Wednesday, November 25, 2020

The Fiscal Cliff

The stock market has now priced in a level of stimulus that will only take place if the stock market crashes...

An event that has now become self-fulfilling:

"CNBC’s Jim Cramer said Tuesday that some of the stock gains in the market are “insane,” with investors recently buying certain names from Tesla to Royal Caribbean seemingly without regard for fundamentals or the state of the coronavirus pandemic and holding onto them."

Cramer questioned how this type of buying can continue, pointing out that in the past such speculation has been met with a big sell-off"

Imagine if every other generation in U.S. history had childishly decided that they never wanted the cycle to end and never go through recession, so what they did was borrow and print unlimited amounts of money. What would have happened? First off, over-stimulated investors would have had no clue when the actual cycle was ending, because the insane amount of stimulus would give the illusion of false recovery. Which is what we are seeing right now. Secondly, on a longer term basis the country would go bankrupt and the dollar would go to zero. An event which this year took a gargantuan step towards inevitable.

Due to the massive COVID stimulus, gamblers don't know where we are in the cycle, which is why they are going ALL IN at the end of the longest cycle in U.S. history:

Which has driven the largest parabolic rally at an all time high, during a pandemic depression:

Today we got an update on Q3 GDP through September, which showed the largest one quarter increase in U.S. history. Following the largest one quarter decrease in U.S. history. All economists and pundits are of the mind that the worst is over and the recovery is well underway. Investors are sniffing the same glue and bidding up cyclicals to asinine levels. Having lagged all year until the election, the equal weight S&P 500 is now record overbought:

Whether they know it or not (clearly they don't), gamblers are now implicitly betting that the record stimulus that was brought to bear in 2020 will be repeated in 2021. Because without that level of fiscal (monetary) support, the economy will crash at the end December when the stimulus runs out. 

Here we see annualized GDP showing the net impact of the gargantuan 2020 stimulus. The red stimulus is the $2 trillion Cares act (and a few smaller bills) passed back in March:

The employment-population ratio is now at the lowest level in modern history. Back at levels not seen since women joined the workforce en masse:

Not only do these over-lubricated gamblers need to cross COVID death valley to get to their promised land next year, they also have to pray that the political tone in Washington improves, and pray that the grim reaper of corporate insolvency does not pay their favourite companies a visit in the meantime. 

Sadly for them, the Cares Act passed in March which was uncharacteristically generous for the GOP, was intended merely to rig the election for McDonald Trump. However, now the GOP is in no mood to bolster Joe Biden's collapsing economy. Which is why political rancor and GOP intransigence will be what collapses the economy and markets.

“If you told me in January, your distribution is going to increase 145% and you’ll be reaching 900,000 people per month by the fall, I would have said, ‘I don’t think so,’” Flood said.

“But that’s what’s happened.”

“We’re fearful that a lot of folks are going will lose a significant part of their support if Congress doesn’t act to extend them or do something,”

In summary, most people are of the mind that the worst is over. However, the inconvenient truth is that the worst hasn't even started. Yet.

The largest rallies are always in bear markets.