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Easy To Get Discouraged

Earlier this week the broad NYSE Composite Stock Index was sitting roughly 7% below its 2015 highs. Therefore, it is rational to get discouraged, especially given the wild central-bank-induced swings over the past couple of years. Thus, it may be helpful look at some facts.

Is The S&P 500’s Pullback Abnormal?

The chart below shows the post-Brexit rally push from point A to point B. A normal retracement would take the S&P 500 back to 2116, 2092, or 2068. After the Fed minutes, the S&P 500 was still holding above all three levels.

Does It Look Like A New Bear Market?

A September 2 analysis used the 50-day and 200-day moving averages to compare a bear market look to a bull market look. The present day S&P 500 chart has not yet morphed into an early bear market look. It may, but it has not yet.

Have Key Weekly Levels Been Given Back?

The weekly chart below shows several levels that acted as resistance in 2015 and earlier in 2016. Thus far, the S&P 500 has not seen a weekly close below the levels shown.

Have The Weekly Charts Flipped Bearish?

An August 2016 analysis looked at a rare turn in weekly stock market trends. After the Fed minutes on October 12, the S&P 500 was still holding onto the favorable long-term probability look.

Could The Facts Flip Bearish?

What Once Was Resistance

Given the market’s near addiction to low interest rates and recent price action, it is helpful to get some guideposts based on the expression:

“What once was resistance may now act as possible support.”

The expression above includes two key words: “may” and “possible”, meaning there is no market law bounding price to act in any particular manner at any particular level. However, we know markets often retest breakout levels or areas of past resistance.

S&P 500 Weekly

Weekly charts can help us zero in on the most important levels. The weekly chart of the S&P 500 below shows, prior to the recent bullish breakout, sellers became more active between 2,096 and 2,122. If those levels are taken out on a weekly basis, our concerns would increase with a weekly close below the Brexit low of 2,037.

Weekly charts print only one price each week. Therefore, intraweek moves are not as relevant as the close for the week.

SPY Weekly

The weekly chart of the S&P 500 ETF (SPY) below shows, prior to the recent bullish breakout, sellers became more active between 207.46 and 209.15. If those levels are taken out on a weekly basis, our concerns would increase with a weekly close below 202.91.

Prudent To Respect All Outcomes

[Photo Credit: hans-jürgen2013, Flickr]

By Rupert Hargreaves                        

London commercial property prices could decline by as much as 25% peak-two-trough while London residential prices could experience an even more severe downturn, that’s according to a research report on the UK’s property market from Société Générale.

According to the bank, both of the UK’s property markets, the commercial market, and the residential market, are at the mercy of Brexit risks. Cracks were already appearing in the UK real estate market before Brexit, but the UK’s decision to turn its back on Europe has only accelerated the fracturing of the market.

Demand faltering

Commercial property is set to be at the forefront of the UK’s real estate market troubles. While initial signals about the state of the market have been mixed (five UK commercial property funds have suspended redemptions since Brexit but large transactions

Also see the most overvalued real estate markets

Professional services network PricewaterhouseCoopers estimates that there will be 70,000 to 100,000 fewer jobs in the UK financial services sector by 2020, and 950,000 across the UK as firms move trading arms out of the UK to more international markets with access to Europe’s free trade zone. Société Générale predicts that 50,000 job losses in London could see office rental values fall by 24%, based on historical figures. The figure of 50,000 job losses in the capital is based on historical boom-bust cycle figures.

Long bull run

UK real estate has been on an impressive run since the financial crisis but after this run, many sectors are now looking expensive. Commercial property yields have plunged as investors seek exposure to the sector at any cost. The £400 million Debenhams property in Oxford Street sold at a yield of 2.75%. At the beginning of 2016 analysts, at Carter Jonas predicted that total returns for UK commercial property would amount to 8.8% in 2016, down from 13.4% in 2015 as yields approached 2007/2008 peaks.

Property Company Short Positions Are On The Rise In London

So, Société Générale’s pessimistic forecast that commercial property prices could drop by a quarter following Brexit might not be as unrealistic as it looks. It could be argued that the UK commercial real estate market is now priced for perfection, and if demand falters, property prices could quickly retrace as investors reconsider their exposure to the sector.

But it’s not just the commercial property sector that is likely to see prices come under pressure during the next few years. London house prices, which have surged more than 60% over the past three years, could be even more susceptible to a market correction.

London property prices could fall 50%

London home prices are now 12 times average London earnings compared to the long-term average of six times. Moreover, London is 50% more expensive than the second most expensive area in the UK and regarding initial mortgage repayments, London is the only region in the UK above the 33-year average. Simply put, London residential property is expensive, and when you combine this with the impact of job losses and the potential relocation of European citizens already in the country, it becomes apparent that the market is highly likely to see a fall in residential home prices as the UK renegotiates its position in the EU.

Confusion Over Brexit Complacency; Concern Over UK Real Estate

Globalization is one of the most dominant yet controversial economic forces in the world today. It has been one of the leading drivers of overall global growth. Globalization is still growing, though at a slower pace.

Deglobalization forces, which roll global integration back, however, are increasing as well. We see rising concerns and a growing resistance to globalization among the public.

Think of the rise of Donald Trump and Bernie Sanders in the United States, the populist movements around the world, and the surge of Euroskepticism in Europe, just to name a few examples.

My friend Ian Bremmer, professor at New York University and founder of the Eurasia Group, is one of the foremost authorities on geopolitical trends in the world. Ian also writes a weekly letter that hits my inbox every Monday morning.

Two weeks ago, Ian wrote a very solid essay on the issues surrounding globalization.

This letter is normally seen only by his private (very high-paying) clients. But he has graciously allowed me to share it with my Outside the Box readers (subscribe here for free) and you.

I think you will find it highly informative and well worth your time.

Update on Globalization

BY IAN BREMMER

This weekend witnessed the worst mass shooting in the history of the United States. It will also surely be the most politicized. Some 50 dead at the hands of a self-declared ISIS supporter with an automatic assault weapon, in the midst of the most polarized presidential election the country has experienced in the post-war period.

The responses are divided strongly along political lines: the left focusing on gun control; the right on radical Islam. There’s no policy change coming: the act of terrorism was by all counts “homegrown” despite an ISIS pledge, and the Obama administration will avoid any politics that pushes towards further American intervention across the Middle East or a post-9/11 style Patriot Act redux at home. While domestic American lobbies against gun control are set in stone until the next election at least.

The greater impact will be on the campaign, where a large attack on the homeland plays into Donald Trump’s (temporary) “ban the Muslims” platform. Hillary Clinton’s hawkish tone on terrorism and us intervention made for a stronger statement than President Obama’s... But it’s still a bigger opening for Trump, especially since the attack, along with the recent mass killing in San Bernadino, happened on Obama’s Democratic administration’s watch. Doesn’t change my overall electoral call, where the demographics and weak GOP (political and financial) support still give Clinton a significant edge. But it will make identity politics over the course of the election – and after – far more toxic, with negative long-term consequences for both constructive political legislation and, as a consequence, market sentiment.

***

Given the short-term situation (enormous headlines, a horrible tragedy, but limited US and global impact) I’m not planning on writing this week’s update on the shooting. Rather, I’ve been spending quite a bit of time thinking about something bigger:

Globalization.

It’s single most important trend of the past half century. Simply put, the various processes by which ideas, information, people, money, goods, and services cross borders at unprecedented speed and with unprecedented depth.

