THE BIGGEST CRASH IN HISTORY

Large scale spot Bitcoin ETFs were just sanctioned by the SEC. Remember this moment in time because it will very likely be viewed as a key point in market history...

This post was inspired by an article I just read citing author Robert Kiyosaki called "The Biggest Crash In History". 

“Please remember my warning in Rich Dad Poor Dad published in 1997 predicting ‘Savers are losers’ and ‘Your home is not an asset’ which came true in 2008,” he wrote. “Watch for my next warning. The S & P is next which will toast millions of 401ks and IRAs.”

I agree that in terms of total wealth wipeout this will be the biggest crash in history with no comparison. However, I disagree on where he thinks people should park their money.

Below I will elucidate my latest thinking on this topic. 

First and foremost, I am not a financial advisor so take everything I say here at your own risk. My credentials are a degree in Finance (University of British Columbia) and 30 years of trading in markets. I've made a lot, I've lost a lot, and I've learned a lot in the process. Throughout this time I've come back full circle to the very basics of what I was taught in business school during the '80s - ALWAYS diversify and dollar cost average. Even if you have 100% conviction in a trade, never assume you will time the entry exactly perfectly. I rarely if ever describe my own trades because I don't want anyone blaming me for their losses. That said, I believe this is both the greatest risk and greatest opportunity in our lifetimes. If you don't panic. Other than learning from the past by observing obviously recurring patterns, I believe every investor/trader must be willing to put mistakes behind them and make whatever is the best decision NOW for their money. The worst thing you can do is get greedy at the top and fearful at the bottom. If you do that, then you lock in your losses forever. 

My wife has an approach to money she calls "slow and steady". She hates taking risk so she pays everything cash - no debt, and she saves a lot of money every month in her t-bill savings account. I told her to assiduously avoid anything backed by the FDIC. Keep working, keep saving is her ethos. She has zero volatility in her account balances. They go up every single month. The plan is great as long as you have enough time for it to pay off. Which is the inherent risk of taking no risk. What if this all explodes before you have enough savings to retire? My wife makes small side bets here and there on speculative investments, but by and large they have ended up being pump and dump schemes which today are ridiculously rampant.

Which gets me to my next point - everything is a trade. In these central bank/algo controlled markets, you can rent risk, but you can't own it. We have ample evidence now that basically every market on the planet is heavily manipulated by the industry that controls it. We saw this in spades during the pandemic when the "COVID-19" Biotech, Arkk ETFs, Cloud work from home, IPO/SPAC stocks soared and crashed. Gamestop soared and crashed, but it was described as a victory for small investors. Nothing could be further from the truth. That pump and dump wiped out thousands of small investors. That event in early 2021 marked the peak of the pandemic trading craze. Semiconductors soared and crashed, now they're soaring again. Gold and silver soared and crashed, now gold is re-testing its all time high. Crypto soared and crashed. Major indices soared and crashed, but now the Dow is at an all time high.

Human history's largest pump and dump all got started when the upstart "Robinhood" trading platform was founded to give small investors "equal access" to markets on a commission-free basis. After that, ALL brokers started offering commission-free trading. Later we learned that brokers were making money selling their trades to Citadel dark pools where algos could skim profits by front-running small investor trades. The Robinhood IPO ironically was part of the overall IPO/SPAC craze that crashed in 2021 amid the "Gamification" of markets. The app was intentionally designed to look like the Candy Crush app. However, it was the SEC-sanctioned Silicon Valley/Wall Street IPO/SPAC market that was THE epicenter of fraud during the pandemic. 

$1 trillion of junk IPO issuance in 2020/2021. By far a record.

Therefore, I think it speaks volumes about today's markets that this week the SEC has now sanctioned Bitcoin spot ETFs which are now being issued by every major investment company in the U.S. 

 

"Investor watchdog group Better Markets, strongly opposed the SEC’s approval of bitcoin ETFs"

“With the flagrantly lawless crypto industry crashing and burning due to a mountain of arrests, criminal convictions, bankruptcies, lawsuits, scandals, massive losses, and millions of investor and customer victims, who would have thought that the SEC would come to its rescue by approving a trusted and familiar investment vehicle that will enable the mass marketing of a known worthless, volatile, and fraud-filled financial product to Main Street Americans.”

