Saturday, October 30, 2021

End Of The Ponzi Cycle

Over on Twitter I'm getting overrun by morally challenged trolls who have fallen prey to a society of Bernie Madoff acolytes running amok. All it takes is time for people to believe ANYTHING. Except the truth, that belief never comes willingly. Now featuring a generation adamant that printed money is the secret to effortless wealth. The biblical fates are conspiring to make epic fools out of epic fools, betrayed by their consensus belief in Ponzi markets...

Depending upon how you look at it, this gambit has been going on for a year and a half, a short time, or thirteen years since 2008. From the former view, it's clear that today's attention deficit trolls have never experienced the downside of a popped asset bubble and bear market. For if they had, they would not be tempting fate by telling me that this can go on forever. From the correct latter view, this has lasted far longer than either the Dotcom bubble and the Housing bubble lasted and therefore the consequences will be far more lethal. These days, elapsed time is widely viewed as a buffer against risk. Like a thief that gets away with his crimes over and over again, the view is that this super asset bubble is now a risk free venture. Unfortunately, that happens to be the opposite of the truth. Per the Minsky Financial Instability Hypothesis, debt profligacy grows with time. People become desensitized to risk and start adding greater leverage as time passes. Nevertheless, people always want to know the exact date of "inevitable", because they want to stay in the casino as long as possible. After all, ours is not a "noble and kingly wisdom", hence one must not grow insolent upon their present enjoyments lest they miss out on the latest pump and dump scheme. 

In the Minsky model, the inflationary stage is the most lethal stage. First off because the inflationary mindset convinces people that debts will be reduced over time by the effects of inflation. Secondly, because this stage leads to a melt-up in asset values as all manner of assets are panic bought and hoarded.

"Over a protracted period of good times, capitalist economies tend to move from a financial structure dominated by hedge finance units to a structure in which there is large weight to units engaged in speculative and Ponzi finance. Furthermore, if an economy with a sizeable body of speculative financial units is in an inflationary state, and the authorities attempt to exorcise inflation by monetary constraint, then speculative units will become Ponzi units and the net worth of previously Ponzi units will quickly evaporate"

In this cycle, the temptation to add risk is far worse than any other time in modern history because central banks have succeeded in convincing people that the business cycle has been eliminated. Therefore debts can continue to grow forever. There will never be a deleveraging again. As of this writing these risks are  now generational in magnitude. Instead of being worried about their badly timed option bets, today's trolls should understand that the lethal consequences of being WRONG are now totally unaffordable to those who are fully wedded to this epic disaster. 

As I showed on Twitter, this past year's pattern of margin debt acceleration is the same as it was at the END of the two prior cycles. After the March 2020 lockdown it took a mere 8 months for margin debt to explode to a new all time high. Whereas at the beginning of the past two cycles, it took FOUR YEARS.

History will say that the Millennials were lured into the end of the cycle by gamified trading apps, Wall Street con men, crypto Ponzi schemes, a global pandemic, and social media organized pump and dump schemes.

In other words, a morally collapsed society of Bernie Madoff acolytes running amok...

What this era represents is a time when most people don't give a a damn about anyone except themselves. Which fully explains how we are now flying blind into the economic pavement while believing this is a period of long term sustained "stagflation". One that magically sidesteps the Minsky Moment. Because if not, asset collapse would instantly flip this record debt bubble to full scale deflation. Overnight. 

On Friday I showed that the Rydex (bull/bear) asset ratio reached a new extreme all time high this past week. For two reasons, first because of a greater allocation to risk. Secondly because bull assets have been outperforming bear assets. Regardless of the reason, we can see that there has been no "rebalancing" taking place. And therein lies the problem, today's gamblers have been systematically conditioned NOT to rebalance their portfolios. The inflation hypothesis has led them to believe that stocks will massively outperform bonds and especially cash. Cash is trash is the new mantra. The global scramble for liquidity will ensure that central banks lose control over inflated asset markets. There is not enough to go around now. 