Those processes are world-changing, and many of them are still accelerating. But just as the Soviet collapse didn’t bring the end of history, globalization hasn’t made the world flat. Today’s ever-smaller world still has as many peaks and valleys: more clearly visible to one another, but still every bit as sharp in relief. That in turn is creating fragmentation, as a wide variety of deglobalization trends gain currency and momentum. The two sets of forces are interlinked and yet rarely considered together. Proponents of utopia and dystopia are getting ever-louder… and talking ever more past each other.

I think it’s worth considering the arguments for both globalization and deglobalization. To stack up the most important factors on both sides of the aisle, and see where we end up.

First, let’s look at globalization:

Migration. The world is crossing borders at record speeds. International tourism receipts are increasing, on the back of a strongly growing global middle class and a steady rise in visa-free travel: above average growth for six years straight; and for the fourth year in a row, global tourism spend has grown much faster than merchandise trade. The rise of China is dominant here, with 120 million Chinese now traveling abroad every year; a trend showing no sign of slowing (interestingly, around the world, only tourism from the former Eastern bloc is significantly shrinking). It’s also developed world interest in ever-more global destinations: even North Korea’s repeated arrests of visitors has not deterred westerners from reaching as far as the hermit kingdom.

The same trend holds for international students. 2015 saw nearly 1,000,000 international students coming to the United States (by far the most important destination for higher education); a 10% year-on-year increase, and the fastest rate of growth since 1979. The rise of China again drives the trend; making up 31% of the total foreign student count (India has 14%, Korea 7%, and Saudi Arabia 6%).

Overall, international migration figures are sharply up; reaching 244 million in 2015, up 40% since the beginning of the century. 3.3% of the world’s population is composed of migrants; 50% of them come from Asia, and 2/3 of migrants live in either Asia or Europe. Not all of this travel is welcome. The fastest recent migration growth has been in refugees – generally forced by climate change and/or conflict, and creating the biggest refugee crisis since World War II. 1 in 122 individuals on earth has been forcibly displaced, for a total of 60 million people. That in turn creates the potential for greater and faster contagion of externalities such as terrorism and disease – the latest illustration of which being the rapid spread of the Zika virus (prompting a realization that normal tourism flows make postponing the Olympics of little use; very much an illustration of our points here on the tension between globalization and deglobalization).

There’s pushback to all this moving around. Some as a consequence of the refugee flows: walls being built, tougher border checks – leading to freedom of movement being curtailed. That’s been easiest to accomplish in areas where borders are well guarded – most notably Europe in response to the refugee crisis, with what’s amounted to a de facto suspension of the Schengen agreement – while across the Middle East and in Sub-Saharan Africa there’s been little effective policy response to growing northbound flows.

Open borders are also being filtered by growing interstate conflict. Take the tourism ban between Russia and Turkey. Iran and Saudi Arabia have cut off direct travel and restricted use of each other’s airspace; most significantly with the Iranian government forbidding its citizens from traveling to Saudi Arabia for the hajj. And, finally, there’s been some enforcement of travel restrictions out of broader stability concerns from authoritarian regimes; with Russia and China implementing restrictions on government and public sector international travel – an effort to maintain loyalty and control. But these are outliers. Overall, vastly more people are moving across borders. Freedom of the seas and air travel continues to be largely unfettered. On balance, the impact of these trends has been unprecedented internationalization of ideas and culture – a strong factor for continued globalization.

Communications. The communications revolution has made it easier for people of all walks of life and every corner of the world to be in touch with one another. Smart phone and internet penetration now stands at nearly 50% of the entire world population, and infrastructure improvements should continue to increase those rates in the coming decade. And, as anybody reading this knows, it’s a life changing technology, a real-time and near-completely immersive default connection of citizens to the rest of the world. Virtual networks have become a critical component – and, for many, the defining component – of personal identity.

To effectively restrict communication, governments would need to dominate technologies whose forced control is a double-edged sword – when social instability spikes, internet shutdowns work at best sporadically and risk leading to greater discontent and violence. Enterprising citizens and new technologies quickly find workarounds. Despite all the hype around China’s great firewall, efforts to completely shut out international communications are increasingly seen by government actors as unworkable. While, for their part, non-state organizations of every stripe use virtual networks to their advantage – corporations and non-profits with new collaboration models, the Arab spring and colored revolutions’ operators everywhere, and, of course, even terrorists. More common and larger-scale cyber-attacks (from Sony pictures to Spanish renewable energy companies) are yet another example of this unprecedented “communication” flow; just as growth of the dark web has allowed for more effective connections in illegal activities – drug trade, human trafficking, and the like. For better and for worse, communications are becoming far more global and efficient.

The global middle class. The biggest “winner” of the past decades of globalization has been the rise of a global middle class. Vast poverty reduction in China in particular, and in emerging markets more broadly, has depended on access to international markets. 700 million have been lifted out of poverty since the turn of the century, with global poverty essentially dropping under 10 percent for the first time – even though most of the world’s new middle class remains financially vulnerable. The resulting empowered billions of people may not support the Washington consensus, but they’re no less interested in smartphones, cars, and the other fruits of globally-connected supply chains. Without an acute war-type crisis, few political leaders will attempt to override popular demands for global goods. This all means economic power becoming more evenly distributed around the world, even as global inequality compared to the world’s top earners has grown within countries.

Corporations. The rise of the global middle class, particularly in Asia, means that most Western-based multinational corporations around the world continue to see their most important growth as global (even as see technology-driven “onshoring” trends for production facilities makes a comeback). There’s also been a sea change coming from China itself, with beijing’s largest companies now embracing a strong interest in global expansion strategies as they try to replicate their domestic significance in the international market. Alibaba Group has made international expansion its top priority in recent years, on both the sales and hiring fronts. There’s also a globalization trend emerging in small and medium enterprises: the so called “micro-multinational;” mid-sized firms deploying new technological strategies to allow them access into new markets earlier in their growth process.

Indeed, the world’s most dynamic economic actors have a powerful interest in maintaining global connectivity even when governments falter. Google, Microsoft, and Facebook are doubling down on undersea cabling. Jack Ma has bought an English-language newspaper and listed his company in New York. Vodafone built a mobile payments system in Africa that is far superior to those in Western markets. Multinational corporations face challenges from slowing growth and more market volatility, but neither trend will derail an ever-increasing globalization trend.

Commerce. Alternative payment systems enable globalization. Paypal and Venmo allow global transactions to be made instantaneously. With Bitcoin, there’s no need for even an exchange process. Movement of money is becoming faster and easier through both legitimate and illegitimate channels. Then there’s the growth in real estate acquisitions by foreign investors, particularly in global cities like New York and London. Silicon Valley start-ups raising money from Saudi venture capitalists. And explosive growth in collaborations for commerce in the cultural arena – movie and music industries cutting across Hollywood, a nascent Chinese industry, Bollywood, and even Nollywood (in Nigeria).

Energy. Energy supplies long acted as a globalization chokepoint. Today, they are a driver of it. A nuclear deal has brought iran back as one of the world’s largest energy producers. Cuba reconciled with the United States in part due to Venezuela’s diminished energy clout (and of course limited ability to provide a socialist alternative to the Americans). The biggest shift is technology ending “peak oil;” an unconventional energy revolution quickly making the United States the world’s largest producer. All of which has decentralized production, stripping government control out of global energy markets and essentially ending OPEC.

Climate change. After decades of “north versus south” and climate-change skeptics holding sway over policy in a number of core carbon-emitting nations, there’s now growing international consensus on the scale of the challenge and the importance of policy redress. Decades of limited cooperation among central governments in a series of failed global summits – all the while extreme climate conditions created greater human impact – has led non-governmental actors to take up a leadership role in the climate change agenda, notably creating incremental but meaningful success in last year’s Paris meeting. It’s the first meaningful example of a global crisis creating progress (albeit to date limited) toward global governance.

