Thursday, January 7, 2021

WMMD: Weapon of Monetary Mass Destruction

Hugh Hendry on Disney Markets:

"The enlightened chose the red pill, and so are convinced that they understand everything which has become illusory about today's markets...They know that today's central bankers are spinning a falsehood of recovery; they steadfastly refuse to be suckered in by the euphoria of a monetary boom; and they are convinced that they will therefore be spared the consequences of the inevitable crash. Everyone else, currently drugged by the virtual simulation of prosperity and its acolyte QE, will be destroyed"


By adding a decade worth of monetary heroin to global markets in one year, central banks have over-lubricated markets and created human history's largest financial weapon of mass destruction. For the vast majority of people who now believe that printed money is the secret to effortless wealth, this will be the surprise of a lifetime. Trump has amply proven there are no limits to this society's level of gullibility, especially those who trust known con men with a history of getting bailed out from schemes of greed and corruption...

Step back for perspective. Interest rates are at record lows for a reason - the economy is in a pandemic depression. There is nowhere to go lower. Europe has experimented with negative interest rates, but as anyone would expect, it's been a failure. Paying people to borrow money is a bad idea. Which means there is no economic monetary safety net.

So, what to do? Inject insane amounts of liquidity into global asset markets and create a massive asset bubble. Pull forward five years of priced in economic recovery into 2021. 

What could go wrong? Wall Streeters can't seem to identify any risks for 2021. Incoming sane president. Vaccine rollout. Global sychronized recovery. 

However, the biggest risk to their asset bubble projections is the asset bubble itself.

What we are witnessing right now is an asinine level of speculation the likes of which can only arise when "free money" is handed out at a casino. Except it's not really free. Zero commission gambling on zero percent margin is free on the buy side, and must be paid back in full on the sale. 

The operating assumption in a momentum market as leverage increases in proportion to the asset bubble, is that the sale price will always be greater than the buy price.

Here we see in this chart below that Bitcoin and Tesla are now 95% correlated. Bitcoin is up 110% in three weeks and Tesla is up over 100% since Biden got elected.

Elon Musk has seen his wealth increase from $30 billion one year ago to $180 billion today. 

It was easy money:

Recall that the Ark Funds have seen far and away the largest ETF inflows of any ETF family in the U.S. The largest of these funds (ARKK, ARKW) have Tesla as their largest holding. Another fund, Ark Autonomous/Robotics also has Tesla as its largest holding.

Gamblers are flocking to these momentum ETFs and the massive inflows are driving Tesla into the stratosphere.

Meanwhile, as we recall, Bitcoin is driven primarily by ETF inflows from the Bitcoin Trust. 

Same idea: Massive momentum inflows

"The odds of a Bitcoin correction would increase if the flows into the world’s largest traded cryptocurrency fund slow significantly, according to strategists at JPMorgan Chase & Co."

Clean energy stocks have been up 10 months in a row. Not one down month since the lows in March. 

You know you're an optimist when...

In absence of a true recovery, what central banks have done via asset markets is give the illusion of a recovery. And in the process, they have massively over-liquified markets.

By applying a decade worth of monetary heroin in one year, they have over-lubricated markets and in the process created human history's largest financial WMD.

The question on everyone's mind, knowing that this WMD will explode spectacularly - is when to get out? Because everyone wants to time their exit the day before it explodes.

Which, in aggregate, is not exactly possible. Nevertheless, all bulls believe they alone will exit at the top.

All I can say is that with the Russell 2000 record overbought, we are already in sudden death double overtime.

Here we see that outside of pockets of extreme speculation, most of Momo Tech has already rolled over. Including the MAGA caps (Microsoft, Apple, Google, Amazon) all of which imploded yesterday (not shown).

Back in February 2020 it took three weeks for central banks to get the Casino under control. 

Picture what happens this time: