was the goal, he probably woke up a lot of people. As far as I’m concerned, there is no normalcy bias here. Just because the market hasn’t started melting down during Christmas, that doesn’t mean it can’t happen. Nonlinear math/Chaos theory suggests markets can and will do whatever they want, whenever they want.
So, let’s go around the horn and take a state of the state. Last week ended on good news. A “Phase One” deal with China was struck. The legalities still weren’t sorted out so I don’t know how much of a deal has been consummated (it seems simply a delay in the tariffs due Dec. 15) but the bankers stated one of the conditions they were watching was the trade war. Who knows if Trump relented on some of the tariffs because he knew the repo market was a train wreck waiting to happen. Then British Prime Minister Boris Johnson had the greatest victory over the Labor Party in the UK since 1935. This was considered another feel good event for the market.
The important takeaway to this point? Since last week was also the 261dg vibration on the Gann calendar, there was no sell the news event on the other side of the news. It’s a display of underlying strength. It is the middle of the next week and while markets look tired, they still aren’t selling.
It appears to be the hedge funds who need interest rates to stay stable for their books to be made whole by the end of the year. As you see on the chart of the two-year note, prices which go the opposite way of rates stalled and reacted to close last week (see chart below). It has an interesting reading with the price action up .899 (which rounds to.90) while the calendar time vibration from low to low sits at 91dg. If this chart holds the line at least one of the risks, which is higher rates won’t materialize before the end of the year.
Another condition to watch is the oil market, which for anyone who may have been long based on the Gann calendar, has been the gift that keeps on giving. Right now, it is coming to an important inflection point as it has hit the connect the dots trendline but also at another Gann calendar test at 67 days from the prior high at the 267th vibrational day of the year (see chart). If oil were to turn, it could impact the stock market.
An Unhappy Anniversary
What is going on with the market? Recall the 2018 correction ended right at Christmas last year. That means we are at the 360dg mark of this rally and the anniversary is coming on Christmas Eve next Tuesday.
If you read the Zero Hedge article you know they made mention of something called a G-SIB score with a potential surcharge. It appears this ratio has something to do with market capitalization compared to reserves, and as the stock market goes higher, the higher the score and larger the surcharge. It wouldn’t hurt the big banks one bit if there was a selling wave before the end of the year.
Last year when the banks had more cash then now, they also ‘enjoyed’ a fourth quarter sell off. This year with worse cash ratios there has been no sell off. It’s likely the biggest reason for a high by Christmas. But the Fed has been racing against time flooding the system with funds with the hope of warding off an end of year disaster.
From the information we have now, a meltdown is likely the lower probability. That’s the good news. The bad news is the Fed can’t keep printing money indefinitely into the future without unintended consequences and serious implications. With everything going on, considering the banks as well as the geopolitical and domestic risks there is a very good chance for a not so black swan to develop in 2020 prior to the election.
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