In summary, the Millennials who never experienced the DotCom bubble nor the Housing bubble, will now get to experience both at the same time. Throw in a 2x subprime magnitude crypto bubble, a trillion dollar student loan bubble, asinine levels of Federal debt, and now we've put an entire generation's future at risk.

Meanwhile, all of the risks of the past ten years have coalesced into the fourth quarter. For those who no longer believe in reality, it's their last big buying opportunity. 

And who could argue with that logic?

Wednesday, October 27, 2021

FOMC: Fear Of Missing Crash

Ahead of next week's seminal meeting, the FOMC has been signaling they are more than ready to start tapering their asset levitation program aka. welfare for the rich. Ironically, today Congress shot down the concept of a wealth tax on the Fed's welfare recipients, because we all know it would be "unAmerican" to punish monetary transfer payments with taxation. Hard work gets taxed but Elon Musk touting shit coins on Twitter for a 12x gain in wealth that's fair gain under the current "system".

Meanwhile, today's pundits are starting to u-turn away from the fake reflation theme to the Fed-imposed deflation theme. In the process they will leave the majority of their acolytes behind holding the bag of inflated assets. 

Hoarding explosion...

Since the pandemic began, Elon Musk's wealth has increased 1200% all due to monetary asset levitation. There is no way to account for that magnitude of gain based upon the "fundamentals" of Tesla. Nevertheless, ALL of that inconvenient fact has been ignored during this most recent debate over a billionaire wealth tax:

"The pandemic has worsened U.S. income disparities, and the wealthiest layer of society is emerging richer than ever before. Between January 2020 and April 2021, America’s billionaires got about $1.2 trillion richer. In dollar terms, Musk was the biggest gainer of them all. Two years ago, Forbes pinned his net worth at $19.9 billion—less than one-tenth of what he’s worth today"

As I have said many times, the politics of today are totally fucking delusional. Those who play the parlor game of assuming these two parties are quibbling over relevant facts, deserve what's coming. Case in point, Joe Manchin sells himself as a centrist Democrat. However, he is clueless as to how weak this economy is right now. Therefore, he is essentially blocking fiscal stimulus that would have cushioned the blow of this impending super recession. He will change his mind quite soon I think, as will his Republican colleagues, when they take down this impending wealth haircut, which will make a 2% wealth tax seem like a great idea by comparison. 

Ironically, what we are witnessing AHEAD of the first tightening action by the Fed since the pandemic began, is a wholesale melt-up of the economic reflation trade. Deja vu of 2008, the Fed and its inflationist acolytes are clueless as to the weakness of the economy. Zerohedge keeps making up this Wall Street endorsed story that the policy error is on the front end of the curve - keeping short-term interest rates too low for too long. However, the policy error is ENTIRELY on the back end of the curve - the Fed should have tapered their asset buying a LONG time ago. That is the difference between Bernanke/Yellen vs. Powell - Bernanke always put a set dollar limit on his QE programs. Whereas Powell has been far too profligate with the asset levitation programs that he and his Fed colleagues have been front-running. 

History will say THAT was the COLOSSAL error. Notice the magnitude of difference between the post-Global Financial Crisis balance sheet expansion and now (lower pane):

Where was I...

It's clear that human history's largest monetary welfare recipient hasn't read too many books on world history.

"Tesla was built on government cash. For years it used government incentives for people to buy electric vehicles. Much of its current profits are thanks to the sale of government regulatory credits to other, traditional automakers, which allowed them to keep making gas-guzzling pickups and SUVs rather than reduce their emissions...Its founder, the most epically rich billionaire Elon Musk, has also been known to avoid paying personal income taxes, according to ProPublica"

In other words, Elon Musk has massively benefited from monetary AND fiscal welfare for the ultra wealthy.

