WHAT HAPPENED?

Repricing "the new volatility paradigm," you got to love these Wall Street fellows. There's no proof the Fed ever had that magic touch. It's the Fed that's caused the carnage by interfering with what would be natural market forces in the first place. Pouring money into the marketplace to prop up weak companies is akin to what so-called well-intentioned politicians do with their looney legislation: punish the many to capture the few. It's a form of political religion.

The Fed all these past eight years copted a page out of history that happened right after the attempted assassination of President Reagan when one of his cabinet people took the stage on national television and claimed he was in charge.

Trying to repress volatility is like trying to take the risk out of life. It's all these plastic package containers no one can open today without their own personal chainsaw mandated in the name of child safety. As a friend frequently points out, life is a terminal illness. Change that and it isn't life anymore.

Trying artificially to repress volatility and they are really not markets with true price discovery any longer either. Tweaking and tampering both begin with the same letter of the alphabet.Tweaking is basically an action of insecurity, tampering of arrogance. With the former you haven't got a clue, with the latter you're absolutely certain you do.

The bigger issue for financial markets is that central banks are running out of ammo, the Allianz chief economic adviser told CNBC. "Markets are realizing that central banks can no longer repress financial volatility. And they are repricing to new volatility paradigm," he said in a "Squawk Box" interview.

To that end, any shocks to the markets will take longer to reverse themselves, said El-Erian, former Pimco co-CEO. "What we're going to see is every time something happens in the world it's going to take longer to restore stability. That's what we're seeing with China today.

Expect more of these Wall Street fellows to cough up their views of the age-old question: "What the hell happened."

IN AND OUT

Inbound  and outbound and here we go. No we're not talking burgers here.

Simply put, Americans are moving from heavily-regulated, bureaucratic, high cost-of-living states to more affordable states.
This year's data from United Van Lines...



 In California the story noted via moving van records more trucks are moving out than in.
For more: zerohedge.com/news/2016-01-08/americans-cant-wait-get-out-these-five-states.

HEADWINDS

The Fed has painted itself into a corner, not an unusual occurrence for such bureaucrats. While 2015 was in Fed lore one of hesitation, indecision, a fact that on its own negatively effected investor confidence, given the recent China blowup, the Fed now faces a real problem: do we or don't we and if so how many times. We're talking interest rate hikes here, the dot plot or any others you prefer.

Any forced rollback in rates or rolling out another round of QE would most likely destroy whatever inkling of credibility this Fed has left. Yes, it's nice for former FOMC member Richard Fisher to come out an admit they created a bubble all the while denying it. In the final analysis this is a committee and putting your faith in committees is right up there with kissing one of the Pardoner's sheep bones in Chaucer's Canerbury Tales. Good luck.

It's amazing what a bad week will do. As the WSJ noted today.

The Dow industrial tumbled more than 1,000 points this week, marking the worst first five days of any year, as volatility across the globe rattled investors.

Traders said they are bracing for further big swings in the weeks to come.

The Dow fell 1% Friday after starting the day in positive territory amid a strong U.S. jobs report and an uneventful session in China’s markets overnight. But shares slumped in afternoon trading as investors became unwilling to enter the weekend exposed to the risk of further losses.

In all, U.S. stocks lost $1.36 trillion in value this past week. The unusually severe drop highlighted the precarious position of markets caught between relatively high valuations—attributable in part to years of easy money from central banks—and a new round of uncertainty about the fundamental underpinnings of key parts of the global economy.

Now if this sounds like the recent Chinese stock market flame out only affected local Chinese investors, it don't rain in Indianapolis in the summer time and the world with all the political push and palaver about the benefits of globalization these past several years is not more interconnected than ever.

So the future is about headwinds. We know central bankers cause bubbles. With all the global turmoil notwithstanding those feel good government numbers about jobs does this so called recovery or any other need another headwind?

SHAREHOLDER DESTRUCTION

Here is a post from dailyspeculations.com/wordpress/?p=10829  that in our opinion expresses many of the things wrong with Wall Street and its bevy of investment bankers wherever they troll.

On January 27, shareholders of Royal Dutch Shell will vote on the company's plan to buy BG Group PLC (the upstream remnant of Margret Thatcher's privatized British Gas).

If you are a merger arbitrageur, you are praying that the RDS shareholders will shoot themselves and vote yes, as the deal spread is very wide.

If you are a shareholder in RDS and have carefully studied the assets, forward prices, and assumptions, you have concluded that this deal is likely to be remembered among the largest destructions of shareholder value in the history of the world. I reached this conclusion several weeks ago. Today, Standard Life, RDS' 11th largest shareholder concluded the same thing and said they will vote "no."

Perhaps if you are the analyst at Institutional Shareholder Services (ISS) who recommended that shareholders vote in favor of the deal, you might be assured of a future job at Goldman Sachs, JP Morgan or Rothschilds after the deal closes — as the investment banking success fees will likely be extraordinary.