I 100% agree, and I think the SEC will be largely destroyed by this event. Which is why I wrote this post disagreeing with Robert Kiyocera regarding Bitcoin being a safe haven from crash.

During BOTH the crash of 2008 and 2020, the order of recovery was long-term Treasury bonds (TLT), Gold, and then stocks. In the chart below, we see TLT (green) was volatile during the October 2008 meltdown but then sky-rocketed. However, we see that those gains did not last because reflation expectations soared. However in 2020 Treasury gains were more stable because the Fed kept long rates pinned to 0% for two years, which is what I expect this time as well. The Japanification of the Treasury bond market. Below, gold pulled back at first, and then it rallied in November 2008, outperforming stocks for the first two years until 2011. Finally, stocks bottomed four months later in March 2009. I expect the same sequence this time, but very likely different timing for when stocks finally bottom.

Another risk I've consistently pointed out is the Japan carry trade which has exploded in size during the past couple of years while the Fed raised rates and Japan kept the monetary spigot open. A monetary divergence on a scale never before seen in history. 

This is a risk that I believe will confound Fed efforts to reinflate markets, because when the Fed eases, it will force carry trade investors to SELL global risk assets.

That is going to make it very difficult for the Fed to get risk markets under control this time around.

So we can expect that volatility will be unprecedented and many markets will simply stop functioning.

Which means that if you don't plan for that ahead of time, you will be trapped in a market possibly for days at a time.

HAPPY NEW BEAR

2024 is beginning eerily similar to the start of the 2022 bear market. Which is why not even one pundit has made the connection. Looking back at recent history to recall what already happened is fraught with more career risk than merely joining the latest consensus of fools...

New Year, new hangover. So far, the January effect is exerting the reverse impact it has on markets traditionally. It used to mean that stocks were sold in December to harvest tax losses, which led to a bounce in January. Now the January effect refers to the proclivity of investors, gamblers, and bots to corner the stock market in December and drive it to new glue sniffing highs, only to watch it implode in January.

This was now officially the third MASSIVE pump and dump in so many years. It's abundantly clear that investors and pundits are not even remotely aware when they are merely going along for the social mood roller coaster ride. Like market clowns, they are happy on the way up and sad on the way down.

ZERO emotional control.  

Herein lies the problem with this latest pump and dump hangover: Big Cap Tech was the last part of the Tech market to actually reach new highs and they did so while the Fed was RAISING rates, which is highly unusual. Normally Tech/growth stocks outperform in a deflationary environment, while cyclical stocks (Transports, Banks, Retail, Airlines) outperform in a reflationary environment. So it is that we enter 2024 with the deflationary growth sector massively overbought while Wall Street is now wildly trying to guess what sector(s) will take over "leadership" from the largest and by far most over-owned sector of the market. Unfortunately, in a presumed rate cutting deflationary environment, that leaves really only late cyclicals such as Energy which is just starting to outperform even as oil collapses, and of course healthcare/pharma aka. recession stocks.

Which happen to be FOUR years overbought on new year momentum. All the way back to the pandemonium.

It's now a consensus on Wall Street that Tech stocks are dead and leadership will soon emerge from other sectors. Once Cramer jumps on board you have to know that every hedge fund is already ALL IN this new theory:

Another headline from this week:

Then there's this gem in the text:

“Crowding risk in the leaders of 2023 has been cited by many (including ourselves) as a key risk in 2024,” Bank of America Corp. strategists led by Savita Subramanian wrote in a note. A “January rout in megacap tech is now consensus.”

How can it be BOTH a consensus rout AND a crowded trade? Do these money managers believe their own positions are about to implode? Maybe they're trapped by the 2023 end of year pump and dump and they just realized it when they filled out the BofA survey.

Q: Are you trapped in a consensus of idiots?

A: Holy fuck!