This chart will be the epitaph for this era:
Here we see that monetary welfare has bid up Tesla to the stratosphere while car buyer sentiment has crashed to a 40 year low. And I should mention the 1980 prior low was in the depths of a recession. 

No question, implementing a billionaire tax when the U.S. needs insane amounts of borrowed money from abroad would be impossible to implement. Nevertheless, if they were smart, at this biblical juncture billionaires would not be weighing in on THEIR disincentives for making money. After all, sitting around waiting for weekly FOMC bond buying programs makes them far more money than going to the office. 
What it all comes down to at this point in time, is that far too many people have come to believe that rampant stupidity is the new normal. When I tell people that crash is inevitable, they always ask me when is that? Apparently it's not just wasted money that is of no issue, wasted time is of no concern either. I am quite certain they will feel differently when this all explodes. 

Speaking of which...

I have been pounding the table on the 2018 deflation paradigm, however, with this impending Fed tightening action, 2015 is starting to loom large. Back then, China's stock bubble was imploding and their economy was weakening. At the same time the Fed was getting set to raise rates for the first time since 2008. The market tanked in late August so the Fed delayed their tightening until December. When they tightened, global markets exploded in early January.

In the chart below, I will highlight the similarities. First off, including Tesla the Tech sector is now 40% of the S&P market cap. The most in market history. Below in the main pane we see the Nasdaq 100 in black and Chinese stocks in gray. 2015 is boxed to the left. 

In the second pane we see Nasdaq breadth is camped at the crash zone. In the pane below that we see that breadth divergence is the greatest since October 2015. Both then and now, these readings are records going back 20 years.

In summary, the Fed's policy error was inflating this mega bubble. What they do next will be merely tacit acknowledgement that they have not even the slightest clue how much risk they have created. Unlike Janet Yellen we need not worry that Powell is going to give a damn about China. All of which leaves today's pundits very limited time to u-turn from the runaway inflation theme to the economic deflation theme. Needless to say they will leave the majority of their followers holding the bag of inflated assets. 

Hoarding explosion. 

Monday, October 25, 2021

The Crack Up Boom And Bust

While I often deride Millennials for chasing this super asset bubble. What can you say about a generation that throws its own children under the bus, in the World's greatest Ponzi scheme? Nothing good...

At the apex of human history's largest asset bubble, social mood has nowhere to go, but down. Central banks have been increasing the wealth divide every day since 2008. Still, the masses will be shocked when monetary welfare for the rich spontaneously explodes. No one told them printed money is NOT the secret to effortless wealth. 

Ludwig Von Mises died in 1973 long before Quantitative Easing (aka. monetary welfare for the rich) was invented. His conventional inflationary theories never predicted the massive deflationary impulse that Globalization would soon create. A world of poverty imported by container ship straight to America's shores. Unlike prior mercantilist eras throughout history, Asia's exporters have never cared that the U.S. dollar was no longer backed by gold, hence they have never rejected it as Von Mises predicted. Instead, they took their bounty in factories, jobs, and industries. Now, ironically, they are as wed to this Faustian Bargain trade relationship as we are. 

It's clear from the comments on my Twitter feed that most people don't understand the difference between inflation and deflation. That's because at the individual level they feel very similar - a declining standard of living as a paycheck no longer covers expenses. Which explains why most people view this as an inflationary death spiral. At the macro level however, inflation and deflation are nothing alike. Inflation takes place when consumer purchasing power is rising along with wages to fuel the inflationary spiral. It assumes FULL employment. What if no one had a job, would there be inflation? Of course not. The U.S. currently has the lowest EMPLOYMENT rate in modern history. People are leaving the workforce in droves and economists can't figure out why. 

There are different reasons why people are leaving the workforce, depending on age, gender, occupation, parenting status etc. For one thing almost all pundits seem to forget that there are 60 million gig workers in the U.S. right now. None of those gig jobs show up in the monthly jobs report. Secondly, many Millennials are quitting their jobs to become full time gamblers in stocks, cryptos and other markets. Thirdly, Boomers were retiring at an average rate of 10,000 per day even BEFORE the pandemic; however, the pandemic moved up their retirement by many years. Why? Peak asset prices.  

