Friday, October 9, 2020

End Of Cycle, End of Circus

Betting against mass delusion is never easy. It's always easier to run with the crowd...

This week, to the pain of skeptics of Disney markets, the entire election risk premium was priced out of markets, despite the ongoing stimulus clusterfuck. Ironically, risk was priced out DUE to the stimulus impasse making a blue wave far more likely. 

Trump tried all week to cut a deal with the Democrats but he was blocked every step of the way by his own party. The Republicans are of the belief that only blue states need Federal aid, which remains the key obstacle to a deal. Today Trump said he was open to a larger package, but McConnell shot it down. As it was in 2008, this is a fatal miscalculation. 

Since the debate and in particular since he got COVID, Trump's approval rating has imploded. Trump is losing his key demographic due to his cavalier attitude towards the virus which selects against older people. This week, having undergone several million dollars worth of royal medical treatment over the weekend, Trump exhorted his base "Don't be afraid of COVID". Those people most likely to die at home alone with the virus were not amused by his latest publicity stunt:

"In 2016, exit polls showed that 52 percent of voters ages 65 and older supported Trump. This year, polling suggests they’ve lurched heavily against him. A CNN poll this week showed Trump winning over just 39 percent of the same age group, compared to 60 percent who support Joe Biden — the latest in a series of polls showing seniors breaking in favor of Joe Biden."

If it's one thing Joe Biden understands it's old age. 

Ironically, the "blue wave" scenario that is now priced into global risk markets, is DUE to the stimulus impasse and GOP unwillingness to help states. Not exactly how Ted Cruz explains the situation mind you - he blames Nancy Pelosi for not throwing the election to Trump with three weeks to go:

"He blamed Rep. Nancy Pelosi and Sen. Chuck Schumer for holding up a deal to provide a new round stimulus and direct payment checks to Americans during the coronavirus pandemic, although it was President Trump who abruptly called off talks earlier this week."

This is yet another example of gamblers front-running stimulus and thereby making stimulus far less likely. When the market is 30% lower, we can expect urgency on a deal. All of which means that risk is massively mispriced, both in terms of the economy and the likelihood of an imminent stimulus bailout. What I call human history's biggest bullshit trap.

The cost of this epic con job will not merely be measured in terms of a collapsed asset bubble, it will be measured in terms of a collapsed economy, a depleted Treasury, and most costly of all, confidence in the system. Those still betting on this Circus are call options on the end of the cycle. This widely accepted chicanery, is putting them right back where they were in the Fall of 2008, behind the eight ball.

On Friday, another gap open melt-up rally within an ongoing melt-up rally.

While the election risk premium is coming out of the volatility futures, the spot Vix remains bid into the impending volatility explosion:

The chart of the week is this one, showing Momentum Tech stocks. Here we see they have had a melt-up rally into the beginning of the past four months. And then a crash:

In summary, the wave count remains intact:

Any questions?