It's times like these when it's useful to time travel back two years to the last time the January effect imploded Tech stocks amid rising bond yields and see what people were saying back then about the prospects for a broadening rally:

Two years ago:

January 5th, 2022:

"Thanks to the new-year bond selloff, Wall Street pros are doubling down on a big stock call for 2022: The leadership of high-growth tech darlings is no more"

And they were right. There was a rotation out of Tech into a  broad-based bear market. See first chart above.  

 

Finally, here is where it gets interesting:  way back in Y2K, two years after the average stock peaked, Big Cap Tech peaked and exploded.

And yes, as we see below the broader market imploded as well. 

Very much to the surprise of everyone on Wall Street. 

2024: YEAR OF THE HANGOVER

Most pundits have already forgotten that the last major rally ENDED with that year's Santa Claus rally - 2021. They are too busy telling people this is the last chance to get IN, to realize it may once again be the last chance to get OUT...

I don't know exactly what combination of factors keeps stocks magically pinned to all time highs at this time of year, but we can be sure it's some quasi-criminal combination of low volume, low volatility, option market manipulation, and most importantly investors wanting to avoid taxes. That's right, all of the big winning stocks of 2023 - meaning mega cap Tech - will be held right up until the end of December and then dumped in January, so that those massive 95% gains are not taxed for another full year. That is the major factor holding this market higher, for now and it portends badly for a hyper-speculative market.

Meanwhile, this past week, we got news that housing prices accelerated in October to their fastest pace in 2023. Which adds  fuel to the ongoing policy disaster that I discussed in my last post. Real estate gamblers are betting that as soon as rates come down, there will be a mad rush to buy real estate. However, history informs us that the opposite occurs. The chart below clearly shows that home prices are positively correlated to interest rates, meaning they are pro-cyclical and massively levered to the ECONOMY, not deflation. In addition, consider what home prices were doing at this point in the last cycle when rates were falling - home prices were already going DOWN. However, even though the Fed has now raised rates an equivalent amount as 2007, home prices are still going up while the economy is already rolling over. Meaning, that housing liabilities are increasing even as the economy is weakening.

From the stock market perspective, the last time the stock market got the totally wrong message from a Fed pivot was Q4 2007. Which happened to be the market top, as we see below. 

 

Many pundits are saying the Fed is being political by not raising rates now due to the oncoming election in 2024. Which is reminiscent of Trump when he said we are in a big, fat, ugly bubble back in September 2016. Little did he know, the bubble would continue growing for ANOTHER seven years after that. Which in today's way of thinking means it has no possible end date. It's human history's first ever perpetual asset bubble. 

The real bet isn't whether markets are overbought and overdue for a correction - even bulls are hoping for a pullback so they can add leverage - the REAL question is whether or not central banks still have control over the monster they've created.

The real answer is unconditionally, no - which is the opposite of what almost every investment advisor, pundit and media mannequin in the business world is saying right now. Central banks no longer have the means by which to resuscitate the economy when their super bubble explodes. Monetary policy alone will not be sufficient. Which means that in 2024 politics will determine the state of the economy, and we are entering a period of MAXIMUM political acrimony. One in which neither party will want to be seen as ceding ground to the other party. One in which neither party will want to be seen as bailing out the wealthy. Which means the Fed can "monetize" debt as much as they want, but if there is no big stimulus to monetize then it will make no difference. Then there is the unresolved matter of the insolvent FDIC, as a result of the 2023 bailout. Which is already long forgotten.

We are now at the point in the super cycle when the Idiocracy finally realizes that they are NOT in control and they were never in control in the first place. They were merely making convenient assumptions while the level of unsustainable liabilities reached proportions that were finally beyond central bank control. 

They are the children of the bailout. And they have to learn once and for all that printed money is not the secret to effortless wealth. And they will all say, "who knew?".

Lastly, as far as the Santa Pause rally goes, this is now officially the longest daily overbought streak on record going back to 1970 (life of data).

Got low rates?

2023: THE LAST PUMP AND DUMP

Instead of joining every other pundit in predicting what won't happen in 2024, I would like to point out that 2023 is not over just yet...

