Friday, March 19, 2021

Financial Weapon Of Millennial Destruction (WMD)

The biggest risk to gamified markets, is the gamification of markets...

For the first decade+ post Global Financial Crisis, Millennials stayed on the stock market sidelines, more prone to joining the Occupy Wall Street movement than joining the investment club. It took a global pandemic depression at the end of the economic cycle to finally convince them to go ALL IN. Now those who have never experienced a single bear market inform those of us who have that WE don't know what we're talking about. Unfortunately for the all-knowing ignorati, the current level of record margin leverage is a financial weapon of Millennial destruction. And there will be substantial collateral damage.

I've heard many perma-bulls rationalize high margin balances by saying that margin levels merely follow the market - up and down. However, any mental midget can see from the chart above, that is not true. One year ago at the start of the market rout, margin balances were at a four year low going back to 2016. I suggest that the low level of margin is one of the reasons why the market didn't outright implode. We will now find out what last year would have felt like, with record margin balances. 

Stepping back for a longer-term perspective, it took the gamification of markets to finally get the Millennials off the sideline. Up until trading became a video game it was too boring to warrant their interest. We have learned recently that their favourite trading app, Robinhood, is merely a Candy Crush front-end for the Citadel HFT dark pool. Which means that under the cleverly marketed auspice of democratizing markets, newbie investors are being fed to the sharks. Since the Gamestop pump and dump debacle, newbie investors have accelerated their adoption of online investing. Now there is an SEC-approved ETF called "BUZZ" that bases its investing decisions around Reddit boiler rooms. Weeks after Gamestop wiped out untold numbers of newbie investors, this week Cramer was out recommending Gamestop as a potential stimmy investment. Cramer knows full well that hedge funds made the most money from that debacle - on the short side. Bill Gross said he made $10 million shorting idiots. Chump change by his standards. 


When Congress held their hearings on the entire Gamestop debacle, their primary concern was that brokerages had limited access to retail participation in the pump and dump scheme. It was a fucking circus. Everyone deserves equal right to lose all of their money to market fraud. It's the American tradition. Next thing you know these Marxists will want to regulate Wall Street.  

I normally wouldn't show such a pissant stock as Gamestop, but here we see it is a typical pump and dump scheme. It round tripped from $40 to $480 and back again in a matter of a few weeks. Most of the dumb money got trapped at the top. Then it had a second go around to a lower high that was three waves corrective.

A good indicator for overall social mood at this latent stage. For this week of peak stimulus, Gamestop is down -20%.

I've heard another rationalization recently that if Tech stocks implode deja vu of Y2K that cyclicals are now leading the market, so it won't matter. The strong breadth is proof that there is broad leadership. That specious argument gives me a good segue to discuss cyclicals during this key FOMC/Biden stimulus week. 

First off, it's true that in Y2K cyclicals were lagging badly when the bubble imploded. This time around cyclicals have been rallying since November. So now cyclicals are concurrently record overbought. Why that is good is not for me to say. We have never seen the Nasdaq and Dow multi-decade overbought at all time highs at the same time. This week, Morgan Stanley downgraded small cap stocks on valuation. In addition, the Fed just monkey hammered bank stocks with its decision to rescind the COVID-era emergency "SLR" (Supplemental Leverage Ratio) rule change that exempted Treasuries from being considered assets that need to be collateralized with capital. 

The irony can't be overlooked, as bank stocks finally eclipsed their 2007 level this week:

I will go out on a limb and say that this week during peak stimulus, the November post-election rally in cyclicals has finally peaked:

I would be remiss if I didn't mention that oil got monkey hammered on the week.

In summary, every retail bagholder knows that the time to buy the most overbought sector is 14 years after the prior market high. Millennials know it better than anyone. Because they are the only ones who have no idea how much fun it can be buying the top. 

It's their turn.