Wednesday, August 25, 2021

The Point Of No Return

All of the growing divergences emanating from the 2008 collapse were massively amplified by the pandemic and its continuous monetary bailout for the ultra wealthy. Fast forward and we can now boast of having a fully virtualized economy with the virtual prosperity to match. Why that's good, is not for me to say. Sadly, due to investors' sole fixation on return ON investment, their unrealized gains are reaching the point of no return OF investment...

Ironically, the confab planned for Jackson Hole Wyoming has been virtualized due to the delta variant. The same Fed that predicted this variant would have no effect on the economy just canceled their own in-person convention, but of course they kept their economic outlook the same. Why? Because they only trust data that's at least three months old. 

Fittingly, we also learned that Jackson Hole Wyoming is the wealthiest enclave in the United States. The only place more ironic to discuss inequality being Davos Switzerland, site of the annual World Economic Forum for the rich and famous. With a massive fiscal cliff in unemployment benefits looming just over a week away, these JHole virtual attendees will discuss how they can solve the problem they intentionally created aka. the fake wealth effect. 

"The wealth effect is a behavioral economic theory suggesting that people spend more as the value of their assets rise. The idea is that consumers feel more financially secure and confident about their wealth when their homes or investment portfolios increase in value. They are made to feel richer, even if their income and fixed costs are the same as before"

Any blind man can see below that monetary policy is no longer working. It's now having a negative effect on the economy as over-leveraged consumers realize their liabilities are going UP in lockstep with the super asset bubble. Those who have any assets at all.  

In other words, the virtualization of prosperity is not as good as it sounds. 

Heading into this meeting, risk asset markets are celebrating a massive short covering inequality rally attended by chasmic divergences not just in U.S. markets but in global markets as well.

After all, you never know what the Wizards of Oz will say about their money printing plans. 

This weekly chart of Nasdaq highs-lows indicates that market participation is now going in the OPPOSITE direction of the index. In the lower pane I calculated the number of new weekly lows attending an all time high in the index. This is by far the largest number in the life of the dataset (1986).

Also as we see, this week gamblers are pushing the index even higher into the point of no return of investment:

From a cyclical standpoint, the divergences are equally dire. Here we see last week's NYSE new highs going in the opposite direction from the S&P 500:

The Dow has yet to confirm this week's S&P high, and Transports have yet to confirm last week's Dow high.

Which is a major violation of Dow Theory which posits that Industrials and Transports must confirm the rally or it will fail.

On the weekly view, here we see banks are three wave corrective ahead of the Jackson Hole symposium due to massive short covering ahead of the meeting:

Zooming out to the global perspective, we see that Nasdaq Highs-Lows are now tracking Chinese stocks 1:1.

We also see that Chinese stocks (black line) are tracing out a pattern very similar to the pattern in 2015/2016 ahead of the global crash. This time around however, global central banks are already ALL IN monetary dopium so they will be shooting blanks in this global crash.

The impending infrastructure bill which is now stuck in Congress due to the debt limit is putting some bid back in cyclicals this week, however oil is trading like a brick. 

Oil's crash in 2015/2016 seemed like a big deal at the time until last year's meltdown. Here we see inflation expectations are trading 1:1 with crude oil. Which is why inflation pundits are ALWAYS wrong.

In summary, in two weeks pandemic unemployment benefits are ending for 7.5 million people, with payrolls stuck at 2017 levels. 

The pandemic is officially over and everything is back to normal. 

With the virtual economy at their back, gamblers are ALL IN virtual prosperity.

The term tempting fate comes to mind. 

Unfortunately, amid all of these massive divergences, bulls are ignoring the fact that recession stocks are now leading this rally. 

Why that's good, is not for me to say.