Wednesday, February 10, 2021

Race Into Risk

There exist no superlatives that are sufficient to describe the level of risk at this lethal juncture. Newbie gamblers are convinced it's their abject lack of knowledge that gives them an edge over staid investors. They will be surprised to learn that's not how this works...

Recently I was updating my checklist of the risks that await unsuspecting gamblers on the other side of this manic melt-up, none of which are factored into current economic projections:

Impending currency crisis
Impending credit crisis
Mass unemployment
Monetary depletion
Over-capacity/everything glut
Loss of confidence in central banks
COVID mutation
Financial re-regulation
Stimulus dependency

Today's gamblers have been assiduously brainwashed into believing that this fake recovery is real. When it's only a stimulus driven illusion aided and abetted by their own misallocation of capital.

Of all of the February highs, this pandemic driven melt-up is by far the least sound from an economic perspective.

Here we see the ten day moving average at each of the key February turning points:

Recall that the Dotcom bubble experienced its final melt-up into early March, 2000. Then as now when the New Year struck, markets went late stage parabolic. Aside from epic greed, clearly central bank over-stimulus and Biden's election are key factors in this global melt-up. Another factor I mentioned in my last post is Chinese New Year. It appears that Asian gamblers have been front-running the New Year knowing that there would be five trading days when they would be offline, starting this Thursday in Asia (tonight in the U.S.) through next Wednesday.

Year to date, Chinese internet stocks are the top performing country-specific ETF traded on U.S. exchanges. Picture what happens when there is no one around to keep these stocks going vertical. Last year it didn't go so well:

There are other non-country specific sectors of course that are even hotter, specifically Bitcoins and pot stocks, now up 200% year to date on epic volume:

But how to explain this rampant pump and dump mentality that is now driving markets? Suffice to say, if Bernie Madoff was still in business today he would be a renowned financial celebrity almost as dangerous as Suze Orman. 

Dave Portnoy is one of the most widely followed celebrity pump and dump leaders of this era. His day job is running Barstool Bets which is an online sports betting company that was acquired by Penn National Gambling early last year. Using his newly acquired wealth, he re-invented himself as an expert investor during the pandemic when all of the sporting events were cancelled. Portnoy evinces a simplistic sports betting view of markets that has now taken over markets - you bet on the Buccaneers, you win, bet on the Chiefs, you lose. Unfortunately, in markets it doesn't work that way. Those who follow Portnoy into his stock bets are bidding up his returns at their own expense. His portfolio is the beneficiary of his large following, each of whom will experience a diminished level of returns, most of which will be negative. This simplistic idea of bidding up one's own returns is now endemic to markets - evident in everything from Bitcoins to pot stocks. The Reddit gang has decided they've discovered the secret to effortless wealth. However, for their gambit to continue working they need a constant stream of new fools to follow. 

Recall it was the Gamestop pump and dump that triggered record downloads of the Robinhood trading app two weeks ago. We now learn that half of the Gamestop buyers were first time traders.

“After studying some of the insights, we learned that half of the consumers that we saw deposit money into Robinhood and purchase GameStop stock – 50% of them had been new, first-time traders. And on top of that, 50% of them made their largest ever DIY day trade ever over the last four weeks"

This story tells the tale of how it ended for these newbies:

"GameStop stock’s climb in recent days captured the international spotlight as a “David vs. Goliath” tale for the digital age: a madcap web of everyday Joes winning billions of dollars from short-selling hedge funds that had bet on the stock’s collapse."

But with the stock having plunged about 80 percent since last week’s peak, the whiplash also highlights how so many investors, lured by the promise of a gold rush, have been quickly dismantled, with help from stock-trading discussion boards and apps that make it easier than ever to invest — and lose — a fortune."

Here we see that - no surprise - dollar volume in Gamestop peaked the day the stock hit $480:

Elon Musk who has recently been pumping Gamestop, Bitcoin, and of course his own ludicrously overvalued stock, has now been pumping a penny crypto called Dogecoin. A crypto that was started as a joke

Which is why on some message boards they are now calling him Enron Musk.

"The billionaire’s endorsement last week of Doge as “the people’s crypto” — cheered by KISS rocker Gene Simmons and rapper Snoop Dogg — sent trigger-happy Reddit traders stampeding into the canine-themed coin. As a result, its price is up around 1,000% year-to-date, eclipsing Bitcoin’s rise."

The deeper fear is that if Dogecoin ends up just another YOLO (You Only Live Once) pump-and-dump in the crypto timeline, it will reflect badly on all tokens — even Bitcoin"

What if it reflects on massively over-valued and over-owned car companies? That will be the REAL pain trade for Enron Musk followers - when sales collapse and the company is no longer cash flow positive. 

Of course, all of this frantic reach for risk means that an entire generation is on the cusp of being financially obliterated. Today's regulators are sitting on their hands with the view that organized pump and dumps can't be regulated.

When this all explodes with extreme dislocation they will all change their minds about that at the exact same time, but it will be far too late. The dislocations we've seen to date DURING this melt-up phase are merely a warning as to what is about to come. 


As a measure of reach for risk, we see here that Microcap stocks - the riskiest stocks in the market took a mere 7 months to eclipse their early 2020 high. And subsequently they have gone parabolic. Back in the 2008 Lehman timeframe these stocks took six years to eclipse their 2007 high.

This epic Ponzi scheme is on borrowed time and money.