But — where are the activists? They can easily and rightly point out that there are numerous other assets around the world that RDS can buy at much better prices ; with a better risk/reward…

THIS DEAL IS EERILY REMINISCENT OF BANK OF AMERICA'S KEN LEWIS BUYING MERRILL LYNCH DURING THE FINANCIAL CRISIS OF 2008. The day that this RDS deal closes, billions of RDS equity will be destroyed.

Are we witnessing the downside of billions of dollars of passive index money blindly following the ISS pied piper over a cliff?

SUFFERING MARKETS

As you might expect people might live lots of places, but the last few days they got China on their mind if they're investors.

One of the concerns is will the China mess spread.Some might suggest that is past tense. It already has. And one of the things you hear financial journalists and market strategists say, as a WSJ columnists wrote this morning: "Falling Chinese stock indexes mostly affect local investors, since foreigners are mostly excluded from domestic Chinese stocks."

That columnist apparently doesn't realize just how right he is. Tons of local investors on Monday and again partly on Thursday in localities from Europe to Japan to the U.S. saw their holdings take a good old fashion drubbing.

It's amazing what people will say and believe to make things look better than they are. At least part of the selloff in Chinese stocks stems from fear about the slowing Chinese economy, a MSM media and stock market meme for months. China for years has been the Big Daddy Buyer of last resort, gobbling up materials and assets like a famished big dog. Check out real estate prices in certain California cities pushed up by wealthy Chinese investors who've profited greatly from their home market's bloated stock prices. All cash perchasers.

But emerging markets depended on that well for water once too often and for too long. Governments fudge their numbers, a proven historical fact. The IMF forecasts 6.3 % GDP growth in China for 2016, down from 10% in 2010. If you want to believe both of those number be our welcome guests.

The ongoing devaluation of the yuan should have alerted many to just how bogus those numbers are. China's voracious imports from around the globe fell for a reason. The numbers over the past year are staggering. A weaker yuan comes with its drawback, however, one of which is weaker purchasing power.

It might make the buyers are Walmart giddy, but don't try to sell that to all those suffering emerging markets.

OVERNIGHT

How do you like me now? That's the volatility question of the moment in the minds of  many investors. You can bet there are some option traders out there who like it as the fallout from China continued in markets world-wide Thursday.

Overnight Chinese stocks showed some signs of a positive pulse beat as the The Shanghai Composite
rallied 1.5% after officials torpedoed the circuit breaker that presumably caused all the pain and angst. Such things tend to be catching as Japan, Hong Kong and Korean markets joined the upswing in share prices.

But the underlying concern remains among many investors--that is, the state of the global economy's health as witnessed by the Thursday market slaughter that stretched from Japan to Europe to the U.S. There are lots of bogus numbers out there and many are in the U.S.from the phony drop in jobless claims numbers masking the recent 70,000 high paying jobs that disappeared in the energy sector to the now apparently 40,000-plus low-paying  Macy jobs about to go poof.

China's GDP numbers have been suspect all along. There's a growing disquiet as demand for goods and services are weak, see the Baltic Freight index, a global scene that is rife with conflict and staggering amounts of sovereign debt.

Some analysts said they expect to see continued volatility this month, as investors grapple with fresh information about the health of economies and markets following a nearly seven-year-long bull market that took the Dow to a fresh record as recently as last May. Thursday’s declines left the 30-stock index down 5.2% for the year and 9.8% below its May 19 high.

The selling has intensified the concerns of many investors that stocks are vulnerable after the Federal Reserve’s first interest-rate increase since 2006 pushed up borrowing costs for traders. Even so, there was a widespread sense that U.S. investments remain the most viable option given the darkening global picture, the WSJ reported.

Some are arguing that what happens in China, like Las Vegas, stays there and will not impact the U.S. supposed ongoing recovery. But apparently bond guru Jeffery Gundlach sees it a bit differently.

Many investors believe the U.S. will weather the global market downturn better than other nations, thanks to its steadily expanding economy. But Jeffrey Gundlach, who runs asset manager DoubleLine Capital LP, is downbeat on financial markets and the global economy, and he is worried the Federal Reserve is compounding the problems. 

Gundlach argues that sharp declines for oil, commodity, junk-bond and stock prices signal deep, fundamental economic problems that some investors are overlooking.
The marked weakness is "a symptom" of "insufficient and dwindling global growth," he says. "The Fed should not be hiking" interest rates, though it raised the fed funds rate last month for the first time in nine years and has signaled it likely will raise rates several times this year.

Gundlach notes that the Fed held off on raising interest rates in September due to market turbulence at the time. By that logic, he says, the Fed shouldn't be considering boosting rates any time soon, since almost every financial market, from commodities and junk bonds to stocks and emerging markets, is down sharply since September. 

marketwatch.com/story/all-is-not-well-in-global-economy-says-bond-guru-jeffrey-gundlach-2016-01-07 

THE POLITICAL SEASON

It's the political season. Once again polls are popping up left and right and that's not a political pun, either. Here's recent one MSM doesn't want you to pay much attention to especially since it was done by one of the longtime pollsters over the years they love to quote to enforce their viewpoint.



http://www.zerohedge.com/news/2016-01-06/gallup-explains-trump-staggering-75-americans-believe-widespread-government-corrupti

BROKEN CURCUIT BREAKERS

Circuit breakers are the direct opposite of free market price discovery. That means willing buyers and willing sellers will find each other in the market without the interference of bureaucrats and well-intentioned, misguided regulators and central bankers.