Now, the forces of deglobalization:

Geopolitics. Geopolitical volatility is at unprecedented levels in the world today. The Middle East is both imploding and exploding due to failed models of governance, increasingly stretched economies, and fracturing security. Failed states across the extended Middle East, North Africa, and South-Central Asia; an unprecedented refugee crisis; and the world’s most powerful ever terrorist organization are all having profound spillover effects across those regions and into Europe (though, notably, that’s not been true of East or Southeast asia, and it’s certainly not true of the Western Hemisphere).

Then there’s the fact that the United States – globalization’s standard bearer for nearly 75 years – is now proving to be considerably more reluctant to be the world’s indispensable nation. That means less appetite for upholding global security, promoting global trade, or cheerleading global values. There’s recently been slightly more support among Americans for foreign policy intervention than during the historic lows of 2013, but the overall tendency is still less engagement and more unilateralism, if not isolationism (a solid majority of americans – Democrats and Republicans alike – thinks the United States does too much internationally, and wants whoever takes power in 2017 to focus on domestic rather than foreign affairs). Meanwhile the world’s other largest economies – China and Japan – have neither the willingness nor the capacity to step into the breach.

All of which means the geopolitical condition I call the g-zero is intensifying, and weighing on a world that’s more de-globalized than at any point since the end of World War II. I don’t view today’s state of dis-equilibrium as sustainable, but it’s unclear whether what replaces the g-zero is a return to a more globalized geopolitical order or something even more fragmented. For now, I’d bet on the latter.

State capitalism. One of the most acute forces of deglobalization is the rise of state capitalism, with China – soon to be the world’s largest economy – dominated by a government player. Yes, Beijing is reforming. But China is growing faster than it’s reforming, and as a consequence it’s projecting its domestic model of government heavy-handedness on the international stage. That means the end of the global free market and its replacement with a model marked by bilateral, rather than multilateral, political and commercial ties, with Beijing playing a greater role in directly determining outcomes. That will lead to growing necessity for economic actors to align themselves with China in many markets, as well as a significant increase in the growth of strategic sectors – sectors in which companies need to be seen as strategically compelling to governments in the countries in which they invest.

The growth in importance of strategic sectors is arguably the most important new dimension of this new global economy when it comes to impacting multinational corporations; which is happening in ways that are fundamentally opposed to a world meant to be marked by increasingly borderless globalization. The technology sector is a good example: in many countries (including Russia, and now increasingly Iran), local industries tend to flourish independently of (and shielded from) the government; but as soon as their growth, success, and strategic importance becomes evident, they’re taken over by government oversight. Whether this also happens in developed countries as technology gets added to the usual military-industrial dyad is one of the most important questions for the future of the global marketplace.

Global architecture & standards. Playing into the tension between (growing) state capitalism and (historically dominant) free market is China’s ongoing development of its own version of the Marshall Plan – displaying the world’s only global economic strategy driven by a trillion-plus dollars of investment into international infrastructure. China’s plan involves very different strings than the postwar American checks did: no interest in promoting the rule of law, free markets, and (US-led) global standards, but a rather simple “buy from Chinese state owned corporations, accept Chinese currency, employ Chinese standards.” Foreigners perceive both the American and Chinese models as threatening and are looking to create “third way” alternatives (think European regulatory approaches to technology).

The fault lines undercutting the prospect of globally unified standards are also at play within countries, as each private sector company seeks to push its own version of a global industry model in areas such as the internet of things: Tencent vs. Huawei, Apple vs. Google vs. Intel. Such competition’s only normal when McKinsey’s estimated gains of over $11 trillion in the next ten years. Tech companies like Google are already facing backlash in Europe, Apple in China, Huawei in the US. That competition will only get greater as the prospects of economic gains become more evident.

Populism/nationalism. Populist movements are expanding across the world, with the strongest and most sudden trajectory found in developed states. That’s a direct reaction from populations hollowing out economically and feeling faced with otherness culturally – it’s essentially the other side of the coin of the rise of the globalized middle class. It’s the Brexit movement and Euroskepticism more broadly. The rise of Donald Trump and Bernie Sanders in the united states. European far right and far left movements, now showing record levels of support in Austria, France, Italy, and beyond. It’s separatism in Scotland, Catalonia, and Northern Italy. It’s the erosion of rule of law and legitimacy of political institutions across East, Central, and Southeast Europe. It’s a growing belief that political outsiders aren’t welcome; that European supranationalism is a mistake.

Many of the core constituencies driving global integration and connectivity over the past 30 years have now abandoned it. The populist argument is that globalists have used powerful institutions to gut what these countries and their cultures stand for. Populists want more homogeneity. In the United States today, frontline politicians cannot be seen to favor free trade, let alone for the reform of global institutions like the United Nations; imf quota reform took intense pressure and came little and late. Europe is more interested in breaking up its own integrating structures than establishing new global relationships; not to mention its rapid abandonment of the principles of free movement in reaction to the refugee crisis. And, critically, as technology removes labor from the capital equation globally, these trends are very likely to expand to the world’s emerging markets – a key trend playing against globalization in the coming years.

Protectionism. In lockstep with increased populism, protectionist sentiment is growing among many in the developed states, who don’t believe free trade benefits them personally. Yes, citizens have benefited from cheaper products. But real wages have been flat – in some cases even shrinking – and job opportunities in the developed world have become more limited. This was less of a problem in the 80s with the rise of Japan, but the rise of China has proved a larger shift… and the rise of technology greater still. That’s led to significant pushback against free trade, now making Transpacific Partnership (TTP) ratification at best a toss-up, and the Transatlantic Trade and Investment Partnership (TTIP) effectively a dead letter.

The process of negotiating TPP concessions for agriculture, cars, and other traditionally-protected industries has been protracted at best. Protectionist measures grew at their fastest pace since 2009 in 2015; led by India, Russia, and the United States. In latest data, for the first 10 months of 2015, governments around the world passed 539 protectionist measures, up from 407 in the same period of 2014 and 183 in 2012. It’s easier to erect trade barriers than to tear them down, as what starts off as “anti-dumping” can quickly become “protect our workers.” Measures put in place in response to populist anger (Trump’s China penalties, Ukraine’s Russian embargo) are particularly hard to dismantle. Global free trade deals have stalled, giving way to bilateral and regional alternatives. All while the fora for resolving disputes – the WTO, the ICJ – are being increasingly ignored by their principal actors (the US, China).

Capital flows & foreign exchange. There was a significant slowdown in net capital flows into emerging markets from Q4 2014 through Q3 2015 (and it’s likely Q4 2015 was just as bad). In 2010, net capital inflows into emerging markets amounted to 3.7% of GDP. By 2014-2015, emerging markets had a 1.2% of GDP net capital outflow – due to a fall in inflows and high outflows. There were a few reasons: the transition from Fed quantitative easing to anticipation of interest rate hikes and worries about the impact of lower commodity prices and slowing Chinese growth.

When it comes to foreign exchange, average daily trading volume in April 2016 was $4.6 trillion dollars, slightly lower than the $4.8 trillion of April 2015, with volumes little changed over three years. Beyond the cyclical uncertainties affecting trading volumes, there may also be structural factors at play, particularly an official rethink of the benefits of open capital accounts, and fast-money cross-border capital flows in particular. The greater respectability of capital controls is one of the most important trends in global finance today. At least for now, we’ve passed the peak of traditional financial globalization.

The global internet. The promise of the internet is souring as digital infrastructure fails to keep pace with the capabilities of states and malicious private actors. Major hacking incidents have become routine. Unlike in finance, the ability of governments to step in and stop a cyber panic, in which individuals would withdraw from online life and commerce, is untested.

