Viernes 08/28/15 Simposio economico

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It's Official: China Confirms It Has Begun Liquidating Treasuries, Warns Washington
Submitted by Tyler D.
08/27/2015 - 23:27

As Bloomberg reports, "China has cut its holdings of U.S. Treasuries this month to raise dollars needed to support the yuan in the wake of a shock devaluation two weeks ago, according to people familiar with the matter. Channels for such transactions include China selling directly, as well as through agents in Belgium and Switzerland, said one of the people, who declined to be identified as the information isn’t public. China has communicated with U.S. authorities about the sales."

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The Complete Jackson Hole Schedule
Submitted by Tyler D.
08/28/2015 - 07:13

Over the past several years, the two-day Jackson Hole symposium had garnered a particular prominence among economists and market watchers as this is where various key inflection points by the Fed were hinted, leaked or announced, including QE2, QE3 and the taper. This year, however, the gathering of central bankers in Teton County, will be less exciting due to the absense of the most important central banker in the world: Janet Yellen, which means the highlighter will be Vice-Chairman Stanley Fischer when he speaks tomorrow at 10:25pm which will be a key event given the recent market turmoil.



Chinese Stocks To Plunge Another 35%, BofA Says
Submitted by Tyler D.
08/28/2015 - 07:46

"As soon as people sense the government is withdrawing from direct intervention, there will be lots of investors starting to dump stocks again."

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The Financial Times Demands End Of Cash, Calls It A "Barbarous Relic"
Submitted by Tyler D.
08/28/2015 - 08:23

Earlier this week, as the financial world was mesmerized by a min-stock market crash, the Financial Times published a dastardly little piece of fascist propaganda titled, The Case for Retiring Another “Barbarous Relic.” When you start to see increased propaganda about banning cash, you know the status quo is very scared and things are getting very serious. You’ve been warned.



S&P 500 Suffers 'Death Cross' For First Time In 4 Years

Submitted by Tyler D.
08/28/2015 09:31 -0400

This is the first time that the 50-day moving average crosses below the 200-day moving average since August 2011, creating the ominous-sounding "death cross." The month following this 'event' has produced negative returns 80% of the time...

For the first time since 2011...

What happened in 2011...

2010's cross was a bust, but 2008 was not...

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Traders Are Panic-Buying Colombian Pesos
Submitted by Tyler D.
08/28/2015 - 09:53

In the last 2 days traders have bought Colombia Pesos with both hands and feet, sending the currency soaring almost 5% higher. This is the biggest 2-day gain since 2010...



UMich Consumer Sentiment Tumbles As "Hope" Drops To Lowest Since 2014
Submitted by Tyler D.
08/28/2015 - 10:05

After July's disappointing drop in UMich Consumer Confidence, August did not help. Printing 91.9, below expectations of 93.0, UMich is hovering at the 2015 lows. Both current and future sub-indices dropped with hope falling to its lowest since 2014 (biggest 7mo decline in 2 years). Income growth expectations dropped and business expectations dropped to lowest since Sept 2014. This follows the highest conference board confidence in 2015 and lowest Gallup confidence in a year. Bill Dudley will be disappointed after proclaiming this a key driver of The Fed's rate hike call (more important than jobs).

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"Total Capitulation" - Biggest Weekly Equity Outflow On Record
Submitted by Tyler D.
08/28/2015 09:38 -0400

If anyone was curious why the Fear and Greed index is at 13 (up from 5) despite the biggest 2-day surge in the Dow Jones ever, the answer is very simple: nobody believes the "broken market "any more, as confirmed by the biggest weekly equity outflow on record.

The full details courtesy of Bank of America:

Record Equity Outflows: weekly flows show $29.5bn outflows from equity funds (largest outflows on record – data since 2002)

* Equities: $29.5bn outflows (largest on record in absolute terms) ($6bn ETF outflows and $24bn mutual fund outflows)
* Bonds: $11.7bn outflows (largest since Jun’13)

* Money-markets: $22bn inflows (8w inflows of $121bn = largest since Dec’13)
* Precious Metals: $1.1bn inflows (largest since Jan’15)

The YTD verdict: equity inflows just $448MM YTD, compared to $97bn for bonds. Even commodities have a greater inflow compared to stocks, making one wonder who else is buying (we know it's not the smart money).

