Tuesday, March 10, 2020

2008 Deja Vu

What is taking place right now in real-time is deja vu of the late summer and early Fall of 2008. A multitude of headfake rallies in an oversold market that keeps going down "the slope of hope". To the inevitable realization that the party is over...

In between the moments of stark terror are all of the bullshit artists who have to say something to keep the sheeple in Trump Casino.







Bueller?




President Donald Trump floated on Monday the idea of “a payroll tax cut or relief” to offset the negative impact from the coronavirus...However, administration officials told CNBC that the White House is not close to rolling out specific proposals to deal with a coronavirus-induced economic slowdown.

“While we believe that a fiscal stimulus package will be produced, the timing and scope remain uncertain”


800 Dow points for imaginary bailout #2. As I said, Congress does not work at the speed of margin clerks. 

Back in 2008, markets were sliding down the slope of hope. There were myriad bailouts as the various dominoes collapsed. Each rally was shorter than the last. Until eventually, the market went vertical down after the TARP fiasco in October 2008. Of course back then the Fed had far more dry powder so each rate cut was attended by a short (covering) rally, rollover, and failure. Last week, the Fed's .5% emergency rate cut failed immediately, because the smart money now knows the Fed is out of conventional ammunition. It was essentially an admission that the economy is heading for recession. 

The downsides of having an idiot for president are about to be fully revealed to even the biggest dumbfucks among us. 












Which gets us to the long awaited return of Quantitative Easing. First off, the Fed has shown no indication of re-starting QE yet. They know it's their last option, so they are keeping it in reserve. Which is very ironic, because the ONLY reason investors are not panicking is because they expect QE, however the Fed is not delivering QE because investors are not panicking. This is the dilemma that attends front-running central banks. 

Unlike 2008, when investors eventually fled risky assets causing "yield spreads" to blowout, NOW investors keep buying risky assets giving the Fed the perception of low risk.

The Fed's own stress model is not a valid indicator of risk. It wasn't in 2007, and it's even less so today. The consequence of living in a low interest rate world whereby central banks force investors to seek risk.

The Fed is stuck in their own feedback loop of creating a false sense of low risk:







At this point, the term "safe haven" is the most bastardized term in the casino. Leading investors to make all sorts of foolish herd-like decisions.

The "safest stocks" are now the most over-valued, as it was in 2008.





The reach for yield today is far worse than it was in 2008. 

There is a belief today that every type of bond is equally safe. Because the cycle will never end meaning there is no default risk. Which is why the so-called "spread" products are catching a massive bid. They are now conveniently viewed to be equally safe as Treasuries. 

The high yield (junk bond) bubble officially imploded yesterday (not shown) during  OilMageddon. So now the investment grade bond market is the next bubble to explode. 







Which gets us to gold. I am short gold via put options, so take that into consideration.

Gold is a very crowded trade as gamblers have been front-running central banks for over a year straight. It's also now highly exposed to ancillary margin calls in over-leveraged brokerage accounts. 

And now we see that volatility is exploding deja vu of the top in 2011. The exits are closing:






My volatility positions have been doing very well of late.


However, I am surprised to see that even as of today, April volatility call options are still relatively cheap near the money.

Why?  

Because amazingly, the volatility short trade is still in place. The vast majority of gamblers believe this is all just Corona virus related. Having nothing to do with global implosion.

Second derivative volatility is very subdued indicating zero sign of panic:








The noose keeps getting tighter:






Which gets us to long-term Treasury bonds. 

The Fed has lost control over deflation which is why T-bond yields are collapsing. 

In 2008, MASSIVE panic doses of QE eventually reversed the deflationary death spiral in late 2008, at which point long-term Treasury bonds went from being a safe haven to being a death trap.

Overnight.





All of which means that short term t-bills and high quality money market funds are likely the only true safe havens. Safe being a relative term. Again, I am not an investment advisor and I don't trust people who are.

But, don't take my word for it:






What does all of this have to do with the economy?

Absolutely NOTHING. 

We now live in a world in which the top performing stock market are Chinese stocks. Why - because quarantined gamblers are stuck at home bidding up their own stocks while the economy collapses in real-time. There is now inverse correlation between the economy and global stocks.

What I see happening next is that gamblers continue bounding down the slope of hope for a few days or hours longer. At which point the frogs in boiling water realize they are totally fucked. 

At which point volatility explodes.

Make no mistake, we are getting closer by the hour:













When humpty dumpty explodes, central banks will panic, leading to a 1930 headfake asset rally lasting some weeks or months.

However, the real economy will go the other direction.

And then will come heli money. The last bailout.

This time for the middle class.

Gamble at your own risk.