Saturday, June 12, 2021

Now For The Real Crash

Over the past decade, central banks have imbued investors with a terminal sense of invincibility. To the point that now even central banks have been warning gamblers they are taking on far too much risk. It's all due to what economists used to call "moral hazard". That was before they themselves bought into the ubiquitous belief that printed money is the secret to effortless wealth:

mor·al haz·ard
"Lack of incentive to guard against risk where one is protected from its consequences"

Just remember:

"No one warned me"

May 6th, 2021:

Those of us skeptics of Disney markets have been largely silenced. The perma-bid to this market has steam-rolled skeptics to the point that short interest is at record lows and hedging has been rendered impossible. Which is a recipe for a bidless market. Usually when selloffs take place it's the shorts and hedgers who are the FIRST ones to step in and buy. This market will have no buyers below the margin calls. 

This moral hazard described above has been fully evident since the pandemic crash one year ago. Investors didn't hesitate to buy the dip and add massive amounts of leverage. Here below we see via margin debt that post-Lehman de-leveraging lasted two years to recover the prior level. During the pandemic last year, it took a mere two months to recover the pre-pandemic level of debt. Investors had no fear during the selloff.

Recall that in late 2018 (Christmas) Trump demanded the Fed reverse their tightening policy to bailout the stock market. Which they did in early 2019. That time the market was down -20%. This time, we need not expect Biden to demand a market bailout. He's not one fraction as corrupt as Trump. Which means that stonks could be down well over 30% before the Fed panics. At which point the damage will be done. An epic global margin call across all risk asset classes at the same time. The Fed will have their hands full just getting the Treasury market back under control. Which was a multi-week ordeal last year. By the time T-bonds are back under control, the other risk markets will be a smoking crater.

The locus of risk will be Emerging Markets which have been feasting on debt since the pandemic began.

And of course the corporate debt market is extremely vulnerable to crash due to the massive increase in corporate debt during the past year. Worse yet, the GOP controlled Congress revoked the Fed's ability to buy corporate bond ETFs in the future.

We need not expect a bounce this time around:

Investors have been lulled into complacency by a somnolent Disney market under the full control of HFT momentum algos. Volume is now at a year's low. Lower than it was between Christmas and New Year's:

New S&P highs are diverging massively from this new all time high in the index. 

Deja vu of last year: 

The Fed's own Financial Stress Index is at the lowest level since the market peaked in 2007. What one might call a contrarian indicator of "risk".

Retail bears are at a three year low for the second week in a row:

The only "warning" sign is the fact that option skew reached a new all time high this past week. An indication that "someone" expects a Black Swan event to occur:

In summary, this is officially the biggest circle jerk in human history. Those gamblers who spent the past decade cultivating a firm conviction in bailouts for the rich will be shocked to learn that another one is not forthcoming. There will be no appetite for bailouts when this MASSIVE FRAUD explodes. 

"Without warning"

"The best part of a pandemic is when junk stonk issuance explodes"