Sunday, January 31, 2021

"Which Stonks Should I Buy In A Meltdown?"

This is the type of cogent analysis you won't get anywhere else in Disney markets. While most of the world is focused on the Gamestop pump and dump "revolution", they are ignoring the true Ponzi risks growing by the moment...

However, a few of us understand what is at stake:

"The stock market turned into a spectacle to rival Super Bowl LV this week, as retail investors and hedge funds faced off over GameStop stock. Tom Brady and Patrick Mahomes will have a hard time providing as much entertainment to viewers around the world as this latest step in the gamification of financial markets."

Every bubble is associated with redistribution, and much of the alpha that professional investors boast about is nothing more than timing gains that are redistributions from other parties. The current populist moment in financial markets, like many other populist moments, will only serve to amplify that redistribution toward the rich and informed, all the while suggesting that it is doing the opposite."

This last point can't be overstated. This so-called populist movement to "democratize" markets is merely going to make a handful of early pump and dump specialists extremely wealthy at the expense of the fools that follow. For every one person enriched by these schemes, there will be multiple losers, none of whom will be interviewed by CNBC.

Getting back to the key point of this post, the inevitable meltdown of Disney markets. When this meltdown gets fully underway - which may well be the case already - we won't have time to reflect on the various dislocations. Therefore, we must think about these things ahead of time. I fully expect that most of these predictions will come true, however the timing will be the hard part, which I leave to the reader to discern.

First off, this event will put Disney markets to the ultimate system test, and they will fail. Market structure has been eroding for years, ignored by regulators.  Whereas the casino almost came unglued last Spring, the violence of this decline will break the market. First off, algos will step back from the market, taking liquidity down to zero. Brokerages will go offline. ETFs will implode. Circuit breakers which are meant to slow market decline will prevent traders from selling their positions and therefore prevent markets from clearing. Panic will ensue. At 2:00 pm each day margin clerks will liquidate gamified investors. Selling any positions they can, indiscriminately. Which means that no "stonks" will be safe havens. 

The magnitude and leverage of this bubble will test central banks to the breaking point. It took five weeks for CBs to get the crash under control last March. It will take a matter of several weeks again this time, however, the velocity of this crash will be far faster and far more violent. The market bottomed at -35% last time, this time we should expect a larger drawdown before they get it under control. Unlike last year, the market will not rocket straight back up. I expect some chopping and retest around a bottom as panicked investors sell. Then eventually a slow tentative rally will ensue. Confidence in Disney markets will be destroyed.

We should expect a currency crisis to erupt and spread globally due to the massive dollar carry trade that was set loose by the Federal Reserve promising to keep U.S. interest rates low indefinitely. The record dollar short trade will get monkey hammered. 

Along with a currency crisis will come an end-of-cycle credit crisis. Facing massive losses, over-leveraged lenders will step back from the market. Ponzi borrowers - which were bailed out last Spring will go into eventual default, unable to roll over their debts. The blood will be in the water.

Recall that Republican Senator Pat Toomey demanded that the Fed relinquish its special corporate bailout powers in the last stimulus bill. Which means that this time around the Fed will not have the ability to buy corporate bonds in the secondary market. Which will leave the corporate bond market open to wholesale collapse. 

As the meltdown spreads to the far corners of global assets, no major asset class will be spared. Deflation will be extreme. Policy-makers will respond with more monetized fiscal stimulus, however the effects won't be felt for months. 

The unemployment rate will explode.

Throughout this dislocation, t-bills and money market funds will be safe havens on a relative basis. And gold of course will be the ultimate safe haven, although it too will experience "volatility". I believe gold will go down initially and recover ahead of other asset classes.

Gamble at your own risk.  

Going forward, policy reforms will be market unfriendly - higher taxes on the ultra-wealthy, and the inevitable reregulation of Wall Street. The stock market will trade in a wide trading range for the foreseeable future, as policy focus turns to the long neglected economy.

All that said, from crisis arises opportunity. In the days to come I will be combing through the IBD (Investors Business Daily) innovator 50 list to determine which growth stocks to buy on a "dip". What could be the buying opportunity of a lifetime. Clearly green energy will be a key space for the coming decade, and this pullback may be a golden opportunity. From the ashes of the Dotcom bubble arose many of the Tech leaders of today. Those who bought Amazon at the nadir are long since retired. 

Those who think all this can't happen are ignoring the fact that it is already. Coincidentally, this coming week is the third anniversary of the 2018 Vixplosion, when Trump's tax cut blew up in their faces.

The set-up is identical:

Good times.