The pandemic was the most deflationary event in modern history - an unprecedented lockdown of the global economy. An event that spawned the final epic stage of the post-2008 global credit bubble as record liquidity flowed out into every asset class, secured by a larger tranche of debt. The exact same central bank bailout cycle we have witnessed multiple times over the past decade. Each time amid the abiding belief that we have successfully borrowed our way out of a debt crisis.
China Evergrande is a mirror image of the global economy. A property developer that has piled on ever-more debt with each successive round of monetary bailout until it reached its Madoff Moment wherein asset values have now fallen below liabilities leading to negative equity and an incipient margin call.
The majority of pundits were claiming last week that the Chinese government would never allow Evergrande to default on its debts. However, this week the company began defaulting on its debts. Now, these same morons are claiming that this Evergrande default is NOT another Lehman event. They claim that this is an isolated event that will have no systemic impacts. They ignore the fact that Evergrande is merely a symptom of a much larger problem.
The problem is moral hazard and the fact that central banks have orchestrated non-stop monetary bailouts since 2008. Now, global speculators no longer fear risk or leverage. They embrace both. Ironically, it's precisely because markets did not sell off this week on news of the default that Beijing has been emboldened to pull the plug on this massive Ponzi scheme. Had markets feared default and sold off into the event, then the PBOC would have orchestrated yet another bailout. Moral hazard complacency has now reached back into the central banks that created it in the first place emboldening them to pull the plug on their own Ponzi scheme.
Likewise, the Fed this week warned that QE "tapering" is coming at their next meeting which is a mere five weeks away. Deja vu of September 2008, they were more concerned about "inflation" than the dominoes already falling in China. There was not one mention of Evergrande or contagion.
We must remember that the same "relief" rally took place in September 2008. October however was not quite as kind.
We also learned this week that U.S. margin debt hit a new all time high in August:
Sadly, the price-weighted Dow is now a better indicator of overall market health than the market cap weighted S&P 500. The inevitable result of a central bank manipulated liquidity rally concentrating all gains into a handful of massively overowned deflationary Tech stocks. The prime beneficiaries of the virtual economy.
Here we see this is by far the Dow's longest stretch below the 50 dma in 2021. If this wave count is correct then the next stop is the 200 dma (red line) which is -10% from the top. If that line is breached then the wheels come off the bus.
This chart shows that the 90 day average of down volume over total volume is the highest since the 2020 crash, and before that the 2018 crash. We have never seen this much down volume on such a nominal pullback in the market - an indication that institutions have been selling into strength. To the usual end-of-cycle bagholders.
What we have to realize is that there is a class of "investors" who have been told that they MUST own stocks no matter how much risk there is in the market. They have been brainwashed to believe that buy and baghold is the only way to increase wealth.
They will soon be disabused of this misdeception.
Wall Street will continue to dump junk until the casino breaks, which by the looks of market breadth, will be anytime soon.
Gold is continuing to warn that "inflation" is a hoax propagated by those who traffic in conspiracy theories and ad-sponsored disinformation.
Likewise, Bitcoins are heading for a third wave down at all degrees of trend. The clearest indication of imploding social mood:
In summary, this society specializes in turning a blind eye to deflation and mass poverty. For them, exploitation is merely a business model.
It is their FATAL blindspot and indicative of Third World values.
Momentum speculators took this Evergrande default as an opportunity to bid the riskiest stocks further into the stratosphere. The pattern is deja vu of 2018, however, this time gamblers have made an ALL IN bet on central bank welfare for the rich.
I predict that this time around it will be all central banksters can do to keep the Treasury bond market from exploding. By the time they get that under control, everything else will be a smoking crater.
As always, the burden of truth falls on those of us not suffering from dementia.
