Sunday, March 22, 2020

In Idiots We Trust

What we have today are fools who place their trust in even bigger fools. This past week monetary policy backfired, now we are very likely going to see the same thing on the fiscal policy side...

Trump's signature casino bankrupting profligacy will be on full display this week:

It's the hallmark of this Idiocracy to forget history, including recent history. This past week, two senators were accused of insider trading in February because they sold their stocks ahead of the market crash. Their accusers seem to forget that the Corona pandemic was a widely known fact in late January. Which means that EVERYONE knew what was coming and yet the market melted up anyways. I called it the "Corona" meltup, the dumbest thing I had ever seen. Which means that we've reached a point in this Idiocracy wherein those who refuse to believe the Sean Hannity controlled narratives are now "insider traders". They have privileged access to the inconvenient truth others don't have. 

It gets far worse of course in terms of widespread amnesia. For years Trump has been clamoring for lower interest rates. Over the past few weeks that chorus has grown louder and louder. On March 3rd, the Fed slashed rates .5% - the market rallied for fifteen minutes and then crashed. This past week on Sunday night, in a shock and awe move, the Fed slashed rates an entire percentage point to 0% AND re-started Quantitative easing. When the futures opened, they were limit down in :5 minutes. Monday was the worst day for markets since 1987. On Friday this past week, the Fed injected a record $1.1 trillion of combined stimulus into markets (repo + QE), the market ended the week down -17%. I have said all along that the next attempt to re-start QE would be an abject failure and this week we got ample proof. For those who adamantly believe that printed money is the secret to effortless wealth, it was a very bad week indeed. 

And yet, the belief in bailouts and free money has carried over into another week. This time on the fiscal side. The belief that the government can bail out the entire economy, which is now offline. The net effect of this continued belief in free money is mass complacency among the general public. They have been told that the government can fix this with borrowed money. 

However, this past week, despite the restarting of QE (Fed bond buying), we witnessed the largest Treasury bond selloff in years. How could that possibly happen with the largest bond buying program in years? Because bond markets were spooked by the Trump fiscal stimulus package making its way through Congress. As it was with Trump's asinine tax cut, we have now reached the point at which fiscal "stimulus" is doing far more harm than good. While Trump is busy trying to bailout his fellow criminals, the vast remainder of economic participants will very like now face higher interest rates and no bailout. It's called "the crowding out effect" - meaning the government is crowding out other borrowers in a limited credit market. Add in a global dollar liquidity crisis, and Trump extracting another $2 trillion of liquidity out of bond markets isn't going to help. 

Note that the magnitude of the stimulus package grew an astounding 100% since Wednesday despite the impact the smaller version had on the bond market:

"Long-term U.S. debt yields leaped Wednesday as investors sold 10- and 30-year bonds amid discussion about a potential $1 trillion federal stimulus package to help goose the economy."

Traders sold long-term bonds in anticipation of a deluge of future debt supply and the government’s eventual need to auction even more Treasurys. Any glut in debt supply could cause bond prices to fall and their yields to rise."

The rapid rise in yields also appeared to spook equity markets on Wednesday. Dow futures hit their “limit down” level in premarket trade Wednesday, then tumbled more than 4.5% in morning trading."

I have said all along that heli money is going to nuke the credit markets. This past week we already got a small taste of that scenario. This week, once again, we will find out who is right and who is wrong. I can assure you, those who are betting everything on free money bailouts can't afford to be wrong.

Nature has checks and balances on how far profligacy and abject irresponsibility can be taken at the expense of future generations before it all blows up in the faces of the generation attempting to plunder the future for now.

I believe these obedient corporate gerbils have reached the end of the line and can no longer be bailed out from their own rampant stupidity.

We will soon find out.

The pavement looms.

"Some investors sounded alarms about the Covid-19 outbreak as it hit China, but the brutality of the equity-market sell-off has been so extreme and rare, no one would dare have predicted it in detail."

Investment-grade corporate-bond risk spreads have burst with record speed from historic lows to levels that roughly price in recessionary default rates."

In other words, the proximate cause of this historic "unforeseen" crash was caused by fools who believed that China could be wiped off the map to U.S. benefit. The ones who drove the Corona melt-up in February to all time highs for U.S. benchmark indices. Amid a manic reach for risk.

February 20th, 2020:

"Veggie-foods maker Beyond Meat trades at 282 times estimated earnings. Tesla’s stock price has doubled this year. Virgin Galactic’s stock price has nearly tripled in 2020.

The world’s most profitable company, Apple withdraws its revenue guidance, and the technology-heavy Nasdaq Composite actually closes higher on the day."

However, the REAL reason for this selloff were the ubiquitous fools who ignored the overwhelming evidence that this was the end of the cycle. Aided and abetted by end-of-cycle central bank easing on a scale that artificially compressed yield spreads, giving the Jedi Mind Trick of low risk. I would include the author Mike Santoli in the category of the easily conned. A highly paid trend-follower who now has to bury recent history to pretend this was an unforeseen event.

Otherwise it would mean that he was in the category of idiots. 

As it was post-Lehman, when all of these bailouts are out of the way, the REAL selling will begin. So far this has been child's play. There is one more group of stocks that have yet to be sold, which is also the main reason this selloff is far from over:

"There may also be reasons related to the ongoing coronavirus epidemic that could be supporting some of these names. For instance, Amazon has announced plans to hire 100,000 additional workers to deal with a surge in orders as retail customers avoid in-person shopping"

The term "smart money" is now going to be put to the test

Just remember, "No one saw it coming"