Geographic Breakdown:

* EM: $10.5bn outflows (largest outflows since Jan’08!)
* US: $12.3bn outflows (largest in 16 weeks)

* Europe: $3.6bn outflows (largest outflows since Oct’14) (first outflows in 15 weeks)
* Japan: bucks trend with $3.3bn inflows (inflows in 25 out of past 27 weeks)

Investor Capitulation: daily flows show massive $19bn redemptions from equity funds on Tuesday (8/25) = 2nd largest since 2007 (when daily EPFR data became available)

Credit exodus: $4.2bn outflows from EM debt funds; $4.9bn outflows from HY bond funds; $3.8bn outflows from IG bond funds (largest combined outflows since Jun’13 “taper tantrum”)



Fixed Income Flows:

* $4.9bn outflows from HY bond funds (largest outflows in 2015)
* $4.2bn outflows from EM debt funds (largest since Jun’13 “taper tantrum”)
* $3.8bn outflows from IG bond funds (largest since Jun’13 “taper tantrum”)
* $0.8bn outflows from bank loans (4 straight weeks) (largest outflows since Jan’15)
* $1.7bn inflows to govt/tsy funds (8 straight weeks)



Bull & Bear Index: falls to extreme “fear” territory of 0.5 (scale of 0-10)…most bearish since Jan’12 (Chart 2)

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Gold Surges On NIRP Hint
Submitted by Tyler D.
08/28/2015 09:45 -0400

The Fed's ultimate dove has been unleashed and this time he means business. Faced with the inevitable rate hike, Kocherlakota has come out swinging to explain how cataclysmic inflation is and why The Fed should use its asset-purchase tools and lower interest rates further... i.e. to negative... Gold reacted instantly...

* *KOCHERLAKOTA SAYS FED HAS ASSET-PURCHASE TOOLS
*KOCHERLAKOTA: THERE ARE WAYS TO LOWER INTEREST RATES FURTHER



And sure enough gold surges...

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The Investor Revolt Arrives: This Hasn't Happened Since Q4 2008
Submitted by Tyler D.
08/28/2015 10:20 -0400

There’s little question that the collapse of the financial universe in 2008 dealt a dramatic blow to retail’s confidence in US capital markets. Taxpayers were forced to foot the bill for a Wall Street bailout just as 45% of their 401ks was being vaporized and to make matters immeasurably worse, CNBC ensured that mom and pop could watch their retirements disappear in real time on the same channel that had, for the better part of a year, been telling them that everything was fine.

To the extent that the Fed-driven, six-year rally restored some semblance of trust between retail investors and Wall Street, it was wiped away for good on Monday when, in a harrowing day of flash-crashing mayhem, the perils of broken, manipulated markets were laid bare for all to see and to add insult to injury, the ETF pricing model blew up causing some funds to trade far below NAV.

Given that, and given how predisposed household investors are to mistrust Wall Street in the post-crisis, post-Flash Boys world, retail outflows during uncertain times (like those that began last month when China’s stock market collapse began to make national news) shouldn’t come as a surprise, but as Credit Suisse notes, something happened in July and August that hasn’t happened since Q4 of 2008: retail investors pulled money from both stocks and bond funds.

In other words, mom and pop were selling everything.

From Credit Suisse:

We observe that the latest weekly estimates from the ICI indicate these retail investment outflows began gaining strength in Q3 2015. Data to date suggest that we will see the first example of back-to-back monthly outflows from both equity and bond mutual funds (in July and August 2015) since Q4 2008.

More from Bloomberg:

Credit Suisse estimates $6.5 billion left equity funds in July as $8.4 billion was pulled from bond funds, citing weekly data from the Investment Company Institute as of Aug. 19. Those outflows were followed up in the first three weeks of August, when investors withdrew $1.6 billion from stocks and $8.1 billion from bonds, said economist Dana Saporta.



