Tuesday, March 10, 2020

Meltdown In Progress

The last Trump Casino is going out of business, those who don't get out ahead of time, are not getting out. We have been warned. The machines can't handle what comes next...

What we are witnessing in real-time is a convergence of unprecedented risks coalescing into the mother of all financial meltdowns:

Yesterday the Dow gapped limit down at the U.S. open and then crashed the -7% circuit breaker down ~2,000 points within :5 minutes. The market closed down almost 8% for the day. Today, the market gapped up 1,000 points and then crashed down negative by European close (11:30am EDT), and then rallied back 1,000 points up on the day. Now, after hours, it's giving it all back. Who knows what happens tomorrow. 

Here is what we DO know. The Dow just traveled 6,000 bi-directional points in 24 hours. That's 25%. Yes, you read that right. The Dow traded a quarter of its value in two trading sessions.

There is NOTHING normal about that. Not only is realized volatility off the charts, but much of it is occurring off hours. Which is not captured in the conventional volatility metrics. Yesterday (Monday) the VIX options were delayed open because the CBOE couldn't find any market makers. 

When Apple and Microsoft, the two largest stocks finally lose their bid and break key support, there will be nothing left holding up the casino. That could happen any time. At that point volatility will explode and market makers will lose all control. We will see markets limit down across all asset classes. 

Market makers will ultimately be wiped out. I predict that at this rate of expanding volatility, within days there could be no buyers for ANYTHING risk related. Everyone will be hoarding cash or money market instruments. Anything that has to be sold will not find a buyer. That may sound extremely bearish, but that is my base case assumption.

Of course central banks will panic and when they do they will take back control of the Treasury market, however, that does not assume they can control every asset class on the planet using t-bond buying programs. 

Nor are they necessarily going to bail out market makers.

Global risk asset correlations will soon approach 100%. Which means the rolling selloff will go day and night. For days, maybe even weeks. Most traders will be locked out. Brokerage companies will collapse. This is not meant to be alarmist. Brokers keep client accounts separate from their own balance sheet meaning the broker can collapse and the client accounts are unaffected. But the liabilities that will arise from this "event" will be astronomical. 

Already we are seeing this via Robinhood, which has been offline for the largest trading days of the past two weeks. They are toast as an ongoing entity. They will be class actioned out of business.

They are the canary in the coalmine. Last week we also saw outages from Schwab, Fidelity, and Ameritrade.

Obviously the panic will be epic. Imagine being in stock holdings and unable to sell as the casino opens limit down and then goes offline for the remainder of the day. The way the circuit breakers work is that -7% triggers a :15 minute time out. -13% triggers another :15 minute time out. And -20% triggers a halt for the remainder of the day. It's not hard to imagine the stock market halted for the day by 10:15 am. Yesterday, the 7% circuit breaker was triggered for only the third time in U.S. market history.

ETFs will be the fatal weakness as they come totally unhinged from their underlying holdings. First we had the repo crisis which locked up overnight markets. Now the paralysis is spreading as reported by Zerohedge yesterday:

ZH: There Is No Liquidity

"The problem with passive investing is that while it propels market dutifully higher, when stocks crash, ETFs reverse, and a painful selling liquidation commences, one which takes a long time to stop, or as Bloomberg puts it, "when the market goes into freefall, they are required to sell the underlying asset, prompting a frantic search for anyone who will buy it."

On the other side of this gong show no one will trust ETFs ever again. They will be considered a failed way to invest. And a hazard to orderly markets. 

As I write this, I am watching the S&P futures moving lower tick by tick with the $USDJPY carry trade unwind.

As we see, they are one and the same now: