Thursday, February 11, 2021

A Fatal Bubble

The asinine arguments being used to justify this unprecedented bubble will be fatal to those who believe them. Only an abject fool uses a global depression to rationalize high stock prices. On the other side of this "event", it will be cold comfort to claim that "no one saw it coming". Contrary to ubiquitous belief, when it comes to mass delusion, there is no strength in numbers...

The same argument is used over and over again by every Wall Street analyst - interest rates are low and central banks are pumping money. These groupthink analysts are driven by their need to crowd their investors into this lethal bubble before it gets larger. Another ludicrous rationalization they share is to use the Dotcom bubble as a basis to justify ludicrous valuations. Interest rates are lower now, whereas the Fed was tightening back then, and of course today we have fiscal stimulus. Everything is better right? They are comparing record profligacy in a pandemic depression now, to the strongest economy in decades during Y2K, in order to rationalize an epic asset bubble. The Dotcom bubble came amidst a booming economy and a Federal government surplus. It was the best economy since the 1950s and nothing anything like it has been seen since - the closest being the peak of the housing bubble. Somehow these fools actually believe that the inverse of the best ever economy is a superior environment for owning stocks. The weakest economy in 90 years, zero percent interest rates, and of course epic money printing.

All of which means no economic safety net. 

When the Dotcom bubble exploded, the Fed took rates down 5.5% to buffer the economy, which is why the recession of 2001 was relatively light. This time, the Fed will be able to cut rates 0%. Which means that the pending $1.9 trillion fiscal stimulus equal to 10% of GDP, will be wholly inadequate compared to what is going to be needed. Today's economists, market pundits, financial advisors, and CNBC media mannequins have all lost their minds. In doing so, they have put the entire system at risk. On the other side of this explosion, the sheeple will lose all faith in central banks, economists, financial advisors, and markets.

The average person may have an excuse to believe "the experts", however those make-believe experts who are abetting this epic disaster have no excuse. 

For those readers who are making their buy list of what to pick up on the cheap post-explosion, be careful not to catch a falling knife. Too many companies onboarded debt during the pandemic under the ubiquitous belief that a new cycle was beginning. They assumed they would delever their balance sheets post-pandemic. When that recovery is replaced by human history's largest margin call, those companies will be dead money. I am of course referring to cyclicals such as hotels, retailers, and airlines. Some will survive but the majority won't. The ones that survive will be extremely valuation challenged until capacity comes out of their respective markets. On the other side of this meltdown, there will be a glut of everything - retailers, shopping malls, aircraft, hotels, condos, Bitcoin rigs, and anything else that can be sold to raise cash.

Below is a chart of revenue passenger miles going back to year 2000. After 9/11, every major U.S. airline went bankrupt (Chapter 11) except American. However, after 2008, American was the only airline that went bankrupt. Why? Because unlike the other carriers they never delevered after 9/11. They were the sole survivor but they were a zombie company, that got wiped out by Lehman. Until American Airlines came out of bankruptcy in 2011, the other airline stocks were dead money, because there was too much capacity in the industry. When American re-structured and reduced capacity, airline ticket prices took off and the stocks went along for the ride.

Now they are all zombie companies once again. And this time the plunge in passenger miles makes 9/11 look like a picnic:

Barring imminent meltdown this may be my last post before the long weekend in the U.S., as Monday is a market holiday. 

Suffice to say, I am epic bearish right now.

All of these seemingly unrelated "events" taking place in markets are sending a blizzard of red flags.

Looking at risk exposure, we see that the Rydex ratio just hit a new all time high today:


Nasdaq down volume just hit a two day record in an up market. 

We've never seen that before.

Momo Tech continues to defy gravity. For now.

Stacking these indicators against the global Nasdaq shows a reach for risk we've never seen before. In the middle pane at the bottom is the market breadth indicator showing the manic reach for micro cap junk stocks.

The event that will end all of this insanity is called "sell". And no one caught up in this manic everything bubble sees it coming.

The one thing they all have in common, they all believe they can get bailed out from their own epic stupidity.

A delusion the Japanese have been recycling for thirty years.