“Anytime you see something that hasn’t happened since the last quarter of 2008, it’s worth noting,” Saporta said in a phone interview. “It may be that this is an interesting oddity but if we continue to see this it could reflect a more broad-based nervousness on the part of household investors.”



Withdrawals from equity funds are usually accompanied by an influx of money to bonds, and an exit from both at the same time suggests investors aren’t willing to take on risk in any form. While retail investor sentiment isn’t the best predictor of market moves, their reluctance could have significance, Saporta said.



“It might suggest households are getting nervous about holding investments, and that could lead to some real economic implications including cutting back on spending,” she said. “Should the market turn lower again, it will be interesting to see if we have the traditional move back into bonds or if households move to cash.”

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The Troubling Decline Of Financial Independence In America
08/28/2015 10:23 -0400

Submitted by Charles Hugh-Smith

If you can't work for yourself and afford health insurance, something is seriously messed up.

By financial independence, I don't mean an inherited trust fund--I mean earning an independent living as a self-employed person. Sure, it's nice if you chose the right parents and inherited a fortune. But even without the inherited fortune, financial independence via self-employment has always been an integral part of the American Dream.

Indeed, it could be argued that financial independence is the American Dream because it gives us the freedom to say Take This Job And Shove It (Johnny Paycheck).

This chart shows the self-employed as a percentage of those with jobs (all nonfarm employees). According to the FRED data base, there are 142 million employed and 9.4 million self-employed. (This does not include the incorporated self-employed, typically physicians, attorneys, engineers, architects etc. who are employees of their own corporations.)

This chart depicts self-employment from 1929 to 2015. Self-employment plummeted after World War II as Big Government and Big Business (Corporate America) expanded and the small family farmer sold to agri-business or went to the city for an easier living as an employee of the government or Big Business.

Self-employment picked up as the bulk of 65 million Baby Boomers entered the work force in the 1970s. Not entirely coincidentally, a 30-year boom began in the 1980s, driven by financialization, technology and the explosion of new households as Baby Boomers got jobs, bought homes, etc. These conditions gave a leg up to self-employment.

Self-employment topped at around 10.5 million in the 1990s, and declined sharply from about 2007 to the present. But the expansion of self-employment from 1970 to 1999 is somewhat deceptive; while self-employment rose 45%, full-time employment almost doubled, from 67 million in 1970 to 121 million in 1999.

Financial independence means making enough income to not just scrape by but carve out a modestly middle-class life. If we set $50,000 as a reasonable minimum for that standard (keeping in mind that households with children recently estimated they needed $200,000 in annual income to get by in San Francisco), we find that according to IRS data, about 7.4 million self-employed people earn $50,000 or more annually.

This works out to a mere 6% of the full-time work force of 121 million, and only 5% of the employed work force of 142 million.

There are a number of reasons for the decline of financial independence/self-employment. I cover the fundamental changes in the economy in my book Get a Job, Build a Real Career and Defy a Bewildering Economy.

But there are other less structural reasons, such as nonsensically complex and costly regulations--a topic explained here recently by entrepreneur Ray Z. in Our Government, Destroyer of Jobs (August 12, 2015).

As many readers pointed out, these complexity barriers limit competition to Corporate America chains and provide make-work for government employees and politically protected guilds.

What's the difference between a Socialist Paradise where 95% of the people work for the state or a quasi-state institution, and a supposedly "free market economy" in which 95% of the people work for the state or a cartel-state institution? Given that the vast majority of employees are trapped in their jobs by the threat of losing their healthcare insurance, how much freedom of movement and non-inherited financial independence is available?

This reality is described in Health Care Slavery and Overwork (via Arshad A.)

True financial independence is probably even scarcer than these bleak numbers suggest. As a self-employed person myself, I have to pay my own healthcare insurance costs --a staggering $15,300 per year for bare-bones coverage for the two of us (no meds, eyewear, dental, $50 co-pay for everything, etc.).

Only 3.9 million taxpayers took the self-employed health insurance deduction. That's a pretty good indicator of how many taxpayers are actually living solely on their income, that is, they don't have a spouse who has family healthcare coverage via a government or corporate job.

That's a mere 2.7% of all 142 million employees. If you can't work for yourself and afford health insurance, something is seriously messed up.

Endangered Species: The Self-Employed Middle Class

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Putin To Get $3 Billion From US Taxpayers After Ukraine Bond Debacle
Submitted by Tyler D.
08/28/2015 - 10:55

On Thursday, Ukraine struck a restructuring agreement on some $18 billion in Eurobonds with a group of creditors headed by Franklin Templeton. That's the good news. The bad news is that Ukraine also owes $3 billion to Vladimir Putin, and Vladimir Putin wants it back. All of it.


Fed Fails - American Spending Growth Is Weakest Since March 2011
Submitted by Tyler D.
08/28/2015 - 11:37

Core personal consumption growth in July was just 1.2% - the weakest since March 2011. Whatever The Fed is doing to grow the middle class (yes, yes, we know: that's not in the mandate - only the "wealth effect" is) is not workingm and as the following chart suggests hasn't worked for the past 35 years.


Dollar Spikes, Risk Slides After Fed's Fischer Seen As "Not Dovish Enough"
Submitted by Tyler D.
08/28/2015 - 11:50

It appears the economy is doing just well enough and the reflexive bounce in stocks showing that everything is awesome is all that Fed's vice chair Stan Fischer appeared to need to note that "we are heading [a September rate hike]direction." This has been judged as "not dovish enough" and sparked some turmoil...

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Oil Surges To $45 After Saudi Troops Invade Yemen
Submitted by Tyler D.
08/28/2015 - 12:30

For the 3rd day in a row, crude oil prices are spiking as the short squeeze morphs into a war premium. Heberler reports that Saudi ground troops have entered Northern Yemen and seized control of two areas in the Saada province. WTI is now above $45...

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Atlanta Fed Cuts Q3 GDP Forecast To A Paltry 1.2%
Submitted by Tyler D.
08/28/2015 - 13:08

Earlier today, following the disappointing July personal spending data and yesterday's record surge in inventories as part of the spike in Q2 GDP, we predicted that the Atlanta Fed would cut its already painfully low Q3 GDP forecast of 1.4%. Moments ago, it did just that, when the Atlanta Fed GDPNow "nowcast" was revised lower to just a 1.2% annualized growth rate, more than two-thirds below the BEA's first revision of Q2 GDP.


VIX ETF Short Squeezes For 6th Day In A Row, Long-Dated Vol Above Monday's Peak
Submitted by Tyler D.
08/28/2015 - 14:00

While all eyes are on the front-end of the VIX term structure, today's volatility term structure in the out-dates is now higher than they were at the close on Monday at "peak crisis." VXX - the VIX ETF - is still surging, as the massive short position continues to get squeezed amid the ongoing backwardation in VIX...

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We Are All Preppers Now
Submitted by Tyler D.
08/28/2015 13:36 -0400

Via The Mises Institute,

Damian McBride is the former head of communications at the British treasury and former special adviser to Gordon Brown, erstwhile Prime Minister of the U.K. Yesterday he tweeted some surprising advice in response to the plunge in global equities markets.;

Advice on the looming crash, No. 1: get hard cash in a safe place now; don't assume banks & cashpoints will be open, or bank cards will work.



Crash advice No. 2: do you have enough bottled water, tinned goods & other essentials at home to live a month indoors? If not, get shopping.



Crash advice No. 3: agree a rally point with your loved ones in case transport and communication gets cut off; somewhere you can all head to.

Evidently, McBride interprets the wipe-out of over $3 trillion in total global market cap during the three-day rout as a prelude to a much broader and deeper financial crash that will precipitate civil unrest.

Just like mid-October last year, the market howls; the Fed panics & puts the dummy back in; and we all pretend it's OK again. It's madness.

— Damian McBride (@DPMcBride) August 25, 2015

Every day the era of easy borrowing persists just means even more loans that won't be repaid when the real crash finally comes.

— Damian McBride (@DPMcBride) August 25, 2015

Today is just the stock market catching up with the terror over defaults that's been gripping the bond market for months.

— Damian McBride (@DPMcBride) August 24, 2015

According to McBride,



We were close enough in 2008 and what's coming is on 20 times that scale.




When The Yen Was A Last Resort Safety Bid, You Know It Was Bad
Submitted by Tyler D.
08/28/2015 - 14:23

It goes until the “big one” shows up “out of nowhere” because everyone studiously ignores these events as if they can’t possibly be what they so obviously are: continued warnings. It is impossible to say what the final turn will be, as you can’t predict the level of “necessary” liquidations going too far because liquidity supply is totally hidden and derivative. The fact that one central bank after another continues to fall victim to the same connecting degeneration is cause for still deeper pause and reassessment, but that isn’t any fun for the bull bubble and the “easy money” mindset. In any case, when the yen functions as the last resort bid of safety, you can pretty well assess just how messed up everything got – and start to make some determination about just how close to the precipice.

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Japan's Legendary "Twitter Trader" Reveals The Secret Of His Multi-Million Dollar Success
Submitted by Tyler D.
08/28/2015 14:35 -0400

Two years ago, when we first profiled Japan's mysterious "Mister Watanabe" daytrader - aka CIS - we thought it may just all be a hoax. But, as his claims this week that he made $34 million trading the panic on Monday - "I do my best work when other people are panicking," Bloomberg reports, CIS - who claims JPY20bn AUM, has become a cult figure among Japan’s tight-knit community of day traders. Notorious for lines like "Not even Goldman Sachs can beat me in a trade," CIS drops some knowledge this week on how he has become so successful... "Buy stocks that are being bought, and sell stocks that are being sold." Just don't tell Cramer.

While a lot of investors were hitting the panic button Monday, Bloomberg reports a Japanese day trader who’d made a big bet against the market timed the bottom almost perfectly and narrated a play-by-play of the trade to his 40,000 Twitter followers. He claims to have walked away with $34 million.

As financial markets got crazy this week, many people turned cautious. Some were paralyzed. Not the 36-year-old day trader known by the Internet handle CIS.



“I do my best work when other people are panicking,” he said in an interview Tuesday, about an hour after winding up the biggest trade of a long career betting on stocks. He asked that his real name not be used because he’s worried about robbery or extortion. To support his claims, he shared online brokerage statements showing his trades second by second.



CIS had been shorting futures on the Nikkei 225 Stock Average since mid-August, wagering it would fall. By the market close on Monday, a paper profit of $13 million was staring him in the face. He kept building the position. When he cashed out late that night, a collapse in New York had caused his profit to double.



Instead of celebrating, he kept trading. He started betting the market had bottomed. When he finally took his winnings off the table on Tuesday, he tweeted, “That’s the end of my epic rebound trade.” His profit, he said, had almost tripled.



“It was a perfect trade,” said Naoki Murakami, who follows CIS on Twitter and whose markets blog has made him a minor celebrity in his own right.

CIS became a cult figure among Japan’s tight-knit community of day traders by trash talking on Internet message boards early in his career. He’s notorious for lines like “Not even Goldman Sachs can beat me in a trade.” Last year he opened a Twitter account, on which he talks about video gam-es and, regularly, his trading.



There was still more money to be made from the panic though. Some investors that night were willing to pay a hefty premium for options that protected against the Nikkei crashing below 10,500. That would be a collapse of almost 40 percent. In CIS’s view, these investors were looking to buy insurance against a near impossibility...

He was happy to take the other side of that trade. The contracts were worth another $250,000 to him. He made the first deal within 10 seconds of what would prove to be the market’s bottom at 10:34 p.m.



“Too delicious,” he tweeted.



“Of course I’m happy about today, but you win some and you lose a lot, too,” he said, explaining the Greek financial crisis had cost him about $6 million.



CIS said he has no idea whether or not China is going to drag down the global economy. He doesn’t even care. When he trades, he tracks volumes and price moves to follow the momentum.



For him the basic rule is: “Buy stocks that are being bought, and sell stocks that are being sold.”


“When a trade goes right I feel like bragging a little, but I don’t get on Twitter to talk about it if I lose,” he said with a laugh.

* * *

In a nutshell, CIS, a momentum day trader and living proof of survivorship bias in finance (because for every CIS who has, allegedly, made it, some 999,999 have failed) has amassed a fortune... at least in Twitter followers anyway.

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Nassim Taleb's Fund Made $1 Billion On Monday; This Is How The Other "Hedge" Funds Did
Submitted by Tyler D.
08/28/2015 17:33 -0400

You can't say Nassim Taleb didn't warn you: the outspoken academic-philosopher, best known for his prediction that six sigma "fat tail", or black swan, events happen much more frequently than they should statistically (perhaps a main reason why there is no longer a market but a centrally-planned cesspool of academic intervention) just had a black swan land smack in the middle of the Universa hedge fund founded by ardent Ron Paul supporter Mark Spitznagel, and affiliated with Nassim Taleb.

The result: a $1 billion blacklisted_site, translating into a 20% YTD return, in a week when the VIX exploded from the teens to over 50, and which most other hedge funds would love to forget.

The WSJ reports:

Universa Investments LP gained roughly 20% on Monday, according to a person familiar with the matter, a day when the market collapsed more than 1,000 points in its largest ever intraday point decline. Universa’s profits—some realized and some on paper—amounted to more than $1 billion in the past week, largely on Monday, as its returns for the year climbed to roughly 20% through earlier this week.



“This is just the beginning,” said Universa founder Mark Spitznagel, a longtime collaborator with Mr. Taleb, who advises Universa, lectures at New York University and is known for his pessimistic forecasts about the global economy. Mr. Spitznagel himself has spent the last several years warning of a coming correction, one he viewed as inevitable given accommodative policies by central banks around the world.



“The markets are overvalued to the tune of 50% and I’ve been saying that for some time,” said Mr. Spitznagel.



Universa gained renown for its outsize gains in 2008, racking up more than 100% profits for many of its clients. In 2011, it notched around 10% to 30% gains for clients. During the years in between it posted steady, small losses.

The firm focuses on finding cheap, shorter-dated options on the S&P 500 and other instruments it expects to rise in value amid a notable downturn.



During the past week, the value of such options that Universa bought over the past one to two months jumped, said people familiar with the matter.



The Miami-based Universa and some other “black swan” hedge funds that seek to reap big rewards from sharp market downturns have emerged as winners amid the world-wide volatility of the past week, say their investors, racking up double digit gains in roughly the past week.

Incidentally, this is precisely what a "hedge" fund should do: protect against massive, "fat tail" days like this Monday; instead they merely ride the beta train with the most leverage possible, hoping that the Fed will prevent any events that actually need hedging, and blow up in a fiery crash any time the market tumbles. Needless to say this makes most of them utterly useless, especially since one can just buy the SPY for almost nothing, and avoid paying the hefty 2 and 20 (or 3 and 45) fee, which until recently was merely there to fund trading based on inside information aka "expert networks" and "idea dinner" thesis clustering.

And speaking of non-hedging "hedge" funds, the table below lays out the performance of some of the most prominent names through either Friday of last week, or as of mid-week. You will notice three things: i) a lot of minus signs for entities that supposedly "hedge" market drops, ii) Bill Ackman's Pershing Square, which until last month was among the best performers, was - as of Wednesday - down for the year, and iii) Ray Dalio's "risk parity" quickly has become "risk impairty" in an environment where both stocks were sold by the boatload, at the same time that China was dumping US treasurys - a scenario no "risk parity" fund is prepared for.

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How Investors Respond To A Market Crash
08/28/2015 15:08 -0400
By Nicholas Colas

Tell ‘Em That It’s Human Nature

The surge in volatility over the past week enabled this year’s aggregate number of plus or minus 1% moves in the S&P 500 – currently 40 – to exceed last year’s total of 38. There were nineteen positive 1% or more days in 2014, and 19 negative days compared to 22 up days and 18 down days this year. We need 14 more 1% days in order to reach the annual average of 54 since 1958, representing only 16% of the next 86 trading days left in the year. As we progress throughout the balance of 2015, we expect to encounter more of the volatility of the past week than the past few years. One percent or more days tend to pick up by the fifth or sixth year of bull markets such as the rallies of the 1980s, 1990s, and 2000s, and we are in our seventh. Additionally, the VIX often hits its annual peak in October – for example last year – more so than any other month with a total of 5 since 1990. December may statistically register as the quietist month with 7 annual troughs over the past 25 years, but this year may prove different due to the uncertainty surrounding the Federal Reserve’s timing of an interest rate hike.

