Friday, July 1, 2016

It's CasinoNomics. It's Not Personal

Global collapse is not personal. You either acknowledge it, or you go to the beach...Stock gamblers are caught up in their own happy little momentum feedback loop, which per CasinoNomics only lasts until the last fool is found...

And the "shock absorber" effect we've seen so many times only works for small declines, after which comes the "free fall" effect...

And the "Plunge Protection Team" is a total fucking fantasy...
The BOJ owns 55% of all Japanese ETFs:

There is an enduring fantasy on Wall Street that Central Banks enter the market during down days to "stabilize" the market. However, per CasinoNomics, Central Banks provide the liquidity that creates the momentum feedback loop. And they also enter the market at preset intervals to "buy assets", but they don't support collapsing markets. Because they can't. Furthermore, the WORST performing stock markets have had the most active Central Bank intervention i.e. Europe, Japan, and China. U.S. gamblers should be grateful the Fed is less interventionist:

Distance from cycle highs:
European Stoxx 600: -20% 
Japan Nikkei: -25% (BOJ owns 55% of all ETFs)
Shanghai Comp: -44%
S&P 500: -2%

Now, in the spirit of CasinoNomics, I will explain the "shock absorber effect" that makes gamblers think Central Banks lurk below the market...

CNBC: July 1, 2016
There Are Technical Reasons To Explain This Rally
"in the nine times during that period when the S&P 500 fell by more than 5 percent in two days, markets have seen an average rebound of 4.7 percent"

Here's why: Wall Street uses "put spreads" to hedge their downside risk which means buying an at-the-money put and selling another put 5-10% below the market. When the market declines a set amount, Team Groupthink goes on Instant Message and tells each other it's time to monetize these hedges. When the in-the-money put gets sold, the market maker who buys the put must hedge neutral by buying the underlying S&P 500. In essence group covering of hedges puts a massive bid under the market. Because with a put spread a further decline is not protected anyways, so the hedge ALWAYS gets monetized. 

This "shock absorber" effect continues until all of the puts get monetized, which apparently takes 3 iterations, after which comes the "free fall" effect. But we've only seen that three times, so how would we know?