This has been the largest % weekly gain to a 52 week high since 1998. The S&P 500 has been up 8 weeks in a row, counting this week. And yet we just learned that fund managers are the most bullish since the start of 2022. Which happens to be the last time the market peaked out and crashed from this exact same level. Can anyone explain why it is that media pundits can't check the charts to see what happened the last time fund managers were this bullish? Instead, they do the opposite and write as if it's a bullish fact that so many "experts" are bullish. 

Ok, so instead of explaining to bulls the difference between a hard landing and a soft landing - which would be gratuitous on my part - I will instead focus on the precarious technical indicators that attend this current market.

The market is now overbought on every metric - momentum, breadth, and volume. Which is why I am calling this the "Santa Pause" rally. We are now to believe that this record overbought condition will not only continue next week, but into 2024 as well. 

"Bank of America also found that 66% of the fund managers it polled expect the world economy to experience a so-called "soft landing" in 2024"

"The bank's own head of US equity strategy is expecting stocks to perform well in 2024"

Herein lies the problem - this is the FIRST time the Fed has "pivoted" to a dovish stance with the market already fully overbought. Prior to last week's FOMC, the market was already 6 weeks straight-line overbought because the market has been front-running this Fed pivot for ALL of 2023. However, when the FOMC turned inexplicably dovish, the market exploded higher to an even more overbought stance. At the beginning of December, Powell had called talk of rate cuts "premature". But then two weeks later, the FOMC put three rate cuts on the table for 2024. It's pure Idiocracy. 

What this means is that the Fed has over-lubricated an already over-heated market. It's unclear why they would do such a thing, except to continue their unbroken streak of policy errors which began in 2021 by saying they would be "lower for longer". And then in 2022 they raised rates by the most since 2007 while keeping their balance sheet still almost 2x pre-pandemic. And then now, with this ill-fated dovish "pivot".

All of which gets us back to the pre-pandemic conditions in which the Fed had already pivoted and was using QE to address the "repo" crisis. By the end of 2019, they had cut rates three times in what they called a "mid-cycle adjustment", which came ten years into the longest cycle in U.S. history. So, risk assets soared and yield spreads collapsed, while the average stock went nowhere. And then we all know what happened next.

Astute observers will note that pundits were calling it a "soft landing" in late 2019. Not as soft as this one apparently.

In addition to the S&P 500 shown above, none of the other major indices have joined the price-weighted Dow Industrials at new all time highs. Here we see the Nasdaq Composite is still far below its all time high while the volume oscillator is now rolling over.

Yesterday, markets experienced a day of extreme selling, which came as a shock to bulls who are not aware such a thing existed. Pundits were scratching their head and calling it "inexplicable" selling. However, a brief glance at the NYSE volume oscillator shows that the market has tanked every time from this level during this past year.

It's only inexplicable if you are Stevie Wonder.

Here is another crazy factoid, the FANG+ are now up 95% year-to-date. And yet the majority of fund managers remain long Tech stocks for 2024:

"The most crowded trades include being long on the 'Magnificent Seven' and short on China stocks"

In summary, the REAL *smart* money trade is to fade everything Wall Street is doing right now. 

And instead bet that Wall Street will explode in 2024 with extreme dislocation and the hardest landing since 1930.

At the latest. 

And know one thing with absolute certainty - they don't see it coming. 

 

ALL IN COLLAPSE

Once upon a time the Fed said they would cut interest rates. So Wall Street went ALL IN…

What we have learned since 2008 is that monetary policy does not have unlimited power over markets, but it does have unlimited power over the imagination of 8 billion gamblers. Therefore, until such time as the last fool is found, it can indeed appear as if monetary policy is unlimited. If the powers of monetary policy were unlimited, then China which has been easing all of 2023 would NOT have the weakest stock market in the world right now. And Japan which has been easing for the better part of three decades would not STILL be below the 1990 high.

Therefore, it's ironic that Japan is finally moving away from negative interest rates which have been in place since 2007, which will put to test my theory that monetary divergence - now going in the exact opposite direction - will cause the $3 trillion Yen carry trade which accumulated while U.S. rates were rising, to explode as it did in 1998.

Ignored Risk: Exhibit A.

