Sunday, April 26, 2020

Monetary Euthanasia

Gamblers at large have been fully euthanized by the virtual simulation of prosperity, and its acolyte QE aka. "Easy money". What comes next will be the inevitable explosive ending to the era of hazardous immorality. Now under the fantasy that central bank asset buying can offset a total collapse in demand. History wlll say this was the dumbest society in history...

mor·al haz·ard
"lack of incentive to guard against risk where one is protected from its consequences"

So far my prediction of epic panic has yet to come to pass. Like everyone else, I am plodding my way through this unprecedented haze attempting to ascertain the future. If I contradict myself or repeat myself, it's because I am reacting to incremental information and evolving my prediction one day at a time.

The first leg down saw epic dislocation in terms of volatility, limit moves in S&P futures, day session trading halts, but no panic. Having panic sold in 2000 and 2008, the sheeple at large have been well-conditioned to buy every dip and otherwise remain fully invested through economic depression. A 75 year old friend of ours told me this past week that he is still 100% invested in bonds and stocks per the advice of his financial advisor. I almost shit a brick.  

I am still overwhelmingly of the belief that further dislocation will test their resolve. Currently, due to RECORD central bank intervention, the stock market bears no relation to reality when looking at the major indices. Under the surface, the broader market tells a vastly different story.

Ironically, the MAGA cap tech stocks (Microsoft, Apple, Google, Amazon) are now bearing an even larger share of the total "market" than at the market top in February. The March decline saw a massive rotation out of economic cyclicals into deflation plays: Tech, Healthcare, Staples, and Utilities.

The only way to "make sense" of it, is to realize that the decline is far from over. 

"Why isn’t the stock market much lower?

This question is occurring to plenty of observers right now, given the apparent contrast between economic realities and equity performance"

If stocks were handicapping such a quick resurgence in the economy, one would expect “early cycle” groups such as autos, banks, consumer durable goods and retail to lead the market. This is the opposite of what’s going on."

Amazon exemplifies another dominant trend, the premium being placed by investors on the acclaimed winners of an even more winner-take-all economy that might follow this downturn. Amazon’s $1.2 trillion market value, in fact, now accounts for more than 40% of the entire value of the S&P 500 consumer-discretionary sector."

With respect to market breadth, here we see that the crash ratio never recovered after the March crash. Unlike 2008 and every other major decline:

Here we see via the NYSE Composite that the typical U.S. stock is in no way confirming this rally off the lows. The TARP bailout analog remains intact. Meaning this was a temporary central bank induced bounce prior to a much larger decline lower. In 2008 new NYSE weekly lows peaked in early October 2008 which was five months before the bottom.

The online shopping bubble can best be captured via the "CLIX" ETF which is long Amazon and online retailers and short brick and mortar stores.

Needless to say it's a very popular and crowded bubble:

The locus of most likely explosion remains Emerging Markets which are currently tracking 99% correlated to the S&P 500:

Hedges were monetized during the March collapse, as speculators are now betting on the Powell Put:

Deja vu of 2019, the internet index has staged a massive recovery. This coming week is peak week for S&P 500 earnings reports. All five of the largest Tech companies report earnings this week (Google Tuesday, Microsoft/Facebook Wednesday, Amazon and Apple Thursday).

Last year first quarter earnings reports imploded the sector after a 40% run. I am sure it will be different this time when they all lift guidance for the remainder of the year:

Here is an hourly wave count. Note that major wave 2 basically retraced back to the same level as minor wave ii.

Also this week, the big three central banks meet:  The BOJ cut its meeting down to a social distanced single day, Monday. The Fed decision is Wednesday, and the ECB is Thursday.

The latest gambler fantasy is that the Fed's next step will be towards FULL Japanification meaning the buying of stocks.

"Among the three systemically important central banks holding policy meetings this week — the Bank of Japan, the European Central Bank and the Federal Reserve — the Fed is least likely to announce new policy measures."

The last thing it would want to do is trigger market volatility by signaling that it has no intention to expand its balance-sheet purchase program to buy stocks."

But by doing so, it fuels a significant new element of moral hazard associated with the view of an ever more encompassing direct “Fed put”

Looking at the daily chart of internet stocks above, I would say that ship has sailed.

Here is what outright buying of stocks has done for Japan - NOTHING for years. At the March lows, the Nikkei was back at 2008 levels:

Contrary to Idiocratic belief, no amount of asset purchases can compensate for collapsed demand. However, due to moral hazard, this society is going to learn the hardest way possible.

Supply Side economics has now reached its inevitable endgame.

Buckle up for FOMC: Fear of Missing Crash