But even more threatening that the asymmetric capabilities of non-state actors is the risk of internet fragmentation stemming from government actions. The Chinese are well known for their attempts at taming – and reshaping in their own image – the global internet. Beijing’s attempts at ending anonymity on the internet by seeking to force all users to have real-name registration will prove a strong pushback on globalization. The coming years will see far more top-down filtering and surveillance from Beijing. And many other countries are interested in taking from the Chinese model for their own security and safety. That means different surveillance models, different governance models, and different economic winners and losers. What had been the clearest “win” for globalization in a single open internet is now fragmenting into a number of differently governed online spaces.

And some factors where the impact isn’t so clear:

Information. This is the most difficult issue to address on the globalization/deglobalization spectrum. On the one hand, the advantages of big data becoming a source of global economic growth are clear and driving game-changing business models in most every sector. So too, the ability for consumers to have access to information flows from all over the world, with virtually no (direct) cost to the individual. But filtering and segmentation of information is at least as important a global trend, and it firmly weighs on the deglobalization side.

Both of these trends are strong, and move in precisely opposite directions. There’s vastly more information out there. But it’s channeled much more among like-minded people (and in many cases marshaled – and profited upon – by top-down systems). The proliferation of news sources sends most people to media outlets that confirm their prejudices. This is a strong form of self-censorship. While when it comes to traditional censorship, control of information is a contest between censors and users that is likely to swing in both directions. One will gain an advantage, and then the other will respond. On balance, I’d say information flows have leaned rather in favor of globalization when it comes to data, and against it when it comes to how people actually relate to, and use, it.

Economic sanctions. Not only has the United States used sanctions extensively as a non-lethal tool of power-projection in the past few years, but this behavior has encouraged a range of other countries to follow suit; from the EU to Russia, Turkey, and Saudi Arabia. So, at first glance, the trend isn’t encouraging when it comes to keeping the world globalized. But it’s also becoming ever harder for americans employing unilateral coercive diplomacy to convince other important economic actors, allies as well as non-allies, to play along. That may ease us sanctions use a bit going forward. The United States is also starting to realize that its “weaponization of finance” will increasingly lead to blowback in an increasingly non-polar world, and hence isn’t sustainable in the long run. Finally, the opposite policy approach is bearing success: Washington has begun opening – rather than closing – doors, as evidenced by the Iran deal, the Cuba rapprochement, and the possibility of a warming up with Russia if a compromise is eventually found over Minsk.

Global trade. Lots of anti-globalization types talk about the diminishment of global trade, but it’s hard to make a call on which way trade is heading. On the one hand, trade volumes have flattened among advanced economies and are shrinking for emerging economies – subtracting about half a percentage point a year from the overall growth rate in the developed world since 2012. The reason to worry is that trade growth typically outpaces GDP by a wide margin; and after a post-recession rebound in 2010 to 12%, trade growth slipped to 7% in 2011, stagnated at 3% for the next three years and then fell below 2% for 2015 – well below GDP for the first time since 9/11 (the 1987-2007 average was 7.1%).

Global trade looks even more alarming when measured in price terms: having fallen 13% in 2015 to 16.5 trillion from 19 trillion in 2014 (though this reflects both exchange rate effects (a stronger dollar) and price effects (lower commodity prices)). China focusing on domestic demand rather than exports for growth is worth watching closely: if wheels start falling off Chinese reform, that’s the tipping point for a big hit to globalization.

But that diagnosis is complicated by issues that relate specifically to the way the Chinese business cycle is presently working. Global trade growth appears to have slowed because China is importing less in both price and volume terms (the price effects being directly related to the volume effects); this will in part reflect a slowdown in Chinese growth. At the same time, as China rebalances its economy away from investment and towards consumption there’ll be a decrease in import intensity because consumption (especially services consumption) is less import-intensive than investment. Furthermore, an increase in domestic technological capacity will mean that a larger portion of the value added in exports is added onshore in China (so goods wholly or partially made in China will cross the country’s borders fewer times). Not sure any of that is a structural move away from globalization.

Supply chains. Like global trade, there’s been a lot of negative talk… but not yet a structural change. Overall, I’d accept the argument that supply chains are going to get considerably shorter. From Adidas to GE, companies are producing closer to their markets, since labor is becoming a much smaller input cost in total production. Plus, 3D manufacturing and just-in-time production capabilities argue for smaller supply chains; as does greater decentralization in energy production and markets. Companies won’t need to ship as much. And so, there’ll be fewer disruptions in bringing goods to market, but also bigger investment concentrations in the West. Like global trade, supply chains are probably now a trend towards deglobalization, but it’s too early to make a clear call.

Who is winning?

First, a subtlety. One striking revelation is that the same countries that most depend on a globalized world (the United States, China) are also the ones leading the charge in harming globalization/creating deglobalization. Second, there’s a difference between one-hub globalization and multiple-hub globalization. Americans are used to one-hub globalization (the post-war world, particularly since 1990), in which Americanization and globalization were effectively the same thing. So you could easily mistake the rise of alternative hubs coexisting alongside the dominant hub as a retreat from globalization. That’s a fair point from a purely us perspective. But, by creating multiple networks, alternative hubs can actually increase the resilience of globalization, provided they are interoperable. In this context, it’s a long term positive for globalization that alternative countries are developing international architecture like Asian infrastructure investment bank, the BRICS bank, and the like. The AIIB’s willingness, for example, to fund projects the more conservative Asian development bank won’t because of pressure from developed market non-governmental organizations is arguably good for future globalization.

The biggest single takeaway is that things/processes/technology tend to be globalizing. It’s the people that aren’t. They’re resisting primarily because many don’t feel globalization benefits them. In part that’s a drive from the hollowing-out developed market middle class... That may soon extend to the emerging market middle class. And in part an increasingly powerful Chinese government that supports aspects of economic globalization but strong political deglobalization... that may soon become more challenged by globalization overall.

That resistance is only going to grow in coming years, as there’s very little that gives near-term hope in changing the calculations of globalization’s “losers.” Given that the losers of globalization aren’t being particularly effective at stopping it, and given that the processes I’ve identified driving globalization themselves aren’t diminishing… there’s a good chance the forces for deglobalization are only going to get stronger. And so, with an increasing push on both sides of the equation, we’re not likely to see a resolution.

For the coming years, i’d bet on more on momentum from the forces of deglobalization. More risk-driven volatility. More differentiation between sovereigns, sectors, and companies. Because as much as “things” matter, they’re ultimately shaped by governance, architecture, and “rule spaces”… all of which are becoming more deglobalized than not.

But I expect that’s not the end of globalization per se. Rather, it’s a downward cycle on a curve that ultimately swings up… the question being how far down it goes (and can it functionally break the curve). I hope not. But we’re going to find out soon.

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Goldman Sachs put together a list of the best books and it is impressive and long – unfortunately it is hard to sift through since it just has the title and the author without any information on the book so we are helping you out by filing in that info. If you want to find the full list go here we also list it below at the bottom along with descriptions. Note: we do not endorse the short term trading strategies (well we really do not officially endorse anything) but to keep the list complete we have included all descriptions of books below. Because this is lengthy we will be breaking them up by section so stay tuned for more!- which brings to Industry Background and Flavor – there are some real classics in here and a few lesser known names and many of the books only cost a few pennies from Amazon and even with shipping will cost you less than $5 TOTAL, a bunch only cost a penny plus a few dollars shipping – so make sure to check them out! Or Listen to the books on Audible. Try Audible and Get Two Free Audiobooks.

Also see Bill Gates: 5 Books To Read This Summer

Also see Written About, By or For Money Managers and Traders -> here

Also see Goldman Sachs’ Recommended Reading List – Industry Background and Flavor Part I

Goldman Sachs’ Recommended Reading List – Industry Background and Flavor Part II

Goldman Sachs reading list sections

Written About, By or For Money Managers and Traders

Industry Background and Flavor

Broad Industry History

Analytical and Reference

Periodicals

Wall Street Journal (daily, Monday through Friday)

Barron’s (weekly publication)

General

IMD

FICC & Equities

Options/Derivatives

Goldman Sachs’ Favorite Books List – Options/Derivatives

How I Trade Options by Jon Najarian

Wiley Online Trading For A Living

Beat Risk and Reap Rewards Like A Pro!

The Compelling True Story of How a Top Market Maker Built a Successful Trading Business

Praise for How I Trade Options

“To much of the outside world, trading appears to be as incomprehensible as rocket science. What Jon Najarian has done in this engaging and very readable book is to ‘demystify’ the world of options for both the aspiring trader and the retail investor. How I Trade Options is a rare opportunity to look over the shoulder of this experienced options trader, teacher, and lecturer.” -Lewis J. Borsellino, CEO/Founder, www.TeachTrade.Com; Author, The Day Trader: From the Pit to the PC

“How I Trade Options gives retail investors who have little or no prior knowledge the insight into how options work and how to use them effectively and responsibly. For those who want to learn about options, this is a rare opportunity to learn from a master trader. Najarian shows commitment to educating investors on the use of options to enhance their portfolios.” -Rance Masheck, President, Quantum Vision Inc.

“Not only is Jon Najarian a Supertrader, he is a Superteacher. I owe much of my good fortune to Jon Najarian. I learned more from him than I had learned in an entire decade-plus it was fun! Jon’s abilities to make his profitable trading strategies understandable are sure to make How I Trade Options a must-have tool that every option trader will want to own.” -Don Fishback, Developer of the Fishback Option Pricing Model

“Jon Najarian is a world-class options trader and a world class options educator. His crystal clear explanations of such strategies as vertical spreads empower the average investor to participate in attractive options approaches that, until now, have been dominated by professional traders.” -Bernie Schaeffer, Chairman and Chief Executive Officer Schaeffer’s Investment Research, Inc.

When Jon Najarian embarked on a career in the world of market making, he went from playing with the Bears to running with the bulls. In this chronicle of his trading evolution, the former middle linebacker for the Chicago Bears focuses on the key ingredient for his market success-learning to control risk.

From achieving speedy victory to coping with some enormous losses to building his own business, Najarian reveals here how he successfully trades the market with options traders, showing investors how to trade like the pros by:

Honing self-discipline

Handling volatility successfully

Grasping puts, calls, and spreads

Seizing opportunities and adapting strategies to changing times

Looking to Najarian’s compelling personal-and highly educational-story as an example, stock, futures, options, and bond traders, as well as individual investors, will learn to limit risks, be aware of and avoid potential pitfalls-and trade options like a market maker.

Options as a Strategic Investment by Lawrence McMillan

The market in listed options and non-equity option products provides investors and traders with a wealth of new, strategic opportunities for managing their investments. This updated and revised Fifth Edition of the bestselling Options as a Strategic Investment gives you the latest market-tested tools for improving the earnings potential of your portfolio while reducing downside risk—no matter how the market is performing.

Inside this revised edition are scores of proven techniques and business-tested tactics for investing in many of the innovative new options products available. You will find:

Buy and sell strategies for Long Term Equity Anticipation Securities (LEAPS)

A thorough analysis of neutral trading, how it works, and various ways it can improve readers’ overall profit picture

Detailed guidance for investing in Preferred Equity Redemption Cumulative Stocks (PERCS) and how to hedge them with common and regular options

An extensive overview of futures and futures options

Written especially for investors who have some familiarity with the option market, this comprehensive reference also shows you the concepts and applications of various option strategies — how they work, in which situations, and why; techniques for using index options and futures to protect one’s portfolio and improve one’s return; and the implications of the tax laws for option writers, including allowable long-term gains and losses. Detailed examples, exhibits, and checklists show you the power of each strategy under carefully described market conditions.

Options:Essential Concepts by The Options Institute

Get the acknowledged industry classic – revised and updated to deliver everything from time-honored options concepts to strategies for individual and institutional investors and traders. Every stock trader or market maker, whether currently involved with options or not, should own OPTIONS: ESSENTIAL CONCEPTS AND TRADING STRATEGIES, THIRD EDITION. Written by today’s leading options practitioners – and edited by The Options Institute, the globally renowned Educational Division of the Chicago Board Options Exchange – OPTIONS leaves no stone unturned in delivering the most complete, authoritative, and easy-to-understand blueprint available for navigating the profitable twists and turns of today’s options marketplace. No-nonsense, packed with useful information, and valuable as either an introductory textbook or a comprehensive fingertip reference source, this thoroughly revised and updated edition details: What options are, how they are priced, and how they are traded; Basic option trading strategies such as covered writing and protective puts; Advanced strategies involving LEAPS and the stock repair strategy; Options from three points of view: private investor, institutional investor, and market maker; How to use the power of the Internet for trading and detailed information gathering. The well-organized, thought-provoking, and dependable ideas found here will help you use options to increase the returns in virtually any investment mix. The comprehensive answers to a wide range of options questions, as well as insights into the latest options trading strategies, cover: Option Market History –  From early transactions to latter-day innovations including LEAPS and index options, knowledge of options industry history will help you intuitively understand and trade profitably today; Essential Concepts – Fundamentals of options pricing theory and their relationship to market prediction, stock selection, and risk management; volatility explained; and introductory strategies from long call to covered strangle;. Investing and Trading Strategies – Discussions of how to approach and understand “investing” strategies that focus on ownership of an underlying equity versus “trading”. . strategies with no intent to hold the underlying stock; plus, the function of market makers ; Real-Time Applications – Institutional case studies; how to use options as an indicator of price moves for an underlying stock; using the Internet for instantaneous trades and information; plus, a comprehensive glossary of option market terminology. . OPTIONS, THIRD EDITION, takes the guesswork out of trading options and gives you the information you need to become a savvy options trader. So get your questions together, and use this step-by-step guidebook to develop option strategies that meet your investment objectives: hedging your stock market risk, increasing your portfolio income, or improving your trading results.

Options For The Stock Investor: How Any Investor Can Use Options to Enhance and Protect their Return by James B. Bittman

Options for the Stock Investor thoroughly explains how to use stock options safely and effectively. James Bittman demonstrates how to integrate options into a long-term investment program explaining in a clear and simple language time-proven strategies that will add value to any investor’s portfolio. He recommends specific strategies for investors with various risk tolerances and investment goals. Authoritative and enlightening, this book is complete with tests and a graphic summary of option strategies.

For individual investors seeking to profit with options, Options for the Stock Investor is an invaluable resource. Specific topics include:

The mechanics of basic option strategies

Understanding option price behavior

Selling options on the stocks you own

Using options to achieve your long-term investment goals

Option strategies for both newcomers and veterans

Trading Index Options by James B. Bittman

Designed and written for active traders who are interested in practical information that can improve their results, Trading Index Options offers tried-and-true techniques without a lot of theory and math. Bittman provides traders with the know-how to evaluate practical situations and manage positions. Among the key features: the basics of index options, including various spreads; how to match strategies with forecasts; alternatives for losing positions; the importance of price behavior and volatility. A windows-based software program that provides multiple option pricing and graphing is included in the package.

Reviews  – From the Back Cover

Leverage Strategies to Make High-Volatility Markets Work For You! Today’s volatile markets are ideal for profitable index option trading. Trading Index Options was written for active traders-spectators who need to see every trade from every angle-and contains market-tested strategies from one of today’s leading options educators and traders. With ready-to-use, battle-tested information on virtually every page, this amazing book: Explains how toption prices behave, letting you stay focused on market activity. Provides proven techniques to understand risk and limit your exposure.

Shows how to take advantage of index options’ unique flexibility. Covers trading psychology-how to think and trade with discipline. Presents strategies from basic to complex-buying, selling, spreads, straddles and more (with case studies to demonstrate each). And because today’s fast-moving markets require instant calculations and adjustments, the easy-to-use OP-EVAL3 option pricing and strategy graphing computer program lets you analyze option prices, set profit target, implement trading decisions, and of critical importance, monitor multiple positions simultaneously.

No other trader’s program can match its speed and versatility! Short on hard-to-comprehend mathematics and long on tried-and-true tactics and strategies, Trading Index Options is fast becoming the bible for index option mastery.

All About Options: The Easy Way to Get Started by Thomas A. McCafferty

Discover the Potential of Options for Managing Risk, Profiting from Bull or Bear Markets, and Leveraging Your Investments

Thousands of individual traders and investors used the first two editions of Tom McCafferty’s All About Options to master every aspect of the options market_and develop strategies for making winning investments.

Now revised and updated, the Third Edition of this best-selling guide provides a clear, no-nonsense explanation of the risks and rewards of using options, ranging from options basics to hedging and speculating to options pricing.

This new edition of All About Options covers the dramatic changes in technology, world finance, and market conditions that have take place in recent years.

How the Options Markets Work by Joseph A. Walker

Designed to serve as a convenient source of basic information about options, one of the most misunderstood products in the investment world, this handbook offers the reader a practical explanation of how the option market works, covering equity options, index options, foreign currency options, interest rate options. It aims to give comprehensive guidance on the subject, concentrating principally on equity options, one of the most important – and popular – options instruments.

Mastering Derivatives Markets: A step-by-step guide to the products, applications and risks by Francesca Taylor

“The first port of call for anyone looking to truly understand derivatives markets, appreciate the role they play within the global financial system and develop the technical knowledge to trade.” Matthew Thompson, Chief Strategy & Business Development Officer, Dubai Mercantile Exchange

“An essential read for anyone serious about understanding the impact of derivatives and technology on the global financial market.” Kevin Thorogood, Global Head, Investment Banking/Energy Trading, Thunderhead Ltd

“We have used Francesca for training on derivatives in the past. She demonstrates a passion for these markets and for learning. In a fast changing world, the combination of technical learning and practical experience that Francesca applies is helpful in keeping abreast of market developments.” Rachael Hoey, Director, Business Development, CLS

Your Essential Companion To The Derivatives Markets

Mastering Derivatives Markets provides full up-to-the-minute explanations — with worked examples and screen shots — covering the basics of options, swaps and futures across the key asset classes: rates, currency, equity, commodity and credit.

This book is relevant to anyone working within the financial markets, from the new entrant to the seasoned trader looking for updates, and to non-trading personnel working in IT, legal, compliance, risk, credit and operations.

Please note that the ‘look inside’ feature is currently displaying the content of Mastering Derivatives Markets Third Edition, this will be updated soon.

Mastering Derivatives Markets Fourth Edition has been completely revised and features new chapters on:

The most up to date thinking in the market

OTC clearing

Regulation

Benchmarking

Electronic futures trading in the FX market

New insights into the commodities markets

Carbon trading and environmental products

“An invaluable and straightforward guide, full of practical applications.” David Ford, Training & Development, International Petroleum Exchange “Another valuable step on the road to improving competence and confidence in the world of financial derivatives.” Paul Dex, International Sales Manager, LIFFE “A vital book for every new entrant into the market.” Christopher Bellew, Director, Prudential-Bache International Ltd “Contains just about everything you might ever want to know concerning the derivatives markets… a well written book about a difficult subject.” The Trader’s Magazine “We run a number of courses on financial products and this book serves as excellent pre-course reading as well as an everyday reference handbook.” Maricar Obieta, Vice President, GCIB, Citibank, NA “As professional market-makers we have found this an invaluable, easy-to-read book. We always have a copy to hand for quick reference.” Andrew Holdstock, Director of Foreign Exchange, IG Group Plc –This text refers to an out of print or unavailable edition of this title.

“The first port of call for anyone looking to truly understand derivatives markets, appreciate the role they play within the global financial system and develop the technical knowledge to trade.” Matthew Thompson, Chief Strategy & Business Development Officer, Dubai Mercantile Exchange

“An essential read for anyone serious about understanding the impact of derivatives and technology on the global financial market.” Kevin Thorogood, Global Head, Investment Banking/Energy Trading, Thunderhead Ltd

“We have used Francesca for training on derivatives in the past. She demonstrates a passion for these markets and for learning. In a fast changing world, the combination of technical learning and practical experience that Francesca applies is helpful in keeping abreast of market developments.” Rachael Hoey, Director, Business Development, CLS

McMillan on Options by Lawrence G. McMillan

Legendary trader Larry McMillan does it-again-offering his personal options strategies for consistently enhancing trading profits

Larry McMillan’s name is virtually synonymous with options. This “Trader’s Hall of Fame” recipient first shared his personal options strategies and techniques in the original McMillan on Options. Now, in a revised and Second Edition, this indispensable guide to the world of options addresses a myriad of new techniques and methods needed for profiting consistently in today’s fast-paced investment arena. This thoroughly new Second Edition features updates in almost every chapter as well as enhanced coverage of many new and increasingly popular products. It also offers McMillan’s personal philosophy on options, and reveals many of his previously unpublished personal insights. Readers will soon discover why Yale Hirsch of the Stock Trader’s Almanac says, “McMillan is an options guru par excellence.”

Thousands of investors turn to Larry McMillan, leading finance writer and advisor, for expert advice on options. In this reader-friendly book, McMillan offers the latest information on the high-profit world of options trading. This up-to-date guide provides an information-hungry marketplace with in-depth coverage of pricing strategies, volatility and risk control, hedging techniques and option philosophy, as well as key insights into the predictive power of options, the versatile option and buying and selling. Real-world examples provide hands-on applications and clear illustrations to turn theory into practice. –This text refers to an out of print or unavailable edition of this title.

The McMillan name is virtually synonymous with options. Over the years, this legendary trader’s popular and informative books, newsletters, and seminars have helped both new and seasoned investors use options to consistently enhance their trading profits.

McMillan first shared his personal options philosophies and techniques in the original McMillan on Options. Now, in this revised and expanded Second Edition, he reveals a number of new approaches for success in today’s fast-paced and ever-changing investment arena.

By exploring both the flexibility and predictive ability of options, this highly revised resource will show you the best new ways to apply options to everyday trading situations. You’ll quickly learn how to establish self-contained strategies, substitute options for other financial instruments, and protect your positions–whether in stock, index, or future options. More importantly though, you’ll receive a complete education in the exciting new products that are popular with investors, from single-stock futures and exchange-traded funds to LEAPS and the brand new volatility futures.

Backed by over 100 case studies, updated charts, and new examples, McMillan on Options, Second Edition:

Illustrates how a stock can be “pinned” to a striking price at expiration, what causes it, and when to expect it

Discusses put-call ratio charts and theory on individual stocks

Examines how to use volatility indices as an accurate market predictor

Adapts trading systems and strategies–such as intermarket spreads and seasonal trading systems–to the realities of a new market environment

Presents advanced approaches to options trading, including the concepts of expected return and Monte Carlo probability simulation

Offers guidance for those who need to find reliable options trading data and tools online

This timely Second Edition also expands on discussions regarding the NYSE as a faulty indicator, the history of market volatility, and the importance of buying and selling volatility.