"About 3 million people retired earlier than they likely had planned as a result of the Covid environment, according to a report by a senior economist at the Federal Reserve Bank of St. Louis"

“Standard theories of household behavior predict that when people get richer, they work less, and there is some evidence that the evolution of asset values influenced labor force participation in previous recessions, especially for those closer to retirement,” the report read. “The large rise in asset valuations during the pandemic suggests that retirement may have become feasible for many people.”

The Fed STILL hasn't figured out that the Fed is the reason why there are so few people looking for work right now. Let's face it, these are not bright people. 

"Where did everyone go?"

There are other deflationary factors that were accelerated by the pandemic: One was the overuse of technology. Silicon Valley has a term they use to describe today's rapacious business model: "Blitzscaling". Blitscaling means using "free" capital to subsidize unprofitable business models as they scale up by destroying traditional competitors. Anti-trust regulators used to call this predatory competition. Now, it's the standard business model for untold numbers of "unicorn" billion dollar pre-IPO companies. At 0% interest rates, pretty much any business idea that MAY turn even a minor profit in the very distant future will get funded. And hence now we have the "virtual economy". 

And of course global debt exploded during the pandemic. 

One chart I posted on Twitter recently showed the collapsed velocity of money. The velocity of money measures the rate of circulation of money throughout the economy. Fed balance sheet expansion is going straight into markets not the economy, like a shot of adrenaline. From there the trickle down effect is making its way into mega yachts, Teslas, and Rolex watches. From there it goes straight back to the banks where it sits as excess reserves. 

The banks lend the money back to the Fed via reverse repurchase agreements, and they earn interest on it for doing absolutely nothing.

Here we see the velocity of money (blue line) and the reverse repo $ amount (red line). What inflationists STILL don't understand is that monetary welfare is for the rich, it's not for everyone. 

The other shocking chart I showed on Twitter is this one of commodities. 

As we see, during the pandemic, commodities lost 50 years of nominal price gains. Subsequently, they have enjoyed the largest rally since 1974. What we also see from this chart is that even before COVID, the trend was already down. 2016 price levels were below 2008 levels. 2008 happened to be peak Chinese growth rate. Now, this year China is set to record its lowest GDP growth in 25 years. Add in a skinnied down Biden infrastructure bill, and there will be no follow-through for this mega rally:

Taking this all together, I am not a deflationist, I am a hyper-deflationist. The only thing standing between us and hard economic reality is human history's largest asset bubble. Consumer confidence has already collapsed and it has taken down housing and auto confidence along with it. This is the consequence of monetary welfare for the rich. It has bid up asset values beyond the reach of normal citizens. As a result, household liabilities have sky-rocketed. The deflationary burden is increasing with each passing day and it will accelerate upon asset bubble collapse.

Since the start of the pandemic, Tesla has gained 2,000%, while Elon Musk's bubble wealth increased 12x in two years.

What we are watching in real-time is peak insanity. The Pyrrhic victory of misallocated capitalism at the EXPENSE of the economy. 

Thursday, October 21, 2021

Global Synchronized Delusion

This cyclical recurring reflation fantasy reminds me of the Matrix. What begins as a central bank assisted rocket launch, reaches second stage orbital escape powered by misallocation of capital, at which time central banks remove their support. And then the machines destroy Zion all over again. This time however, I believe the zombies will remember the ending. When they wake up to the Third World reality of fully leveraged denial, the true believers in fraud will have nothing to show for it…

There is an exorbitant price to be paid for this fool's errand, in time and money. The true bagholders will be short of both when it comes to this final reckoning. I predict very few "winners" in this ultimate game of chance. Art is imitating life on the most popular show in Netflix history - "a bit of the old ultra violent" Squid Game, is a South Korean version of the Hunger Games, wherein desperate gamblers from all walks of life are recruited into a deadly series of games for the amusement of the ultra wealthy. 