In the U.S., the belief that only monetary policy matters and all risks should be ignored grew out of the 2008 bailout and the attendant ten year span of 0% interest rates. That faith in monetary policy was reinforced again during the pandemic. Central banks have magical powers to bail everyone out. Investors seem to forget that both of those events came along with explicit government assurances that all bank depositors  - insured or uninsured - would be made 100% whole. Something that the FDIC itself has already stated would be TOO EXPENSIVE to repeat in the future:

FDIC (May, 2023): Options for Deposit Insurance Reform

"Following the 2008–2013 banking crisis, the reliance by the U.S. banking system on uninsured deposits grew dramatically, both in dollar volume and as a proportion of overall deposit funding.20 From year-end 2009 through year-end 2022, uninsured domestic deposits at FDIC-institutions increased at an annualized rate of 9.8 percent, from $2.3 trillion to $7.7 trillion"

Ignored Risk: Exhibit B

Banks are now three wave corrective over the Spring (Feb '23) bank run. Shorts have covered on the belief that the worst is over. When in fact the worst has not even started yet. 

Another key risk factor that giddy investors seem to forget is that home prices usually decline when interest rates are coming down. Whether that is correlation or causation is up for debate. However, clearly declining interest rates attend a weakening economy and the housing market is highly sensitive to overall economic activity.

Ignored Risk: Exhibit C.

As a fourth risk I would point out that this is the SECOND Dow Theory Non-confirmation that investors are buying in three years. And we all know how the last one worked out. Essentially what happened was that investors became more bullish over the course of 2019 as the Fed moved from pivot to full on easing. Which is why when the pandemic struck, they were maximum levered to risk. 

The 2024 risks that are "invisible" now to bulls are invisible as the pandemic was in late 2019.

Ignored Risk: Exhibit D. Dow Theory confirmation requires that the Dow Transports make a new high to confirm the Dow Industrials new high. As we see, the Transports are a long way from confirming the Dow. In addition, the Nasdaq, S&P 500 and of course Russell 2000 have not confirmed the Dow either. As a reminder, the Dow is the ONLY price weighted index, so it is not representative of market cap. 

In summary, if you think that this divergence between investor fantasy and global reality has a happy ending in 2024, then indeed ignore all risk and go ALL IN. And then you will realize the hard way that in an Idiocracy, there is no strength in numbers.

"Check out the performance of the “Magnificent Seven” compared to the rest of the S&P 500 Index since the beginning of the year...the Mag 7 has done +71%, and the rest of the S&P 500 stocks have managed just 6%!"

These levels of concentration are unlike anything we’ve seen before — even the late ‘90s dot-com bubble doesn’t compare"

And it’s all happening because investors from all over the world keep chasing the same Big Tech higher and higher"

Ignored Risk: Exhibit E and F.

THE WINTER OF DISCONTENT

2023 is coming to a close amid giddy optimism in markets. Pretty much every piece of junk that got bought in the past three years of pandemic asset bubble, is now hot again...

Dec. 1st, 2023:

Yahoo Finance:

"Stocks that got slammed amid fears of higher-for-longer interest rates caught a second wind during the roaring November market rally. The S&P regional bank index (KRE) rose more than 16% during the month...Cathie Wood's flagship Ark Innovation ETF (ARKK) gained more than 34%. Meme stocks are soaring too"

"Traders have decided that even though it’s still earning nearly 5%, cash is trash compared to quick profits in a wide variety of risk assets," Interactive Brokers chief strategist Steve Sosnick wrote in a research note on Wednesday"

Sosnick adds that the root of what he described as a fear of missing out, or "FOMO" rally, is the "expectation that rates will be coming down, and that is indeed a solid reason for a rise in risk assets."

This article came out on the exact same day that Powell warned that interest rates are not coming down any time soon:

Dec. 1st, 2023:

This is all very deja vu, because one year ago, stocks were rallying on the prospect of imminent rate cuts. Back then as well, the Fed was trying to tamp down expectations, but clearly they didn't do a good job of it because here we see that for over a year the Dow has been rising inversely to National Financial Conditions, since the lows of October 2022. Risk markets are unwinding the Fed's tightening.

