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Todd Harrison: Will the Revolution Be Televised?


The facts and frustrations of 2016


It's getting real.

Yesterday, Russia warned of a 'new world war' starting in Syria. Global markets were rocked by a litany of headwinds. Riots and uprisings spread through the Korean Peninsula.

Each of those things was disturbing in its own right; collectively, it was just plain heavy. I'm reminded of 2007 when the homebuilders, banks and brokers got hit hard--real hard; three 'lower highs' later it was meltdown city.

If we substitute the current energy complex for the homebuilders of 2007, we find ourselves reading an eerily similar script -- with a possible rally coming, which almost nobody expects, that would creat the third 'lower high.'

I'm no fan of analogs, particularly in the multi-linear mazes that are global markets, but I do believe experience is the source of wisdom. This is my third crisis and while it is an extension of the last crisis -- the last two, really -- it will forge its own legacy.

The most bullish thing I see -- and it's not actually bullish -- is that the bear case seems too darn obvious. Maybe it's because it's been rattling around in my head for so long that it feels tired; but in my bones, I know it's not going away.

Here's what we know:

• The Bank of Japan NIRP (Negative Interest Rate Policy) is rocking Asian banks and helping to invert the yield curve. That doesn't guarantee a recession but there's never been a recession without an inverted curve.

• European banks are trading below--in some cases, significantly below--tangible book value. Deutsche Bank ($DB) is changing hands at 29 cents on the dollar and that's scary to contemplate.

• In a finance-based still-levered global economy, with risk sliced, diced and repackage in various iterations, world markets are interconnected and counter-party risk is fragmented, not linear.

• Credit default markets are screaming for attention. I've traded equities for 25 years and if I've learned anything, it's the credit market is smarter than the stock market.

• The most promising innovations-robotics, artificial intelligence and the internets-are structurally deflationary.

• Crude crashed; foreign investors, who had parked a ton of money in illiquid high-end real estate, sold what they could as a source of funds.

• Janet Yellen didn't dismiss stateside NIRP, which is partially why US financial institutions took it on the chin this week.

• The reaction to news-even best-in-breed earnings from Google ($GOOGL) and Facebook ($FB)-has been sharp, swift and brutal.

• Global Stocks, as measured by the STOX 600, entered bear market territory.

• This sell-off is hitting the 1% much harder than the 99%, largely because the 99% lost their dough a long time ago.

• We can check the box on that "commodity vol leads to equity vol" conversation.

• Markets don't lie; people do.

• Something is only worth what someone else is willing to pay for it.

• There are currency wars, class wars, race wars, regional wars and religous wars; and society is a sum of the parts.

• Despite all the hand-wringing, fear-mongering, click-baiting, headline-grabbing "fear," the S&P is a whopping 14% from *all-time* highs after a 220% seven-year rally.

Here's what we don't know:

• The depth of the Chinese Monkey; is it just bad, or "Outbreak" bad?

• Can Central Banks reinvent another bazooka to kick-save the markets?

• Would investors believe it if they did?

• Did WW3 begin without a single shot fired?

• Are markets voting on the US Presidential Elections?

• Would it have mattered if Yellen dissed NIRP and threw Japan under the bus?

• Do governments hold a grudge against financial institutions after inhaling their toxic debt in the first phase of the financial crisis?

• Are billionaire hedge fund managers trying to "break the bank" given their dismal performance the last few years?

• Just how much will excess to the upside breed excess to the downside?

Pictures help frame perspectives; some food for thought:

Banks must hold major support

If SPX 1812 breaks, next support is ~SPX 1750 (-4%) and ~SPX 1550 (-15%).

If you still believe in cycles, this one must play through.

This psychological continuum is as old as dirt; You are where?

I will conclude with this: everyone has unique time horizons and risk profiles and where you stand is a function of where you sit. I wrote last month that I favor commodity plays (understanding there are additional shoes to fall) over high-multiple tech, but that is one man's view and far from a given. Nobody knows for sure and anyone who sells the future as fact is not to be trusted.

I appreciate you taking the time to read this and I hope you enjoy the three-day requisite respite--you've most definitely earned it.

May peace be with you.


Twitter: @todd_harrison

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