Friday, November 13, 2020

Looking Across The Valley. Of Death

A combination of record stimulus, Ponzi borrowing, record gullibility, and plain old greed, has obfuscated the end of the cycle. Gamblers have been told they can ride out depression in bankrupt companies...

The level connivance we are witnessing right now is the sum total of over a decade of Disney markets. Imagined Realities in the Hendryite tradition.  

"In the long run we will come to rue the central bank actions of today. But today there is no serious stimulus programme that our Disney markets will not consider to be successful."

Central banks are the only reason markets never priced in economic reality this year of COVID. And what remains of "GDP" is entirely predicated upon fiscal stimulus currently accounting for 17% of the economy. Add in state and local unemployment programs and total government stimulus is unprecedented in U.S. history. 

And it's all about to run out. 

And yet, Wall Street is telling their clients to buy economic cyclicals as the pandemic explodes out of control. Our favourite "quant guru" of bullshit who made the worst call in history one year ago, is back selling Kool-Aid again. 

Waves 'a' and 'c' of this value spike saw the two highest call/put ratios in history:

This week, the S&P 500 made a new all time intra-day high, that was unconfirmed by both the NYSE Composite AND the Nasdaq. I highly doubt that has ever happened before in history. The Nasdaq peaked back in September. Whereas the NYSE Composite peaked back in February and is currently at the same level as early 2018 almost three years ago. This is the true MAGA top as evidenced by the most economically sensitive sectors. Note that realized volatility is at the same level it was at the bottom in 2018. Which is extremely unusual:

Now, what remains of "GDP" is set to collapse by the end of the year. The economy is on life support which is about to be turned off:

"Two critical unemployment programs are set to expire at the end of the year, potentially leaving millions of Americans vulnerable to eviction and hunger and threatening to short-circuit an economic recovery that has already lost momentum."

Up until now there has been no sign of panic because gamblers have had the virtual simulation of prosperity to rely upon.

They have been well conditioned to believe in Disney markets:

In the process they have loaded up on bankrupt companies, and are currently being pushed towards the most insolvent sectors. This year in a bizarre distortion, record bond sales have attended record corporate bankruptcies. Financial markets never got the memo to stop lending to bankrupt companies. Just as Millennial newbies bought Hertz stock in bankruptcy, so to are the morons on Wall Street lending to insolvent companies.

After all, if they stop lending, these companies will go bust sooner rather than after bonus time. So they just keep shoveling good money after bad.

Which is why this week Bill Ackman made a(nother) bet that the credit markets are about to crash. His first bet paid off handsomely, as the Credit Default Swap (CDS) premiums exploded. however the actual full scale of defaults never took place, because lenders are bailing out insolvent borrowers with more debt.

Ackman is betting that at some point the lenders are going to shit a brick:

Corporate debt % of GDP:

All of which is identical to the events of 2008 wherein the CDS premiums FELL as the subprime mortgages deteriorated. For a time. And then they exploded.

"Over a protracted period of good times, capitalist economies tend to move from a financial structure dominated by hedge finance units to a structure in which there is large weight to units engaged in speculative and Ponzi finance"

Gamblers are betting that Wall Street won't let them down.