Which means that the Fed is nowhere near cutting interest rates. 

Nowhere is there more interest rate cut FOMO than there is in the housing market. Recently we learned that pending home sales have collapsed to multi-decade lows, but homebuilder stocks are at all time highs and leading the market. This week, Toll Brothers reported that their unit home sales collapsed -27% year over year and yet the stock went vertical. They "beat" Wall Street's negative expectations. 

It's abject criminality on an epic scale. 

 

If there is a recession in 2024 - which most economists are now predicting - then it will be the first back-to-back recession since the early 1980s. A mere two years between recessions. Normally, in a recession there is de-leveraging of debt, however, during the pandemic initially there was de-leveraging, but central banks created such an instantly massive asset bubble that by the end  of the pandemic there was a massive RE-leveraging of debt.  Which is what we see in the graph below. That has never happened before in U.S. history.

Which is why we are now facing a second recession, but this time at astronomical levels of debt. And yet today's pundits are telling people to buy stocks ahead of this recession. It's fucking ridiculous. 

  

This week, Moody's downgraded China's sovereign debt from stable to negative. Which is the EXACT opposite of what happened a year ago when everyone widely expected China to lead the world in economic growth in 2023. 

And yet we see below via the ISEE call/put ratio that speculators are MORE euphoric going into 2024 than they were going into 2023. What it comes down to is that investors have been hearing about the China economic implosion for so long that they no longer fear it. Even when it's happening in real time. Why? Because they have been convinced over and over again since 2008 that they will always get bailed out by central banks.

But remind me again which is the only major central bank right now that's easing?

China. And they have the worst performing stock market in the world. A harbinger of what's coming for every other risk asset market IN THE WORLD. 

BUYING THE COLLAPSE

The bull case and the bear case for 2024 are now the same - lower interest rates. Bulls are convinced that low rates are good for stocks - and they are...Unfortunately, the record clearly shows that rate cuts are NOT good for stocks.

It took decades to reach this juncture at which bulls are now praying for a weak economy. The divergence between the economy and stocks began in the early 1980s with the implementation of free trade and mass immigration, but it was kicked off by Fed chair Paul Volcker who famously broke the back of inflation by pushing the economy into a double recession at 10% mass unemployment. Those events set-off a multi-decade deflationary era which has been incredibly beneficial to markets at the expense of middle class labor. Another unhealthy predilection that started in the 1980s was this market addiction to monetary policy which started in 1987 with Alan Greenspan. Over the course of the past three decades, each time the economy weakens, the Fed has arrived with greater and greater monetary bailout policy. Filed under moral hazard biblical scale.

Therefore it can come as no surprise that for 2024 Wall Street expects a recession AND higher stock prices. A brief glance at the chart above will show that none of the most recent recessions led to higher stock prices initially. It took quite a bit of pain first: -50% in 2001, -55% in 2008, -35% in the case of the pandemic.

I didn't read that article, because I'm not interested in data mining ancient history to goal-seek stock bulls' requisite answer. We can see from my own chart above that this type of  fool's errand is fraught with peril. Granted, the pandemic bear market was the shortest in history which is why it's an even greater fool's errand to believe that it was anything more than a speed bump in an aging bull market.

On a monthly chart, the pandemic "bear market" barely appears.

We were also informed this week that home prices have surprisingly reached a new all time high despite the Fed rate hikes. I'm sure the Fed was surprised to read that as well.  It clearly shows that their rate hikes are not reaching asset markets. 

Therefore we are now to believe that the Tech / housing bubble will continue to grow inexorably whether the Fed tightens OR the economy implodes.

Unfortunately for bulls, as I showed on Twitter this past week, delinquencies (adjusted for inflation) have now reached the same level as 2008. Except, the difference is that back then interest rates and home prices had ALREADY peaked and were coming down. Whereas now, neither is coming down yet. 

More importantly, we see that delinquencies continued to rise long after home prices began to fall.

In summary, what we are witnessing is the largest policy error in market history. Bought with both hands by complacent bulls at the behest of known con men.

How this was always going to end.