Readers can now gain a unique insight into McMillan’s personal philosophy on options, and discover the innovative new tactics and strategies he applies to his own trading and analysis. Packed with hands-on examples and techniques that address hedging and volatility–plus fresh new pricing concepts–this comprehensive and updated work will help you understand and unleash the full power of options.

New Financial Instruments by Julian Walmsley

In the beginning, there were four financial instruments: a bank deposit, a bill of exchange, a bond, and an equity. Today, as a result of a steady stream of financial innovations, the market landscape is far less sparse-and far more complex. To help you maneuver smoothly and profitably within this crowded and much-evolved arena, Julian Walmsley’s New Financial Instruments has been thoroughly revised and expanded to include complete coverage of all the new financial instruments available to market practitioners.

New Financial Instruments, Second Edition offers a clear, practical perspective on the shifts and changes behind today’s dizzying proliferation of market tools and techniques. Its in-depth examination of both international and domestic markets probes the nature, causes, and consequences of financial innovation, as well as the ins and outs, advantages and disadvantages of the myriad products engendered by change.

New Financial Instruments, Second Edition is a comprehensive, comparative guide offering concise descriptions of convertibles, warrants, preferred stocks, and other instruments. In addition, Walmsley’s clear-eyed analysis distills the latest variations in areas such as barrier options, asset-backed securities, credit derivatives, structured notes, and equity derivatives. There’s important information on the origin and methodology of each innovative technique, as well as essential details on the risks, rewards, and key considerations that must be understood before deciding on one instrument over another.

New Financial Instruments, Second Edition takes you step-by-step through a wide range of procedures, revealing how to:

Analyze risk level and return

Use interest rates and currency swaps in synthetic securities

Value exotic options, weighing the risks they entail against the leverage they provide

The book also addresses such key topics as:

Basic analytical tools-present value calculations, zero-coupon curves, modern portfolio theory, value at risk, continuous compounding

Securitization-transferable loan instruments, Eurocommercial paper, and asset-backed securities

Swaps-interest rate, currency, diff, zero coupon, asset, and equity

Options-barrier, binary, cliquet, ladder, rainbow, shout

Mortgage-backed securities-market development, superfloaters and inverse superfloaters, PAC bonds, reverse PACs and lockouts, TAC bonds

Supported by extensive illustrations and working examples, this indispensable resource is a must for anyone seeking to understand and apply the latest financial innovations.

A comprehensive guide to today’s new financial instruments-what they are, how they work, and how you can profit from them

Written by an expert practitioner in the field, this up-to-date, systematic guide takes you through the ins and outs, advantages and disadvantages, risks and rewards of today’s sophisticated new financial tools and techniques. Now revised and expanded, New Financial Instruments has complete coverage of bonds, equities, warrants, and other traditional vehicles, as well as a comprehensive overview of the latest developments in asset- and mortgage-backed securities, credit and equity derivatives, convertibles, and preferred stocks.

“With the flood of innovations we have seen in international finance in recent years there was a great need for a succinct, comprehensive survey of the field. New Financial Instruments fills that need admirably.”-Professor Brian Scott-Quinn, ISMA Centre, University of Reading, U.K.

(www.ismacentre.rdg.ac.uk)

“For the practitioner to keep up with innovations across a wide range of markets is always difficult. This book will be a great help to those who need to bring themselves up to date with a great variety of markets.”-John Langton, Chief Executive, International Securities Market Association, Zurich

Options, Futures and Other Derivatives by John C. Hull

For graduate courses in business, economics, financial mathematics, and financial engineering; for advanced undergraduate courses with students who have good quantitative skills; and for practitioners involved in derivatives markets

Practitioners refer to it as “the bible;” in the university and college marketplace it’s the best seller; and now it’s been revised and updated to cover the industry’s hottest topics and the most up-to-date material on new regulations. Options, Futures, and Other Derivatives by John C. Hull bridges the gap between theory and practice by providing a current look at the industry, a careful balance of mathematical sophistication, and an outstanding ancillary package that makes it accessible to a wide audience. Through its coverage of important topics such as the securitization and the credit crisis, the overnight indexed swap, the Black-Scholes-Merton formulas, and the way commodity prices are modeled and commodity derivatives valued, it helps students and practitioners alike keep up with the fast pace of change in today’s derivatives markets.

This program provides a better teaching and learning experience—for you and your students. Here’s how:

NEW! Available with a new version of DerivaGem software—including two Excel applications, the Options Calculator and the Applications Builder

Bridges the gap between theory and practice—a best-selling college text, and considered “the bible” by practitioners, it provides the latest information in the industry

Provides the right balance of mathematical sophistication—careful attention to mathematics and notation

Offers outstanding ancillaries toround out the high quality of the teaching and learning package

[Photo Credit: Tomek Nacho , Flickr]

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By Mark Melin                        

Omega Capital’s Leon Cooperman looks at the world as if it is a mathematical calculation. In a presentation with Evercore ISI this week, Cooperman essentially said: 1) those who think stock multiples are high need to understand relative value analysis; 2) those that think high frequency trading is the savior of market liquidity and stability need to look closer at market structure and the January-February market sell off, and 3) Brexit? Catch a clue. Even though most fund managers thought remain was going to win, the demagoguery that intelligent professionals could see through during the campaign fatally hurt the Remain cause. After a Brexit vote, the sun will come up in the east, the sky will remain blue and relative value spreads hit by volatility might present opportunity for astute fund managers.

Brexit by itself is not the issue as much as the sinking European Union, a topic said to have been addressed by major fund managers this morning, according to ValueWalk sources.

Also see a list of top hedge fund letters

Cooperman: Bear markets don’t materialize out of immaculate conception

Those weren’t Cooperman’s exact words, of course – particularly that last comments on demagoguery and hedge funds finding value amid Brexit volatility. Don’t forget Cooperman is a long only Wall Street “equity guy.” His alpha is “beating” the stock market, a task made increasingly difficult in a world of quantitative easing that lifts all stock market boats but creates a sharp inequality divide among the general population, an issue he cited as increasingly impacting Fed thinking.

“Bear markets don’t materialize out of immaculate conception,” he said. “There are generally causes.” Take the January – early February stock market sell off, for instance. Cooperman said it was due to algorithmic market structure factors and high frequency trading factors, not fundamentals.

Separately, those following the algorithmic trading signals might recognize that algos don’t sustain trends. In fact, at the time “algo exhaustion” was given as one causation point for the February 11 mean reversion that ushered in a stock rally, as well as opportunistic coordinated buying that could be seen by examining market technicals.

Stocks are not euphoric because cash levels are high and retail investors are currently redeeming their mutual fund investments, he said.

“Volcker Rule, Dodd-Frank, the collapse in the commission structure, the (NYSE floor) specialist system demise, most importantly the elimination of the up-tick rule which has accelerated the growth of high frequency trading and a lot of these quantitative trading strategies and has change the structure of the market,” were problem causations, Cooperman said, reiterating previous charges he has made. “What was going on in early January and February can be attributed as much to a change in the structure of the market as it was a read on the economy or the Fed.”

Cooperman: Watch these three factors as a sign of a bear market

When considering the potential for a stock market crash – the S&P 500 is down nearly 55 points in late morning trading – ignore the Brexit hype, Cooperman said just before the surprise vote outcome. There are only three reasons the economy will go into a bear market and Brexit isn’t one of them.

“Brexit is like Ebola” or other market fads, Cooperman said. “Even if (the vote is leave), it’s not the end of the world.” There might be a value adjustment but ultimately water finds its own level, and based on three core fundamental indicators, that level could be higher.

