Friday, March 20, 2020

Staring Into The Abyss

This will be known as the week that global central banks went ALL IN to rescue gamblers trapped in Trump Casino. Which happens to correspond with the week that Trump Casino gave up all of its gains since the 2016 election. What's at stake now are all of the gains since 2009. Somehow, the MAGA circle jerk survived the collapse of the moron bubble.

Which means that the next "test" will be faith in proven psychopaths who are right now panic lying. Don't expect it to be successful. No other society in U.S. history would be dumb enough to believe that printed money could offset shutting down the entire economy. This is a biblical IQ test with an epic fail...

With this post I am going to try something I haven't tried in the past ten years - being mildly optimistic. Once upon a time I was always optimistic with respect to the markets. However, after getting bilked a few dozen times by Wall Street sociopaths, I finally learned my lesson.

At this all important precipice, bulls see a double bottom forming, while bears see a last line of support prior to the abyss. Not everyone can be right. In the coming week we will  likely have either a headfake 1930s vertical rally, or a super explosion lower. In this post I will assess each possibility...

To those who desperately believe in central bank bailouts, this week gave them everything they wanted - unlimited amounts of imaginary reflation:

“The speed and aggression with which authorities are wheeling out measures to cushion the economic fallout from the virus and sowing the seeds for a hopefully rapid recovery, has resonated somewhat in equity markets,”

ZH: The Fed Balance Sheet Exploded to Record Highs This Week

"The Fed just injected in one week almost the entire amount of liquidity it did in all of QE2 and it is barely enough to keep stocks from plunging"

On the other hand, the economic data that comes out over the coming weeks will be hellacious:

"Upcoming weekly jobless claims will shatter the standards set even during the worst points of the financial crisis and the early-1980s recession, with Bank of America forecasting a total of 3 million when the number is released Thursday"

The worst month for job losses during the financial crisis was 800,00 in March 2009"

“We never imagined we’d write anything like this,” Sheperdson said in a note. “The shock will be so great that it will leave policymakers with no choice but to pass much more stimulus than is currently under discussion.”

One upside to the coronavirus scenario is that most economists still expect the downturn to be brief compared to other recessions, with the worst news front-loaded."

In other words, we are to believe that the worst jobs data since the Great Depression will lead to a mild recession in an economy that was heading towards recession BEFORE the virus struck.

Nevertheless, the 1930 headfake bounce also took place under the backdrop of similarly worsening economic data. So we can see why one could manifest now.

What this will come down to is a battle between central bank liquidity and imploding market technicals, while the fundamentals of the virus and the economy deteriorate in the background. Which means that in the coming week, the casino will either explode up, or explode down.

Which gets us to the casino technicals. Notwithstanding massive intervention, my opinion of the markets is very similar to last weekend:

The Minsky Moment (Sunday, March 15th, 2020)

"By not allowing capitulation, central banks have allowed this stair-step lower to continue. They have funded the BTFD mentality all the way down. They have given it false hope. Today's "capitalists" no longer believe in markets, they only believe in non-stop bailouts. 

Worse yet, the Fed's market manipulation efforts via the S&P futures have continued to see more money rotate to mega cap Tech stocks and out of the rest of the market. While the average stock gets massacred, the largest stocks keep receiving an artificial bid due to index alchemy pushing more and more inflows to the largest cap stocks"

The crash ratio continued to deteriorate this week, to levels far worse than 2009 as the reflation trade (banks, transports, autos, homebuilders, retail, industrials) went entirely bidless.

Which means that the Tech bubble grew larger this week:

"MOST of the selling continues to occur overnight, leaving U.S. gamblers buying the dip lower and lower while algos sell the futures limit down in the off hours.

Pundits who keep recommending buying the dip have now trapped gamblers in a non-functioning and wholly illiquid market. Which has become less liquid and more volatile with each stair step lower. All on the premise that central banks are coming to the rescue. The perceived safe havens are now the least safe stocks"

Here we see the "low vol" stocks broke the critical support line that held in February and December 2018:

Compliments of exceptional bullshit, the dumb money bubble remains intact, as there is no sign of panic among the general public. They have been told to look across the valley of great depression and ignore the -80% drawdown along the way. And the decades it will take to repair the damage. In 1929 it took 25 years to regain the all time high.

When the smart money is getting out, there is something very useful about a useful Idiocracy:

The global margin call accelerated this week as the dollar liquidity shortage became acute.

The past three weeks are circled in red:

The impending stimulus checks are a drop in the ocean compared to shutting down the global economy, something that never happened in 2008

Central banks have lost all control over deflation. The divergence between fantasy and reality is breaking hard down in the direction of reality:

Considering all of the above information, one must conclude that the impending explosion will be lower.

When liquidity collapses to zero and the casino is closed until further notice, the shit will hit the fan, literally.

You know you're an optimist when you take this home for the weekend:

"A worldwide credit crunch triggered by the coronavirus will set in motion a wave of corporate bankruptcies that will make the global financial crisis look like “child’s play”, investors have warned."

“$2tn worth of corporate debt is due to be rolled over this year but the market has completely frozen. The market is essentially closed. It’s a disaster.”