Wednesday, March 24, 2021

The Last Bailout

Over the past year central banks went ALL IN to protect gamblers from the downsides of their own greed. Which has created a lethal case of "moral hazard":

"Lack of incentive to guard against risk where one is protected from its consequences"

One year later from the COVID lows, and somehow Wall Street, media pundits, economists, and central banksters have convinced the sheeple that the longest bull market in history (11 years) was corrected by the shortest bear market in history (16 days). You have to be brain dead to believe this shit, which is why it goes unquestioned.

The reason they believe this bullshit is because newbies have never heard of a broadening top. Not only is this a picture perfect broadening top - complete with final overthrow of upper trend line - but per the specification, it was powered by retail participation at the end. It's out of control. And it will crash from an all time high, making it the most devastating "unforeseen" crash in history.

Aside from never ending subsistence stimmy checks, policy-makers are out of ammo. 

In other words, the economy will go from the much feared inflation to extreme deflation in the blink of an eye. Which means that the biggest risk markets now face is bailout risk. Because there will not be enough bailout money to go around.

The locus of risk will be global sovereigns that do not have reserve currencies i.e. emerging markets. The other locus of risk will be major corporations that feasted on debt during the past year in order to fake recovery. One year ago, the Fed was granted special authority to buy corporate bonds in the secondary market. That power was rescinded by Congress in December. Without that special Fed power, the corporate bond market will be bidless.

Here we see via year over year $ corporate debt change the difference between this fake recovery and all of the others. Whereas every other recovery featured ZERO net debt growth during the recession phase, this "recovery" featured the largest spike in history. Minor difference. 

And looking at the grey shaded recession zones, think about this related specious factoid: due to the 27% of combined fiscal and monetary stimulus, we are told that this was also the shortest recession in history, amid five years of job losses.

We can fully expect the next synthetic "recovery" to feature zero employment.

Getting back to the bailouts, one must understand the level of rage that will emanate from this impending meltdown. There will be no appetite to bail out the rampant assholes who led the public to believe that this was a risk free market. 

Which means that aside from massive short covering rallies, debt laden sectors of the market, and financial stocks exposed to debt laden sectors of the market, will be in deep trouble aka. cyclicals which have been leading the market in 2021 and are the number one consensus trade on Wall Street. 

Think of this past year as a massive one year TARP bailout rally that will inevitably fail now that short interest is at record lows.

The Tech sector lost -80% after Y2K and was dead money for over a decade. Which leaves high quality defensive stocks - utilities, consumer staples which are currently overvalued but can be bought after they implode.

As far as gold goes, I will scale into it over time, but I am in no rush. We can see from the chart that gold is one of the few markets that knows what is coming.

In summary, all of todays economists, financial advisors, media pundits, and central banksters are wrong again, when it counts the most. This time they will lose all credibility. And then the underwear will be mighty stained.

Their fatal miscalculation was assuming that per the Minsky Financial Instability Hypothesis, the Federal Reserve is in full control over interest rate policy - they alone can decide when the cycle ends. However, what we are seeing in real-time is the market is taking that control away from the Fed. 

"Over a protracted period of good times, capitalist economies tend to move from a financial structure dominated by hedge finance units to a structure in which there is large weight to units engaged in speculative and Ponzi finance. Furthermore, if an economy with a sizeable body of speculative financial units is in an inflationary state, and the authorities attempt to exorcise inflation by monetary constraint, then speculative units will become Ponzi units and the net worth of previously Ponzi units will quickly evaporate. Consequently, units with cash flow shortfalls will be forced to try to make position by selling out position. This is likely to lead to a collapse of asset values"

Getting back to the casino:

The Nasdaq (100) has been working on a two month head and shoulders top, with a very weak right shoulder. Only a handful of the largest cap stocks are still holding it up. 

Since the FOMC meeting last week, cyclicals have been joining the downside party. They have not corrected back to the 200 day moving average since the election.

Today's newbies have never seen a bear market, so they keep buying the dip all the way lower. Now, they are throwing their latest stimmy check away at the casino. There is no sign of capitulation, which is why the market keeps dripping lower. It's heading for the panic moment. Even perma-bull Cramer understands that the noose keeps getting tighter:

"CNBC’s Jim Cramer on Tuesday said the stock market won’t reach a bottom until sentiment finds a low point, akin to how stocks rebounded from the historic coronavirus-fueled plunge last year."

A couple things Cramer gets wrong: First, there is no leadership in this market anymore. Second, this decline will be worse than last year. 

The COVID rally was merely the blow-off top in a decade+ Tech-led rally going back to 2009. Cleverly marketed by Wall Street as the shortest bear market in history.

Looking at the weekly chart of the Nasdaq we can clearly see there was no bear market, there was merely a correction prior to the one year 1999 style blow-off top.