Tuesday, August 31, 2021

The Promise Of The Joker And The Fool

For those amnesiacs who enjoy Tech bubbles, housing bubbles, and EM currency crises, all at the same time, this is their kind of market. For anyone who can fog a mirror and retains a semblance of memory, this is all just human history's biggest fool's errand...

My blog posts have become less frequent lately because there are only so many ways to describe mass idiocy, and I am running out of adjectives. As I tweeted recently, only to a species that is close cousin to the baboon does any of this make sense. In the words of Joe Walsh, Mother Nature has her little surprises. 

First off, the taper news that came via the Fed minutes two weeks ago led to an immediate selloff followed by a short-covering rally.  It was a bear trap. Conversely the follow-on confirmation this past Friday at virtual Jackson Hole that the Fed indeed plans to taper this Fall led to an immediate ramp higher. Time will tell if this last rally is human history's biggest bull trap. The Fed has three meetings remaining in 2021 - Sept. 21-22, Nov. 2-3, and Dec. 14-15. Most pundits are predicting either a September or November taper announcement which means ~4 weeks or 8 weeks. At the same time, Democrats and Republicans will be going head to head over Biden's latest fiscal stimulus proposal. The GOP is hellbent on NOT raising the debt ceiling which could lead to technical default sometime in the next 8 weeks. In August 2011 technical default on Treasury obligations shaved a cool -20% from the S&P 500. But before any of that happens we have the looming expiration of Federal pandemic unemployment assistance on Labor Day this weekend. Which means that regardless of Fed or Congress actions, a major reduction in fiscal stimulus is set to take place imminently, with the economy already slowing and institutions already rotating to recession plays.

Removing unemployment support for the middle class ahead of a looming recession amid Congressional gridlock in world history's largest asset bubble is a recipe for rioting followed by rich man's panic. The house will be moving like a rummage sale. One could not possibly imagine a scenario more conducive to a paradigm shift in "bailout ideology", which is long overdue. 

In addition to all of the U.S. risk which is being assiduously ignored by investors, there is the risk out of China which is slowing even faster than the U.S. Recently, the PBOC has been very actively increasing liquidity and cutting its bank reserve ratios which of course is weakening the Yuan. Meaning, the U.S. is about to tighten monetary policy at the same time as China is easing monetary policy, which is 2015 deja vu. Emerging Market disaster. But as we've already seen twice in the past six years, U.S. investors are firmly in the ignoring risk mode of operation.

Most people don't understand or believe in social mood. They don't acknowledge the extent to which herd thinking guides their own thoughts and actions. They are both beholden to competitive conformity and ignorant of it at the same time. They believe that THEY are fully in charge of their own actions, and it's everyone else who are the blind sheeple. Never before has this widely shared blind spot been more massive and lethal than now. It's clear from this dire set of adverse circumstances that the human mind is only capable of accepting a certain degree of bad news before it enters the mental fetal position which is where this society is hiding right now.

It's clear that the Fed left their foot on the gas too long and now this robo rally in risk assets is out of control. Likewise, they've bailed out corruption so many times that now the record lies are as out of control as this market. 

"FOX Business' Stuart Varney, during his latest "My Take" on "Varney & Co.," argued the markets keep climbing despite "pretty grim" news and argues everyone benefits from the surge in wealth creation"

STUART VARNEY: I've been covering the market since 1975. I've seen crashes and rallies, but I’ve never seen a stock price surge like the one we're in right now. It’s a stunner"

Technically it's true. In a Ponzi scheme, the morons who buy grim news with both hands are the sole reason for the record highs.  

Below are the "record highs" Reg Varney is referring to:

The U.S. Dow, Global Dow, small caps, and cyclicals have yet to confirm the S&P 500's latest all time high. 

Bond yields are at critical support:

Option skew is tracing out a familiar form. Twenty nine out of the top thirty highest skew readings are ALL in 2021 (since 1990), a staggering statistic.

2021 is officially the year in which the smart money secretly made massive bets on a market meltdown while at the same time telling the public this will all end happily ever after. 

As of yesterday's close, semiconductors were up 8 days in a row - the longest streak since the COVID rally began. This pattern is reminiscent of the February high which happened to be a bull trap:

"Peter Boockvar, chief investment officer at Bleakley Advisory group, said prices are rising at “a really out of control pace that is unsustainable and unhealthy.”

For now, it's fun and exciting. 

In summary, blatant market manipulation by central banks,  Wall Street momentum algos, and Reddit chat rooms has concealed the tremendous risks that lie under the surface of this market. Which has led investors to become massively complacent in the face of lethal risk. Just because market manipulation is now fully legal doesn't make it a great idea. 

A lesson this Idiocracy is going to learn the hardest way possible.