Trader Note

Use daily charts to establish bias for strategies.

2018-01-15 Week

Kraken outage. Bonds and Collapsing Markets.

 

This Week

All eyes to China numbers and Chinese's government releases. Don't expect an outline of Chinese Government Plans for an exit from USD instruments, but expect that markets will fear the worst.

    

Kraken & Crypto Markets

BUY Bitcoin now. Kraken closed markets at 13500 (Orders still in market) while XBT price will tap 12500 levels. When Kraken re-opens, the orders in market will drag ALL market prices higher.

  

I will be posting this early this week because I have spare time. That is because the crypto site I use, Kraken, has gone dark. It has been offline for over 15 hours. It also went dark right in the middle of a busy trading cycle.

The thing that makes me furious is that this was not a planned outage. I know because I checked the maintenance schedule before I started trading. It is not something I do every day, but I do it frequently to avoid this sort of rubbish. As this is not the first time I have had markets / brokerages go dark while trading, I check such schedules. The worst time was when I was trying to remove my funds from Man Financial (a day late) when Joe Corisine lost everyone's money on Greek bonds. That took a few years to clear up, with most accounts taking a haircut. Hopefully, this outage is not as severe as that.

For any traders that had orders-in when that market went dark, I am right there with you. Relax, because there is NOTHING else you can do. You WILL get your money back out of markets (mostly, if lucky). You WILL get an opportunity to unwind your trades. Yes, you probably just lost a packet on Ripple, but you can make it up on buying Monero… and betting against the banks always feels better than betting for them.

If I had known that there would be a system outage, I would not have had orders in market (I'm not an idiot). I actually had a long order on Bitcoin half filled (I love it when I ping the bottom of a move) and was waiting for price to fulfill the order. I was about to reposition the second half of my order to get a total fill at a higher price, but the market crapped out. Luckily, I got the chase order into market and canceled the hanging partial-fill order before the shutdown (except the current price move would have provided a total fill). I was about to place another chase order into market as it closed (luckily, I didn't have multiple orders hanging in market as always cancel the hanging order first). So as you can imagine, I am… angry, anxious, pissed off, frustrated, etc.

Crypto markets are currently not up to the task for the volumes in markets. That has been obvious every time volume spikes because there are outages in these markets. Crypto markets are not being run as markets but as websites where an outage is considered no big deal. Markets need to keep traders in the loop, because small changes effect traders (like margin requirements, holiday closures, operating hour changes, etc.). These crypto markets are NOT operating anywhere near the performance level of historic markets (NYSE, CME, CBOE, etc.). Until they do, this facet of the market will continue to be a high risk speculative market place.

The proof that crypto currency markets are still in their infancy is frequent market outages, wide arbitrage prices, and challenging order entry with sporadic volumes. Don't expect that to change any time soon.

Bonds and Market Collapse

Do any traders still trade bonds?

I know that big funds like bonds, mostly as a holdover from an archaic time when bond yields were high. Junk bonds were a favorite trade of some firms, and in the past this had led to various junk bond market crashes.

Prop trading houses and big firms make fresh faced traders start with bond futures. This is because the moves are often small (outside of market data) so that these companies can minimize new trader losses.

HFTs like bonds just because they are one more data set to scrape cash out of markets while sitting between traders and floor.

But the real question is: Do any INVESTORS buy bonds? Do any real-life, human investors actually buy bonds that are paying less than 2% in an up-trending market environment that has lasted for many years?

  1. A savvy investor does NOT lock up capital for 10 or 30 years at a rate BELOW that of inflation.

Bond investment is mostly done by corporations and governments. Banks can use bonds, bought with free Fed money to have a guaranteed yield of 0.5%. They can then take that 0.5% and bet it on ANYTHING they want (because the bond is the collateral). Win or lose, it doesn't matter because it is free cash. That cash ends up in highly speculative derivatives markets and spread into high yield junk bonds.

When the Fed stops giving out free money to take bonds (end of QE programs), then that free money will dry up. That means that money will not flow into those high risk areas, and with a drop in liquidity there will be many trades left hanging for an opposing trade. This is what happened in the derivatives market with the "London Whale" as well as the Lehman Brothers collapse. So expect more bank failures brought on by the once lucrative high risk divisions.

China

Bond yield is held low through buying. As QE ends, less buyers will be in market so yields will rise (as they should have done 10 years ago). However, one of the biggest buyers has decided to curtail USA asset purchases: China will not be buying any more bonds.

When the USA trades with China, cash flows into China. They have to do something with that cash, so they buy USA debt in an attempt to keep the yuan price low. Low yuan price means that other country manufacturing cannot compete with cheap Chinese goods. This has led many manufactures to go out of business leaving China as the ONLY supply for many things. If China is no longer artificially suppressing the yuan price, it means that they are comfortable with their near monopoly in manufacturing markets.

It also heralds the death of the USA and correlated EU bond markets. Without that buying support, bond yields will need to rise to encourage real investment. When bond yields rise to a level that investors WANT to put money into those markets, it means that there will be a rotation out of stocks and into bonds. In a normal functioning market place, stocks and bonds are (inversely) correlated. That is a MASSIVE flow of money, especially for managed funds that traditionally invest up to 40% in bonds (lately 10-20% or less). When that rotation occurs, ALL markets are going to feel the pain.

Conclusion

A rotation out of stocks and into bonds will suck the liquidity out of stock markets making it highly likely for deep dips. It also makes it very likely that a crash will occur.

Without Chinese money manipulating dollar-yuan prices, expect that the US dollar will drop in value. This will make ALL goods and services more expensive. A falling dollar will mean a rising prices to gold, silver and oil… and most HARD assets.

Sell stocks. Exit USD holdings to buy gold. Hold that during the changing market (profit from the collapse). Only invest in stable government bonds when the yield exceeds 10% because it will go much higher than that before markets stabilize. Only buy bonds if you want to bet that governments won't fail, too.

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