The circuit breakers the PBOC imposed added to not stemmed the panic twice in just four days. That might be some kind of panic in itself. These circuit-breaker rules — which US markets also have — are put in place to stop trading in the event of some malfunction in equipment or to stem a market panic.

The past few days of action in China have indicated more of the latter more than the former.

REUTERS

But as Chris Weston, chief markets strategist at IG Markets in Melbournetold Business Insider Australia, this week's action exposed some flaws in these rules.

For one, the distance between the level that triggers a temporary halt — a 15-minute pause takes place after a 5% drop — and a full-day stop, which happens after 7%, is simply too narrow.

"When the market hits 3.5% to 4% we see everyone panic and put in their sell orders," Weston told Business Insider Australia. "When the 15-minute window ceases, the market shoots through to 7% straight off the bat. The distance between the two needs to be wider — otherwise we are going to see this happen time and time again."

Bloomberg News' report on the chaos that broke out in the Chinese stock market on Thursday also captured this feverish rush to sell that Weston mentioned. But the entire premise of even having markets — whether they be markets in oranges or stocks — is that the market itself will give participants, the buyers and the sellers, time to find one another. When trading takes place for only 10% of what's anticipated, that mechanism would seem to break down.

On Thursday morning, stocks in the US were selling off as global markets deal with the aftershocks from the chaos in China. And while the circuit-breaker rules are in place to keep panics from spreading, it seems that perhaps Chinese authorities think the opposite effect has been achieved.

http://www.businessinsider.com/china-stock-market-halt-suspended-2016-1

OVERNIGHT

The route is on. That is how Reuters, "China stocks trading halted after rout," describes the Chinese market after "the second time this this week" trading was halted, pushing the panic button for investors on regional currencies and stocks.

Once again the PBOC sideswiped investors when it forced the yuan  0.5 percent lower against the dollar, "the biggest daily drop since last August, when an abrupt near 2 percent devaluation of the currency also roiled markets."

CNBC described the action this  way:

 China’s stocks were suspended from all trade on Thursday after the CSI300 tumbled more than 7 percent in early trade, triggering the market’s circuit breaker for a second time this week. That drop-kicked stock markets across Asia, which were already wallowing after a weaker open amid concerns over China’s economic slowdown and its depreciating currency as well as falling oil prices. On the mainland, the Shanghai Composite tumbled 7.32 percent by at the time of the halt, while the Shenzhen Composite plummeted 8.34 percent. The CSI300, the benchmark index against which China’s new circuit breakers are set, plunged 7.21 percent. If that index rises or falls 5 percent, the market halts all trade for 15 minutes. If it moves 7 percent, trading will be suspended for the rest of the day. In total Thursday, China shares only traded around 15 minutes.

Fifteen minutes, that's a short time for a lot of carnage. How European and U.S. markets react when they open is anyone's guess. Ours is more of the same. According to the WSJ, the PBOC blamed the chaos on spectulators trying to profit from a weaker yuan. "The PBOC on Thursday said speculators were responsible for the recent dramatic yuan weakening and it vowed to keep the yuan largely stable." Blaming speculators for fiscal and monetary incompetence is hardly new. So here's a question from Mr. Volatility: "How do you like me now?"  Let's see where European and U.S. markets close later to ask investors there.

MARKET VOICES

 What do you do when worse case is another, even deeper recession and best case is muddle through with some losses? Keep on muddling?

Not long ago, David Kotok firmly believed that the S&P 500 index could climb 50% over the next four years, taking it to 3,000 by 2020. Recently however, the founder of money manager Cumberland Advisors has become less optimistic.

Global markets, Kotok believes, face many headwinds, from rising U.S. interest rates to slowing growth in China to bad debt on European bank balance sheets. The terror attacks in Paris, in his view, could be a glimpse of global instability ahead, and the recent collapse of the high-yield bond market might be an early warning sign. 

For 2016, Kotok sees the best risk/return trade-off in U.S. stocks, particularly the technology, utilities and health-care sectors, and tax-free municipal bonds. He has inched back into the energy sector. Kotok uses exchange-traded funds, rather than individual equities, for their tax-efficiency and diversification. 

Kotok founded his Sarasota, Fla.-based firm in 1973 and manages about $2.4 billion. Thanks to what is known as Camp Kotok, however, he punches above his AUM. Every August the money manager hosts an invitation-only gathering for financial luminaries at a fishing lodge in Maine. Attendees include top economists, former Federal Reserve officials and money managers – it’s been described as a mini Davos with fishing rods instead of skis.

Barrons.com recently caught up with Kotok to discuss his outlook for stocks, Fed policy, oil prices and why he sees the unloved natural gas industry as a bargain. Excerpts from our conversation are below. More:

.barrons.com/articles/top-etf-picks-for-2016-according-to-david-kotok.