Monday, March 22, 2021

The Dumb Money Bubble Is A Crowded Trade

In Japan and China, gamblers have already learned the hard way about trusting central bank sponsored delusion. So far the U.S. has dodged that fate by creating ever larger and more lethal bubbles. Those who keep betting on these dumb money bubbles will wake up to the inevitable reality that there is no one on the other side of the trade...

In any functioning society this level of deception would be illegal. However, Congress has decided that central banks are running pump and dump schemes so why shouldn't everyone else? After all, Wall Street's various frauds have been bankrolled by serial monetary bailouts since 2008. It's high time we democratize financial fraud in this country. 

When the media pundits, the economists, central banks, and financial managers are all drinking the exact same dumbfuck Kool-Aid, then us skeptics of fraud are easily derided as "perma-bears". Those who don't believe in fantasy and denial. The unbreakable faith true believers have in common is the belief that central banks are omnipotent. Because everyone knows that printed money is the secret to effortless wealth.

It's the same type of Disney thinking that now abides the skyrocketing addiction epidemic. When times get hard simply dial up the drugs and alcohol to level '11' and hope it all goes away. It's an infantile strategy for an infantile society totally incapable of accepting reality. 

This is what the average person is told to believe:

Below we see the total amount of stimulus that will be deployed in 2021: 27% of GDP:

This is a fully synthetic recovery with no plan for how to recover from the fake recovery. 

The Fed's hubristic miscalculation is the fact that as we see above, this year the amount of fiscal stimulus dwarfs the amount of planned monetary expansion in 2021. Whereas the Fed fully monetized the entire deficit in 2020, they are of the belief that in 2021 the bond market will absorb record issuance. It's an asinine delusion that is already failing. In 2019, the $1 trillion deficit broke the overnight repo market requiring a Fed bailout. This year, the deficit will be four times that amount. The Powell Fed told the White House to go big on fiscal stimulus - and they did - but now the Fed is in a reflationary bind. Reflation expectations are skyrocketing due to the combined 27% stimulus, combined with the vaccine and re-opening. 

The Fed can't save the bond market from the Minsky Moment they themselves created. So what they have to do now is wait until markets explode and then come in with a bailout. Unfortunately, margin clerks work far faster than the FOMC, and algos are faster than margin clerks. There will be serious carnage when this biggest of all time dumb money bubble explodes. 

For those true believers in "free money", here we see that despite massive monetary expansion and record margin debt, the ultra-crowded Technology trade already imploded.

The chart above should be a warning to those who are now crowded into the ultra popular 2021 cyclicals trade. No bubble lasts forever. 

So far, the Dow peaked last week and the Nasdaq peaked in mid-February which is similar to Y2K - one month apart. In addition, despite the largest one year Dow rally in history (to an all time high), Dow new highs are the lowest since Y2K:

As far as the imminent recovery at 27% stimulus, here we see that refinery oil demand (lower pane) is at a decade low, while oil is record overbought (top pane).

Between the insane stimulus, the narrow breadth, and the lack of economic activity, this is by far the most specious recovery in U.S. history. 

And it's now running on glue fumes. 

In summary, epic meltdown from all time lies, is inevitable.

And printed money is not the secret to effortless wealth. But it does fake a lot of people over and over again - 31 years, but who's counting?