What to do with all that risk?

There is so much risk out there it is hard to know where to start.

From the prospects of Brexit to being on the brink of a European (world) banking crisis, the disappointments from open-ended BoJ promises and a Federal Reserve with a chairwoman, Yellen, obviously driven by politics, China's banking sector, (.... breath ....) wars and the threat of more wars and now the U.S. presidential race getting fully underway with economic bubbles around the world's economy masquerading as growth (.... breath ....) while interest rates remain at rock bottom, feeding the bubbles that are undermining the economy while creating stagflation ... (.... breath ....) ... In such an environment, you would expect the safe havens to be doing well.

Source: iStock

However, look at gold. Gold is falling the hardest it has done since the start of August. But, it is the fact that the markets are looking to the U.S. still as a safe haven, not that gold is weak. The dollar is strong and the DXY is recovering. Wall Street is attracting investment and the Yen is parked until further notice (a long play if you ask me though). 

However, the party can't carry on for much longer, and once these presidential elections are out of the way, regardless if a volatile Trump or an untrustworthy Clinton gets in, inflation, higher energy prices, a shortage of savings in the US economy, a lack of legitimate capital investment, consumer debt and when the Fed finally takes away the punch bowl, the phony economy will collapse before a legitimate recovery can ever start to take place. 

Yellen ignoring economic reality, policy based on politics

In respect of Central Banks, well, the Fed did not hike, so no surprises there. They may have signaled they’re on the verge of hiking, and left the idea that, "the case for a hike had increased," but it is entirely obvious given Yellen's rhetoric, that the FOMC is entirely political at the moment even though Yellen denied this in last week's press conference. But, if the economy was as strong as she say's it is, then why is she not raising rates? She knows full well the economy can't handle rate hikes without causing an implosion of it and subsequently ruining Clinton's chances of winning the election with the Obama administration thrown into tatters. 

One big keynesian bluff

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I also think the effect in the market of the dot plot, for example, with Fed members looking for rates to be lower to longer, exposes the fact that investors don't believe that rates will be going up in November or December. We are just over two months away in fact, so what realistically can improve in the U.S. economy so significantly between now and then? Yellen never tells us what data is needed in order for the Fed to hike and that simply tells me that it actually doesn't matter; it is all just one big keynesian bluff. 

Anyway, forget about the Fed and the U.S. elections. What we should really be worried about are the ongoing concerns about the health of the European banking system and the potential for an anti-establishment rebuke against Renzi at Italy’s referendum on the 4th Dec. At the same time, the BoJ could be perceived as heading towards tapering their JGB purchases, thus the Yen could be the best bet out there in a short period of time, especially while markets start taking on board how weak the U.S. currently is. 

In fact, the Atlanta Fed have recently revised their forecasts for Q3 GDP lower to 2.9% from 3.6% of not too long ago. Elsewhere, the pound should remain on the backfoot regardless of how hard a landing a Brexit would be for the economy. The BoE will need to be highly accommodative and that exposes more downside to the pound, but vs the euro, there should be limited scope for a move through 0.9000, especially should Germany approve a bailout plan for Deutsche Bank (DB) with their shares now falling by 50% this year alone and to the lowest levels since mid 1980's. 

The question is, just how much safer is the world's banking system compared to 2007/08? We will just have to take the chairman of UBS and former president of the German Bundesbank word for it, when he said that such fears of a rerun of the 2008 banking collapse were misplaced and where he pointed out that banks had between seven and 10 times more capital than eight years ago.  

However, it is the knock-on effect of such a possible bail out would have on the EU given that there are rules that stipulate that no bank can be bailed out with public money until creditors accounting for at least 8% of the lender’s liabilities have contributed towards the bailout. But, it is not just DB, HSBC and Credit Suisse are also very worrying cases that the IMF warned of in its recent Financial Sector Assessment Program. It is the degree of possible outward contagion compared with the risks that they pose internally is what we need to be very concerned about.  

Forget the banks

Regardless of whether the banks are less leveraged and are better off than they were in 2007, the governments that bailed the economies and banking system out are not and there lies the real impending danger. Once the bond market loses all confidence in the governments this time around, the plug will be pulled and it is game over. Most Central Banks have got overnight lending at zero or below and can't provide any debt service relief for the economy from there. Look at the Fed for example. The very best they could do now to try and rescue the economy from entering an official recession is to take away its 0.25% rate hike made in December 2015 - They don't have room to do anything else other than to try and repeat the tactics of increasing the amount of publicly traded debt and run trillions of dollars in deficits to try to boost consumption through transfer payments, but that would only cause an interest rate spike sending the economy into a depression as the end result. 

S&P 500 and gold's correlation turns positive

Source: iStock

Anyway, for now, keep an eye on the S&P 500 and gold's correlation that has just turned positive. Analysts at Brown Brothers Harriman have suggested that the change in inter-market relationships is a warning sign to investors:  

"The full implications may not be clear. It is difficult, for example, to tease out market direction from the shift in correlations. If gold, for example, holds above $1300-$1310, the technical pressure may be alleviated through broad sideways movement. Similarly, the S&P 500 held important support near 2115 in the middle of September and a break of it is needed to signify anything important on the downside. A benign interpretation of the shift in correlations is the choppy but broadly sideways active. A more significant implication is that the market drivers are shifting. The price action in the coming weeks will help determine which scenario is more likely. Stay tuned."