What do you think moved financial markets over the past week of turbulent trading? Perhaps slowing growth and unstable equities in China, renewed fears of deflation, the impending rate hike by the Federal Reserve, or all of the above. Each example certainly played a role. One underappreciated culprit irrespective of economic fundamentals, however, lends itself to volatile capital market environments: investor psychology.

In the midst of turmoil among asset classes, investors tend to make irrational decisions, such as panicking and liquidating at inopportune times. Nobel Prize-winning Psychologist Daniel Kahneman helps explain ill-conceived reactions to the market with his concept of loss aversion. That’s the fear and feelings of loss surpass the joy one may receive from a similarly sized potential gain.

In order to frame this discussion of volatility, we dug up old surveys of institutional and individual investors that recorded their responses to the 1987 market crash. They were conducted by Nobel Laureate Robert Shiller in October of that year, just as the field of behavioral finance started to garner credibility and attention. We recognize the market has evolved rapidly and grown in complexity since with the development of high frequency trading, for example, but our minds still work the same.

These surveys, therefore, serve as a useful case study to glean insight on the psychology of investors during significant market events. Here is a brief breakdown of the results (link included at the end of this note):

* Survey methodology: Shiller sent out a questionnaire to 125 individual investors about the downturn in the stock market from October 14-16, 1987, and received 51 responses. He also sent out another survey following large price declines on the morning of October 19, 1987 and garnered 51 responses as well. Shiller then conducted a full study of 605 individual investors and 284 institutional investors’ responses to questionnaires distributed after October 19th, 1987 that accounted for the news of the day.
* "No clear-cut reaction to news”: Shiller asked participants to rate the importance of news stories that the media listed as possible causes of the stock market selloff from October 14-19, 1987. The 200-point drop in the Dow on the morning of the 19th was the highest rated among both institutional and individual investors, followed by the fall in prices during the prior week in second or third for either cohort. Other top of mind concerns, particularly among Institutional investors, was the recent climb in interest rates. With that said, Shiller concluded that investors likely reacted to price movements themselves on days of large market declines rather than specific news stories.
* “Much talk, much anxiety…”: Almost one fourth of individual investors and about 40% of institutional investors “reported experiencing a contagion of fear from other investors”. Of the individuals who sold on October 19, 1987, over half “reported experiencing contagion of fear”. Additionally, a little over one third of individual investors and slightly more than half of institutional investors said their conversations touched on the events of 1929 leading up to the 19th.
* “Many investors thought they knew what the market will do”: Just shy of 30% of both intuitional and individual investors said “yes” to a question that asked if they “had a pretty good idea when a rebound was to occur” on October 19, 1987. Many individuals said they knew based on “intuition” or “gut feeling”, while several institutional investors reported “gut feeling”, “historical evidence and common sense,” or “market psychology”. Obviously, the remaining 70% felt differently.
* "Investors thought investor psychology moved the markets”. Several survey participants attributed the price declines from October 14-19, 1987 to the “overpricing of the market before the crash” or stop-losses on the institutional side. Another theme included investor irrationality, which garnered a quarter of individual and institutional responses. Moreover, 67.5% of individual investors and 64% of institutional investors said the theory of investor psychology rather than fundamentals explained the selloff. By contrast, Shiller noted that results obtained previously from a random sample of institutional investors showed 79% held an individual stock on a normal day due to a theory about fundamentals.

In sum, Shiller determined that the crash occurred due to investor reaction to price and investor reaction to each other: “the communications proceeded rapidly, and prices were checked with great frequency”. Fast forward to today, and this theory compounds itself in an age when communication, stock quotes, and financial news are all quickly available with simple swipes of the finger or a few taps of buttons. Consequently, the surveys from nearly 30 years ago inform Shiller’s most recent commentary on the collapse in U.S. stock prices over the past week. While most economists blame China, Shiller blames human nature.

