Achtung, Kapitan!

Just when you thought the good ship S.S. Spoo had righted itself after a couple of nasty rogue waves, it went and hit a bit of uncharted reef late in Tuesday's session.  Morning ecstasy turned to afternoon despair, and you can just envisage a scene similar to that from a black and white WWII movie in which the German seaman shouts "Achtung, Kapitan!" when spotting Allied torpedoes approaching.

Let's get one thing clear: this is not 2008 redux, for the simple reason that the underlying stress in the real economy of most of the world is not nearly as significant as it was 8 years ago.  That having been said, there are pockets in which the current environment is worse than the GFC:

* China's real economy and shadow banking system are in worse shape.   Without delving into too many specifics, the authorities went all-out on stimulus in 08/09, not only borrowing from future growth but also encouraging an even more extreme misallocation of capital than was the case previously.

* Commodities have been hit by the twin storms of previous capex coming on line and reduced demand thanks to China and shifting demand patterns elsewhere.   Remember that a key plank in China's stimulus platform in response to the GFC was to engage in strategic purchases of key commodities.  It seems safe to say that that ain't happening this time around, and China's natural rate of demand is also ebbing with the economy downshifting to a lower growth profile.  In the US, the capex into oil extraction from alternative sources has naturally made the sector (and its debt) more vulnerable to sustained lower prices, given the relatively higher breakevens from extraction.

* Market microstructure.   At the risk of belaboring this point ad nauseum, it cannot be re-iterated enough how ephemeral the price on your screen is.  In many cases, there are no real market makers any more, only "liquidity providers" who can come and go as they please.  Brokers act on an agency basis, which means if you want to sell, the price you get is one that another punter (or "liquidity provider") wants to buy.  Unfortunately, that's not always the price at which you want to sell!

Of course, regulators have made noises in the past that less market liquidity is not necessarily a bad thing, as it exacts divine retribution on punters with the temerity to get their size and direction wrong. File this one under "be careful what you wish for, because you just might get it."

Macro Man was somewhat disgusted to see HFT shop Virtu trumpeting in the WSJ that Monday was one of its best ever days.   (This from the firm that famously never loses money.)   "We were there to catch the falling knives," they claimed, neglecting to mention that they also helped tip the knives off of the edge of the table to begin with!   One wonders what the regulatory reaction would have been had a bank or a bloke living over his Mum's garage had made a similar claim.

In terms of markets, yesterday's price action was obviously pretty poor- giving up a 70 point rally in the SPX is not a good thing, producing the dreaded "Satan's middle finger" candlestick formation.

The 30 level in the VIX remains a useful touchstone; although it was breached with Spooz at their ding-dong highs, the break could not hold, which was a significant warning signal.

It seems likely that the equity market will have another look at the downside today; at the time of writing 10 pm NY, Chinese equities aren't exactly blowing anyone away with their reaction to yesterday's policy easing- which itself was fairly close to the bare minimum that one could reasonably have expected.

For choice, however, Macro Man will be inclined to buy this dip (assuming it has materialized), as he would expect some sellers with weak hands to materialize, especially after Tuesday's price action.  It's not a particularly high conviction view, however, so the size will be very social indeed until some ancillary indicators give him a bit more confidence.

One final note, this time one bonds.  Yesterday's price action stank worse than a day-old kebab, particularly in Bunds, which couldn't get out of their own way.  One narrative circulating was that a sovereign that had spent some of its FX reserves defending its currency was ditching its lowest-yielding bonds to brings its portfolio back in line.   The story is eminently plausible, as there are plenty of candidates for FX reserve burn, and would you keep the bonds yielding less than 1%?

That Bunds could not manage to outperform BTPs this week is another indication of some fairly persistent selling pressure in the former.

Macro Man remains of the view alluded to yesterday that fixed income is not a bad way to fade the current rout in risk; sure, there is downside, but if the CBs are selling there is at least something of a backstop.  Either way, they didn't really rally when stocks were getting crushed and they got crushed when stocks rallied.   In the short run, at least, that divergence is telling you something; that the usual suspect owners of zillions of bonds have blanketed the press talking down Fed hikes (and up Fed easing) sends a similar message.

It would be nice, for once, if the beneficiaries of the most egregious misallocation of capital were forced to shout "Achtung, Kapitan!"