If gambling is a rampant problem, then one can make the case that the situation isn't about to improve as the Kospi backtests the 200 dma ready to go bidless:

These Global Chaebols however are far from merely a South Korean problem. China is taking its oligarchs to task in a serious way, whereas the U.S. is sitting back and doing nothing. More content to criticize China for interfering in what is clearly exceptional capitalism.

"...None of those U.S. shows capture the rage and despair of our broken capitalistic system, in which young people are crushed by debt, social mobility feels like a joke, power and capital are hoarded by unreachable oligarchs and elected officials are too impotent or indifferent to help"


U.S. policy-makers are captured by the system. From an economic standpoint, the "center" has silently moved to the right over the past forty years, meaning the old center is now to the left of Nancy Pelosi and her gambling husband. Ron Paul can take pride that he consistently voted for the destruction of the middle class, while pretending to be a man of the people. It's the fruit of forty years of "Shock Doctrine". In the words of Milton Friedman, never let a good crisis go to waste. Now what we have is a Third World economy papered over with continual stimulus.  

And it was all going so well...

My predictions for a deflationary collapse in 2021 have been continually pushed back into the end of the year, bonus season. The stakes have never been higher. Unfortunately, none of today's pundits acknowledge the binary risk inherent to these manipulated markets. They are all content to extrapolate  Ponzified "stagflation" into the indefinite future. Not one of them acknowledges the role of speculation in fueling this illusion of reflation. Capital is now front-running the economy and inventing false narratives on the way. Whereas the economy used to drive markets, now it's the other way around. 

Returning to the 2018 analog, all of the Trump tax cut stimulus was spent in the first half of the year. By the fourth quarter, the fiscal drag was well underway while the Fed was hell bent on tightening. Sound familiar?

I can't explain why these serial fools keep believing the same fairy tales each time expecting a different result, but they do, every single time. Here we see via Financials that this week the reflation delusion went full crack up boom mode, however NYSE new highs are right back to where they were a year ago when the massive post-election reflation rally got started.

The whole stimulus-driven illusion is turning back into a pumpkin.  

Just in time for Halloween.


Here we see weak bears are capitulating deja vu of last year at the top. Meanwhile, skew is also coming down.

All it takes for delusion to become rampant is time and misallocation of capital.

While reflation trades go late stage parabolic, the Nasdaq is dragging. This fantasy has taken its toll on growth stocks.

It's been a long time since we saw both cyclicals and growth stocks implode at the same time...

Global markets have seen this fake reflation movie over and over again since 2008. 

This secular recovery fantasy is a Made In America export.

In summary, at the beginning of this longest cycle in U.S.  history, Millennials were protesting Wall Street. Now they are massively levered to the world's largest Ponzi scheme, the S&P 500. Bitcoin/crypto is the fission trigger for thermonuclear detonation of the Weapon of Millennial Destruction (WMD).

They have now officially become Generation Gambler. And when they implode, they will take down everything.

Monday, October 18, 2021

The Golden Age Of Fraud

Today's pundits have capitulated to the zeitgeist of rampant fraud. Investing has taken on a magical quality in which financial fraud goes largely unquestioned. Sadly, mass insanity is not a bullish argument. It's clear that the masses have been fully euthanized by the virtual simulation of prosperity and its acolyte QE. In this post I will tackle today's chimerical "bullish argument". And destroy it...