What matters most, Cooperman said, are appropriate stock market price / earnings multiples, euphoric valuations and hostile Fed. Looking at these three factors, Cooperman sees a runway that is positive for at least the next 12 to 18 months – assuming high frequency trading or systematic algorithmic strategies don’t cause a crash.

Economy is going relatively well, why the emergency interest rate policy at zero?

Stock market valuation is often measured relative to interest rates. Right now there are significantly more stocks providing dividend yields higher than that which can be obtained by investing in a US ten-year note, for instance – a sign there is relative value in the stock market relative to its most significant competitor for assets, bonds.

“The market is fairly and appropriately valued,” Cooperman said. Even though forward price earnings ratios of 16 and 17 are “high relative to historic norms, (they) are low relative to interest rates.” Given US rates near the historic zero level, Cooperman eyes a 2200 target on the S&P 500.

It is a hostile Fed that should be most considered. “The third reason for a crash is a hostile Fed where the Fed takes the punch out of the punch bowl,” he said. “If anything I’ve been critical of the Fed, I think they are behind the eight ball.”

Cooperman says the Fed should have raised rates long ago. The economy is not at emergency levels “in a world of 200,000 employment increases monthly and 17 million+ car sales” point to a reasonably good economy. “The Fed funds rate (should not be) at near zero.”

Cooperman said the Fed is being affected by income disparity, which the Fed is “driving themselves.” Another concern is (US) dollar strength, which further negatively impacts the manufacturing activity. The Fed is also being driven by low global interest rates, which makes the dollar expensive on a relative basis.

As Reuters earlier reported, Bridgewater Associates said in its Daily Observations:

The UK voting to leave the EU is a clear warning signal that the rise in populist/separatist positions has reached levels that they can change the status quo significantly.  Many voters across Europe are looking for their own referendum, and it seems reasonably likely that with time some will get their chance (although many centrist politicians will probably learn from Cameron’s disaster and try to avoid a referendum).  All in all, on a global scale the UK leaving the European Union was a rather modest political outcome, yet the fear of it led to 10% swings in global equity markets (in light of this outcome, we have attached our June 22, 2016 Observations: “The Options Facing the UK and Europe If Brexit Wins”).  This is a reflection of the tight coupling of the global financial system, a risk that would be significantly higher if a major Eurozone country were seriously considering leaving.  The global economy and financial system relies on the euro and the ECB, and the continued existence of the euro depends on the cooperation of the Eurozone countries.  If the UK leaving the EU caused a 10% swing, what would a set of political events that raised questions about the future functioning of the ECB cause?  Managing this risk seems to us to be an important part of managing money in this secular environment.  Below, we share our thoughts on this risk and the questions a referendum on the continent would lead to.

Within the Eurozone, a referendum could pose huge problems.  Given how easy it is to move capital within the Eurozone, any rise in risk of a country leaving could easily cause a pickup in capital outflows that could threaten the country’s banking system (as we saw during the sovereign debt crisis). And this could extend to other countries perceived as potentially vulnerable to leaving as well. The ECB would then be faced with the choice of whether to step in (increasing its exposure to a country that might walk away from the liabilities) or institute capital controls like in Greece last year.  The prospect of such pain and disruption lowers the probability of such an event occurring. But even given the low probability, it looks to us like markets are under-discounting the risk.

Yesterday, Marko Kolanovic, PhD of JPMorgan Opined:

Investor positioning — overall equity exposure of systematic strategies and fundamental investors is currently high. Systematic strategies (including those levered to equity momentum and low volatility) are currently running very high equity exposure (~90th percentile, see here). Fundamental investors are also long equities — Retail equity allocation is near 2007 high; Hedge Fund equity exposure is substantially above average (60th to 65th percentile) and Mutual Fund cash balances remain low. Furthermore, short interest across US equities, ETFs and futures has not increased which could be an additional headwind under a “leave” vote.

By Michelle Jones   Sign Up For Our Free Newsletter and receive in-depth ebooks on famous  investors          

Peter Lynch On Investing In Volatile Markets              

If estimates are anything to go by, S&P 500 earnings troughed in the first half of the year and will recover in the second half. However, experts say any growth in the second half likely won’t be meaningful. And then there’s the fact that the S&P 500 has posted a massive rally over the last five years despite the lack of any earnings growth at all.

Have investors lost their heads? Of course, the commentary below will not be surprising to value investors who have studied Ben Graham, but it is worth a look regardless of your investing style.

P/E multiple Expansion Accounts For 135% Of S&P 500 Return

S&P 500 skyrockets despite the lack of earnings growth

In his June 8 Breakfast with Dave note, Gluskin Sheff Chief Economist David Rosenberg called the current U.S. equity market “the most overbought market since July 2014” as almost 70% of S&P 500 stocks are trading higher than their 200-day moving average. Further, this is occurring even though the general economic growth outlook “is still pretty bleak.”

“There is seemingly no visibility on the part of the folks who run the corporate sector, and the anomaly is that there are investors out there who are snapping up shares who apparently do have the visibility,” Rosenberg wrote. “I have no clue what they are seeing, unless it is all about central banks and ‘TINA’ (There Is No Alternative).”

The well-known economist noted that since the stock market peaked more than one year ago, earnings have declined 8%. Further, the S&P 500’s operating earnings per share is where it was in the second quarter of 2011, but the index has skyrocketed 50%. Additionally, he said earnings are at the same level they were at in the second quarter of 2007, but the index has rallied 50%. Further, he pointed out that reported earnings are where they were in the third quarter of 2006, but today the S&P 500 is above 2,100, while then the index was at around 1,250.

Bargain Hunters Might Find Some Values In Stock Market

Will there be any earnings growth for the S&P 500 soon?

Rosenberg’s observations put the current lack of earnings growth into perspective, and S&P Global Market Intelligence Senior Analyst Lindsey Bell suggests that real earnings growth may not become a reality for some time. She said in a June 7 report that consensus estimates for S&P 500 earnings this year are finally starting to improve, but there is reason for skepticism.

She said that over the last month, Wall Street estimates for aggregate S&P 500 earnings have increased by almost 50 basis points, which boosts expected growth to 0.4% from the expectation for negative growth at the beginning of May. However, Bell says the reason for this improvement in estimates is unclear “and may even just be typical behavior for the index.”

John Bogle: The Stock Market Is Ignoring Big Risks

“Typical” for the S&P 500?

She pointed out that data has been mixed over the last month, with housing data being a bright area while consumer spending and sentiment holding steady. Oil prices have been climbing, however, while the U.S. dollar’s decline has released some of the pressure on U.S.-based multinationals.

On the other hand, consumer confidence is no longer improving, and the last two jobs reports disappointed. S&P 500 earnings for the first quarter ended up beating estimates, but profitability declined 5.4%, marking the third consecutive decline, and the nearly 260 basis point beat was far lower than the historical average beat of 400 to 450 basis points. Guidance wasn’t particularly great either.

Earnings, Sentiment More Important Than Rates: Barclays

So why are earnings estimates rising? Bell reports that based on earnings trends going back to 2012, full-year estimates usually bottom out at or around early May, then rise for a few weeks before returning to a downward trend going into the third quarter earnings season in the middle of July. She adds that this pattern suggests that the recent improvement in S&P 500 earnings estimates for the full year could only be temporary.

“While we still believe the second half of 2016 will provide positive earnings growth results, it may not be enough to significantly improve the overall market outlook for full-year 2016 prospective earnings,” Bell warned. “During periods of extreme economic stress, as experienced in 2008 and 2009, earnings estimates can move erratically. Even in the period following the years of the Great Recession, earnings growth has been difficult to predict given the subpar economic growth experienced. This has led to reductions in earnings over each quarter except one since 2012.”

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