Tuesday, January 26, 2021

How To Create A Bidless Market

Central banks and Reddit traders are collaborating to create a bidless market. Millennials are putting Boomer retirement at risk, because they've mistaken the stock market for a casino... 

The biggest stock market rally in the past decade just took place during a pandemic that caused the most economic damage since the Great Depression. COVID accelerated the end of the cycle, but the central bank Jedi Mind Trick made it impossible to see it ending. A generation of financial illiterates with no experience in bear markets, is now convinced they are invincible stock picking geniuses. When volatility explodes, the global margin calls will arrive night and day. It will be the reverse wealth effect, and the margin clerks will be much faster than the central banksters. 

"When do you think we'll get another pandemic?"

Gamestop and the short squeeze story is now all over the financial pages, so I will spare you the details. Suffice to say our Millennial son called us on Friday to say he had banked $25k one day profit on this latest pump and dump. Easy money. Now, the retail Reddit traders are ganging up on hedge funds and options market makers. Jim Cramer sees nothing wrong with the little guy getting even with the big boys. If that was all there is to this I would agree. However, these rampant pump and dump schemes are symptomatic of a massively over-heated market. Picture self-directed retirement plans now 100% correlated to a Las Vegas casino. You get the idea. Millennials have their Robinhood portfolios stacked with GE and Ford stock side by side with Gamestop and Bitcoins. When the margin calls roll in the margin clerks will reach for whichever stock is most liquid. 

And it won't be Gamestop. 

Reddit traders are targeting all heavily shorted stocks, particularly in the retail sector, which is bolstering the delusion of a full recovery:

Move along, nothing to see here:

Just as Reddit traders are bidding up the riskiest stocks, central banks are doing the same thing to the broader market - compressing volatility making hedging totally unprofitable. Which is why last week asset managers reached decade high risk exposure:

As I've shown recently, Asian markets are going similarly bonkers. Hong Kong is playing catch-up with the rest of the world:

"A chill swept through Chinese financial markets after the central bank withdrew cash from the banking system and an official warned about asset bubbles."

The People’s Bank of China drained about $12 billion via open-market operations on Tuesday. The decision was unusual in the weeks before the Lunar New Year holiday, which in 2021 falls in mid-February"

The reaction was particularly brutal in Hong Kong’s stock market, where onshore funds were helping underpin a world-beating rally. Mainland investors bought a net $32 billion worth of Hong Kong stocks this year through Monday, almost 40% of last year’s total"

Five months of inflows in three weeks. 

The pounding in Bitcoin is a warning of what is coming to every other over-heated asset market:

"With a full-blown retail raid targeting their short books, many of the stocks hedge funds are bullish on are suddenly in trouble, too. That has prompted the industry to cut their risk appetite at the fastest pace in more than a year"

In a market where bearish wagers are backfiring like never before, one way to mitigate career risk might be to sell stocks that had previously been working -- even if that means parting with some beloved companies."

The irony that Reddit bulls squeezing hedge funds out of their bear trades could be the catalyst for the casino to come crashing down. Can't be overlooked.

Picture how many hedge funds hold Tesla:

In summary, short covering is providing the illusion of a recovery where there is none. 

Next comes the bidless market deja vu. And then Millennials will enjoy their first bear market wipeout. 

Good times.