“It’s pretty basic in medicine that our doctor may give us a drug, which, in a small punchy dose, for a brief period of time, might help us recover from whatever ails us, but that the same medicine, the same drug, taken in massive doses over long periods of time, might kill us" 

I used to search the internet for sources of financial information that would affirm my position - bullish or bearish. Not anymore. Now I seek to find sources that will challenge my hypothesis so I can ascertain where I may be wrong. Which is fortunate, because now I see almost no bearish commentary whatsoever. All I find now are snippets of bearish commentary in stand-alone articles that assiduously ignore the bigger picture of rampant fraud having taken over all aspects of modern life. One of the lasting legacy's of Trump's presidency will be the fact that back in 2018 he killed fiduciary duty and since then fraud has been rampant:

"So did the rule’s demise benefit Americans by empowering them to “make their own financial decisions,” as Trump indicated he wanted to do? The evidence suggests not. Sales of potentially questionable investment products have soared, and retirees stand to end up billions of dollars poorer"

Investors will be TRILLIONS poorer. 

For my strawman this time I'm going to use this article below by Lance Roberts which caught my eye because he has been mostly cautious towards markets this year but he now views this latest minor dip as a potential buying opportunity. It's clear that many who have been on the sidelines this year are getting anxious to make up for lost time in Q4. The typical money manager's dilemma. In other words, this is about as "bearish" as it gets these days: 

The bullish argument is predicated upon several key factors he elucidates:

First off earnings ARE strong. Corporate profits are at a record high as a share of the economy, while labor's share of the economy languishes at all time lows. In addition, corporate profit margins are historically at all time highs. The bullish bet is that it will all continue. However, the article notes that rising supply costs are now eating into profit margins potentially creating a peak for profits. In addition, stock buybacks are now back at record highs as well. Forty years ago stock buybacks were illegal because they were deemed market manipulation. However, now they are at record highs because organic corporate profit growth is ZERO. Therefore the only way to increase per share profit is to shrink the share count. What we are witnessing is maximum buyback market manipulation. Why that's bullish is not for me to say. 

Among the other "bullish" arguments he makes is that the market is oversold: I showed on Twitter that the S&P McClellan (breadth) oscillator is now seven months overbought. More importantly, this is the largest (% gain) uncorrected rally since 1933. When I say uncorrected I mean having not touched back to the 50 week moving average. Another quasi-true argument: sentiment IS getting more bearish particularly among retail investors. However, it's far from as bearish as it was at prior market lows. Here we see the eight week moving average of retail bears is at the same level as the 2007 top. Last week's reading is even lower. The long blue rectangle shows that bears sidestepped the worst part of the crash in 2008 by being far more bearish than they are now. We also just learned that margin debt fell only slightly during this past September during the biggest monthly pullback since March 2020.

This is NOT negative sentiment:

The final main bullish argument is around seasonality. It's clear that many investors that were shaken out in September are looking for any reason to get back into the market, and the end of year is usually seen as good for markets. They seem to forget the experience of 2018 when the same set of circumstances tanked the market in the fourth quarter.

What's the most shocking is that there was NO MENTION of China in that entire article. Too many U.S. investors have a massive blindspot when it comes to the rest of the world. Which is why they are constantly blindsided by events taking place overseas often taking the futures limit down overnight. As happened in 2015 (China crisis), 2016 (Brexit) and multiple times in 2020 when the pandemic was initially ignored.   

To kick off my bearish rebuttal, below I show the S&P then and now with the similar factors that tanked markets in Q4 2018:

China implosion, money outflow (lower pane), fiscal hangover, monetary withdrawal, second Nasdaq blow-off top in a massive Tech bubble, chasmic breadth divergence:

Of these bearish factors shown above, the article mentions monetary withdrawal and weak breadth. A bland argument in the face of unprecedented risk. The article says that valuations are "stretched". No they're not, they are asinine by any measure. The only REAL reason to own these markets is because money printer goes "brrrr". We've never seen simultaneous over-valuation of stocks, bonds, home prices, car prices, cryptos, and every other asset class at the same time.

Worse yet, the Fed is repeating the same mistakes as 2008. They are fixating on the inflation they caused while ignoring economic risk. The Atlanta Fed GDPNow real-time GDP estimator has 3rd quarter GDP at just above 1.2% stall level. Given the simultaneous withdrawal of pandemic UI fiscal support, monetary taper, mass unemployment, and the outright collapse in consumer sentiment, it's highly likely the recession will be backdated to September. Which, is also when the stock market peaked. 

