Sunday, November 8, 2020

Front-Running Collapse

Four years ago, the Trump MAGA bubble got tacked onto the "big, fat, ugly" Obama bubble, creating the longest bull market in history, compliments of record stimulus. There were only three crashes along the way (-10%, -20%, -35%). Now Wall Street would have us believe, the Biden rally will extend the party. In Disney markets, people will believe anything...

Writing on Sunday evening and gauging the early futures, the Biden rally has officially started. Last week's record no leadership rally finally has a geezer to call its own. The weekend Biden win was of course interpreted bullishly by the headline scanning algos. As I wrote last week, Wall Street is busy re-arranging all of their forecasts around the now "bullish" gridlock scenario. Historically, gridlock has been very good for markets, because it meant no major changes in policy. In this case a major sigh of relief that there will be no Marxist regime change. All good. There's only one problem, we've round tripped back to the February crack high of skyrocketing Tech stocks and skyrocketing COVID. This time with exhausted fiscal stimulus. 

Basically what we have is manic rotation to a Super Tech bubble while the economic sectors go dark again. How long until we start to see either lockdowns again, or hospitals turning away patients? Either scenario won't be bullish for sentiment. Meanwhile, the political atmosphere has turned from bad to hellacious. So extrapolating past scenarios into the future is a fool's errand. Which is why Wall Street is all over it.

The problem with the nascent "Biden rally" is that gamblers were already lubricated going into the election. Here we see via Rydex positioning, the difference between 2016 and now:

Meanwhile, the call/put ratio shows that speculators are back with a vengeance.

Barron's was out this weekend saying that Tech stocks are the new safe havensNowadays, after over a decade of non-stop stimulus people are questioning whether or not bubbles even exist. Especially the ones that are broadly owned. In my prior post I said that total stimulus had reached a ludicrous 30% of GDP. I was wrong. I went back and did an historical analysis and found that combined fiscal and monetary stimulus has now reached 47% of GDP in 2020. 32% of that is growth in the national debt year over year, and 15% is monetary expansion. All figures are from the Fred database. 

If every other generation had been as profligate as this one, there would have been no recessions and the Great Depression would have been a minor event. 

The dollar would have become worthless decades ago.

But there would have been one hell of a big party before it all exploded. Like the one taking place right now. 

Amid all this epic super bubble in profligacy and RISK ON party, Wall Street has decided that the most toxic political environment in U.S history, is good for stocks. The average household may well implode, small business will be decimated, but "stocks" will go higher.

It appears they have all settled upon the Goldilocks and The Three Bears bedtime story for euthanized gamblers. Meaning not too hot and not too cold. Everything is just right.

One of these storytellers is the famed "quant guru" Marko Kolanovic from JP Morgan. It was exactly one year ago, that he made the worst market call in world history, when he said that the value stock rotation was a "once in a decade" opportunity. Of course no one could foresee COVID, but he happened to pick the part of the market that performed the worst during the crisis. Then, leading into the election, he predicted Trump would win. Another bad prediction from the "quant guru" of bullshit.

Now, he's onboard with the standard Goldilocks delusion, that Trump refusing to leave the White House and Pelosi and McConnell at opposite ends of the stimulus spectrum, is "the best of both worlds". JP Morgan's equity team is now predicting a 54% rally post-election, based on what they call under-weight positioning by investors:

Got that? There is NEVER a reason to be anything but massively over-allocated to stocks. Note that they never mentioned record valuations and record risks, they only mentioned positioning and central bank dopium. Meaning ignore all of the risks that abided the last time these exact same morons were CRITICALLY wrong in February, add in Constitutional crisis, pre-imploded economy, and exhausted stimulus, and roll the dice again.

Notwithstanding Wall Street's usual bonus time Kool-Aid serving party, the question on the table is how long can the Biden rally now last? Months, weeks, days, or hours?

Given the epic con job underway now, I will go with hours to a few days at the outside. Followed by epic uncontrolled meltdown.

Skynet can no longer handle a global RISK OFF event, given the amount of leverage in a handful of overowned stocks. 

Back in February recall that despite the -35% decline, there was a net rotation into Tech stocks that prevented wholesale meltdown.

Don't expect that to happen again. Gamblers are well conditioned to front-run collapse.