Tuesday, July 20, 2021

Double Or Dog Food

People respond to incentives and the incentive arising from cheap money is to pull forward consumption from the future in order to live large today. From a speculator standpoint, the incentive is to borrow the maximum amount of cheap money in order to maximize risk. So it is that we find ourselves in a FOMO asset bubble which is driving FOMO consumption demand. The only thing that will be left when it all explodes will be the record liabilities. Gamblers have been doubling down on every dip since this rally began. So it was inevitable they would be one dip over the line...

The market fragility issues that almost imploded markets back in February have long since been forgotten. In the meantime, risk appetite has increased, margin debt has reached new records, and liquidity has collapsed. Perfect time for a Robinhood IPO to put the exclamation mark on this epic era of greed coming at the end of the longest cycle in U.S. history. The gamification of fraud packaged and sold as the "democratization of markets". You can't make this shit up.

Recall that the Coinbase IPO top ticked the crypto/Bitcoin rally back in late April. I see the same thing happening now with this imminent Robinhood IPO - a blowoff top in risk sentiment:

"More than perhaps any other company, Robinhood has benefited immensely from the animal spirits unleashed by a coronavirus pandemic-driven 18 months of meme trading and stimulus-fueled speculation. And it now seems poised to taste the other edge of the blade as a falling short-term market damps enthusiasm for what should be a long-term bet"

Ironically of course, Coinbase was also part of this stimulus-fueled speculation. From its first day peak, that IPO is now down -35%. Meanwhile, Bitcoin just broke the key support level which has been holding for over a month. The BTFD has failed, which means massive global margin call is imminent:

The IPO count so far this year is literally off the charts. This is already the busiest summer for IPOs on record:

"The great IPO boom of 2021 has already smashed the record for the busiest summer ever, and there are plenty of big deals still to come"

One thing we know for certain is that Wall Street will keep dumping new supply into this market until the casino explodes. They will not leave $1 of dumb money on the table. So it's perfect timing for Robinhood which will be one of the biggest IPOs of recent years. 

SPACs, IPOs, Bitcoins, Biotechs, Electric Vehicles, Cloud stonks, they're all the same trade now - RISK ON.

For months, the bond market has been warning that speculation is way out of control, meaning t-bonds are now a much better barometer of market risk than the stonk market. Why? Because deja vu of last year, today's gamblers would rather remain in the casino gambling, and learn that lesson as late as possible. Which is why each crash has been more abrupt than the last. Gamblers have become more and more over-confident with time. Absolutely convinced that central banks can bail them out of whatever massively over-leveraged bets they make in every asset class. This week we learned that margin debt increased again month over month to a new record high. This means that the second best first half in 20 years ended with maximum leverage.

This is the type of headline last seen in 1929:

"Rising stocks and rock-bottom interest rates have delivered a big perk to rich Americans: cheap loans that they can use to fund their lifestyles while minimizing their tax bills"

Banks say their wealthy clients are borrowing more than ever before, often using loans backed by their portfolios of stocks and bonds"

This tax avoidance scheme has gone into overdrive since Biden got elected, because the wealthy now fear a potentially increased capital gains tax more than they fear the market. In other words, they are willing to risk a 60% drawdown to save a few percent on taxes. Buy, borrow, die indeed.

Aiding and abetting this speculative insanity is the fact that today's economists, pundits, and gamblers are now convinced that the shortest recession in U.S. history corrected the longest expansion in U.S. history. You have to be brain dead to believe that, therefore it goes unquestioned.

It's official, we now live in a 100% Idiocracy. When debt is now "GDP" and printed money is monetizing the debt, then the concept of recession no longer has any meaning. In 2021, the U.S. Federal debt will grow 6x faster than the economy as a % of GDP. Had every other generation been this profligate, there would be have been no recessions in history, and the dollar would be worthless. This chart which I showed on Twitter and have since updated (corrected a few errors) gives an idea of the duration of this expansion/recession combination relative to past decades. The 1990-2000 expansion was formerly the longest expansion in history and yet it appears fractional compared to this current illusion:

Gamblers will inevitably realize too late that they went ALL IN a pandemic melt-up bubble arriving at the end of the longest expansion and bull market in history. Because really who wouldn't believe that a pandemic and attendant mass layoffs were catalyst for an entirely new economic cycle?

However, I made the case in my last post that the nations that have the most debt: Japan, Europe, U.S., Canada, Australia etc. now have the least likely chance of being in reflation. They are slaves to the debt market and debt is deflationary. The balance of power has skewed towards capital for too long and now the economy is buried by debt. Which is why monetary policy is  now solely for the rich, and the fiscal multiplier has collapsed. Which portends a deflationary ice age on the other side of global margin call. Picture a scenario in which the price of everything collapses at the same time. Gold jewelry is sold to pay the utility bills. Used car prices are a fraction of new car prices, meaning no one buys a new car anymore. Housing prices exploded globally. At that point, assets turn into liabilities. Those who have been binging on excess and borrowing against their assets in human history's largest asset bubble, will soon realize that their erstwhile lifestyle is now a ball and chain. Asset values collapse, but the attendant liabilities will remain at their peak bubble high.

Which gets us to where things stand right now in the casino. As I write on Tuesday, bulls are staging a miraculous comeback from yesterday's gap 'n crap. As I wrote on Twitter, the algos are doing everything possible to defend the 50 day moving average. However, we are seeing signs of hedge fund liquidation as the massively crowded reflation trade gets unwound and at the same time the ultra-shorted Ark ETF pair trade gets bought. Meaning hedge funds are taking down their total exposure.

One need not expect this fake Tech bid to turn into a new bull market:

Cyclicals are in no man's land:

Energy stocks are weakest and indicating a three wave social mood correction that has been conflated as a new bull market:

In summary, it was inevitable that today's bailout addicts would be one dip over the line. The incentive is to do stupid things with money, and they always respond to incentives.