The Fed however is now boxed in by their own profligacy. They kept the spigots open for too long post-pandemic and now they are facing another financial crisis. The scenario is very similar: The Fed responds to a crisis, the policy response creates an asset bubble, liabilities rise in tandem, the bubble explodes due to unsustainable valuations, equity turns negative. For a time banks throw good money after bad, but then the music stops and financial crisis ensues:

"Along with “deteriorating asset quality,” banks’ “excessive search for yield” is feeding growing demand for leverage, increasing market risk"

Been there, done that.

The real risk not mentioned in the Zerohedge article is extreme moral hazard arising from continuous monetary bailouts. The greatest risk is that investors no longer fear risk. Recall, this year saw greater stock market inflows than the last 20 years combined. It's hard to unwind that extreme amount of positioning with a 5% market pullback. All that money is now TRAPPED in gamified markets that almost exploded in the early Spring during the Gamestop debacle. Too many newbies have no experience in markets and are taking way too much risk in speculative assets. Algo market structure is the biggest risk that is seldom discussed. Traditional human market makers no longer exist. Now the market is reliant upon HFT scalping algos that TAKE liquidity out during selloffs instead of adding liquidity. 
As I pointed out in my last post, the risks to the traditional 60/40 stock/bond portfolio have never been greater. The potential for a simultaneous drawdown in stocks AND bonds at the same time exposes the majority of passive investors to losses on a magnitude they are entirely unprepared to experience. 

I will summarize this speculative mania by discussing this crypto bubble that is reaching back towards the Bitcoin highs of April - The day Bernie Madoff died was the all time high. Many crypto "investors" claim that scarcity is the reason price will keep going higher. Cryptos are not scarce. Imagine if there were several thousand precious metals and new ones were being found every day. Would gold be considered "scarce"? No, it would be a commodity. There is only ONE gold and new ones are not being invented out of thin air.

The amount of speculation however in these "shitcoins" is truly telling of the fraud in this era:

"Called altcoins or, sometimes, "shitcoins," these are essentially penny-stock cryptocurrencies. And they're crazy. Bitcoin tripled its value recently, but many altcoins explode 30, 40 or 50 times over within days"

"The Dot-com Bubble was all about pouring money into "pre-profit" companies in the hopes they'd make money someday. Cryptocurrency, however, takes speculation into the stratosphere. For the most part, cryptocurrency is pure speculation. People are investing in technology that produces nothing"

These are "penny stocks" that are now cumulatively worth over a trillion dollars - as much as subprime mortgages were worth at the height of the housing bubble.

Friday, October 15, 2021

The Hardest Landing

One could not invent a dire set of circumstances that would be more cataclysmic than this banquet of overdue consequences. The Casino Class is about to experience what the middle class experienced in 2008 - forced de-leveraging in a bidless market. What happens when you are looking down the tracks expecting inflation and get steamrolled from the other direction by deflation. Hard to believe, but bidding up everything to record valuations ahead of a global crash is a bad idea...

Here we see consumer sentiment is very similar to the 2007 market top except even lower. Q4 2007 was also the onset of the Great Recession, however it took until the markets exploded a year later for the Fed to realize it had started. Up until that time they were primarily concerned about inflation. Sound familiar? 

The other low in consumer sentiment we notice was from August 2011 just after the debt ceiling debacle. Which is a reminder of what is coming up in a handful of weeks (December 3rd). And then of course we learned this week via the FOMC minutes that the taper is coming in as soon as a few weeks (mid-November). Suffice to say, the Fed's current policy stance is 100% wrong. I predict they will soon be forced to a neutral stance on their way to an easing stance. But unfortunately they are 100% out of easing ammo.

At the top in 2007 they had a 6% interest rate buffer, now they have 0%. But really, what could go wrong?