We look to the number of annual one percent days for the S&P 500 and seasonal patterns in the VIX – the market’s designated “fear indicator” – for historical context on what to expect in terms of market volatility relative to each year and economic cycle. The results highlight Nassim Taleb’s theory of Black Swans, or that outliers (in this case outsized moves in stock returns) occur more frequently than the math of Normal Distributions suggests. Consider this list of stats broken out into ten bullets (tables and charts of the data follow this note):

* The average annual number of plus 1% moves in the S&P 500 from 1958 to 2014 totals 53.6. This includes an average of 27.5 days up 1% or more, and 26.1 days down 1% or more.
* The period from 1958 to 1970 was much less volatile, with an annual average of only twenty seven 1% or greater days per year. From 1971 through 2014, the annual average increased to 61.5 (32 up, 29.5 down). Since there are about 250 trading days in the year, this suggests a 25% chance that stocks rally or selloff by 1% or more in any session.
* From 2010 to 2014, the average is 59.8 days (31.4 up, 28.4 down). Over the past three years through 2014, the average falls to 42.3 (23.3 up, 19.0 down).
* Looking at the pattern of the annual 1% days in the S&P 500 since 1958, market swings typically occur in the beginning of a bull market, wane, and then climb higher towards the end of consecutive annual gains in equities. Using the rally in the 1980’s up until the market crash, for example, shows eighty two 1% or more moves in 1982, which declined to 28 by 1985. This figure, however, picked back up to 61 in 1986 and 95 in 1987 during the fifth and sixth years of stock advances. Likewise, there were 118 plus or minus 1% moves in 2009 at the start of the most recent bull market, which fell to 38 in 2014 or its sixth year of gains.
* Given that we passed last year’s total of thirty eight (19 up, 19 down) 1% days this week – currently at 40 (22, 18) – we expect that volatility will continue during the remaining four months of 2015 as part of a reversion to longer term averages. One percent days accelerated in the fifth and sixth years of the bull markets in the 1980s, 1990s, and 2000s. We are now in our seventh year as the Fed allowed the capital markets more time to hibernate with its easy monetary policies, but investors are waking up to the imminent tightening measures that may take effect as soon as this year.
* Getting back to the annual average of 53.6 dating back to 1958 requires 13.6 more days of plus or minus one percent moves, or 16% of the next 86 trading days of the year. Reaching the annual average of 61.5 since 1971 would take 21.5 more days, or a quarter of the trading days left in 2015.
* The CBOE VIX Index has registered both annual high and low points throughout most months of each year since 1990, but the peaks and troughs do tend to cluster...
* If the VIX were randomly distributed across time, you’d expect each month of the year to post both two highs and two lows over the last 25 years. Yet this is not the case; some months have substantially more or less than that average. October’s price action, for example, typically experiences the most volatility with the VIX hitting its annual high five times during this month over the measure’s existence. The “fear index’s” performance last year added to this total. Also, note that the VIX has never troughed in October in any year since 1990.
* By contrast, investors don’t usually run into much market noise in the month of the “Santa Clause rally”. The VIX has fallen to its annual bottom in December during seven years. This measure only peaked in December once back in 1996 amid a weakening dollar and turmoil in China’s financial markets.
* January, on the other hand, is a mixed bag with the VIX peaking and bottoming during four years each. As for the remaining months, most put at least one point up on the board but are less volatile comparatively: February (0 high, 0 low), March (1, 2), April (3, 1), May (1, 1), June (3, 1), August (3, 2), September (2, 0), November (2, 2).

What does this signal about trading during the balance of 2015? Get used to the recent wide swings in the market because they are likely to continue as we head towards the most volatile month of the year: October. Perhaps December will provide some relief during the typically quiet month. But with the Fed likely pushing off raising short-term interest rates past September, Santa may bring coal this year as opposed to the gift of historically low rates that supported equity valuations over the past six.