Even at this latent juncture, gamblers, pundits, and advisors remain sanguine. Deja vu of the Fed circa September 2008, the Chinese government just announced today that they will not be bailing out Evergrande, because it's a "unique" situation. They see no risk of contagion and therefore they have conveniently ignored what is now officially the largest property asset bubble in human history. According to this recent article, China's super real estate bubble is even larger than the one in Japan from 1990 that put them in deflation for the past 30 years:  

"According to Rushi Advanced Institute of Finance, condominium prices in the southern city of Shenzhen are now 57 times the average annual income, and 55 times that of income in Beijing. Even at the height of Japan's bubble economy in 1990, Tokyo condos were 18 times the average annual income"

Picture a middle class family in the U.S. with household income of $80k per year. At 55x they would be buying a home worth $4.5 million on leverage. You get the idea. 

The other crazy statistic is the fact that real estate/property development is 25% of China's GDP. In the U.S., it's 6% of GDP. So imagine the magnitude of dislocation if the Politburo is wrong in not attempting to stop Evergrande from imploding. Quite high. Regardless, in 2009 China's massive property-driven fiscal stimulus exported reflation via commodity demand to the rest of the world, whereas from this point forward they will be exporting deflation as the air comes out of their bubble at a "controlled" rate. Needless to say that China's satellite cities of Hong Kong, Sydney, Vancouver, Seattle, London and San Francisco will feel the full effect of real estate de-leveraging. 

The chart of the week is this one showing EM currencies at critical support and in the lower pane Chinese junk bonds which have collapsed BELOW COVID levels. If EM currencies break that key level, the entire World switches from an inflationary impulse to a deflationary impulse OVERNIGHT.

Nevertheless, today's gamblers are making an ALL IN bet that it can't happen. 

For the purpose of the discussion below when I say "cash" I mean money market funds and t-bills. There is no such thing as pure cash deposits in today's fractional reserve world. Everything is a loan of some sort. 

Today's negative real yields are the root cause of moral hazard in today's Casino. By taking rates down to 0% the Fed made cash extremely unattractive. By leaving them down at 0% they  have generated just enough inflation to force real yields negative forcing institutions, robo-money, (and many others) out of cash entirely. "Cash is trash" is the mantra of the day. Bond "guru" Bill Gross said so himself at the end of August which still stands as the S&P all time high by the way. This article I posted on Twitter explains that today's money managers are "super cash efficient", which means they don't have any at all. What they have instead is something they believe is highly liquid aka. long duration Treasuries which they assume can always be turned into cash easily. That assumption will be tested and fail catastrophically. What I predict is that first deflation will explode with a vengeance via some sequence of EM currency collapse, commodity/oil crash, global margin call etc. THEN, I see so-called Risk Parity funds being forced to puke Treasuries (and other long duration proxies i.e. Tech) back into the market due to forced unwind/de-leveraging. When they do so, they will further accelerate the rise in real yields which will further monkey hammer reflation trades, forcing more de-leveraging so on and so forth. I call it the de-leveraging death spiral. I do not predict that T-bonds will be permanently imploded - I predict they will be imploded long enough to wipe out every other risk asset, particularly non-yielding assets - Bitcoins and all that other worthless crap that had perceived value so long as yields remained negative forever. Long duration Treasuries imploded back in March 2020 for a day or two, but this time I see it lasting substantially longer. The Fed will eventually panic and take over the Treasury market Japan-style. But suffice to say, policy-wise they are right now heading in the other direction. Sadly, the FOMC isn't quite as quick as algos and margin clerks. 

What we notice from the chart below in the lower pane is that gamblers have less and less respect for owning cash. They are 100% positioned wrong for what's coming and therefore they will exacerbate the overall liquidity collapse that will be global. 

Which is why I said above, they will be forced de-leveraging in a bidless market.  

Dr. Copper already knows what's coming:

This chart gives an inkling of the magnitude of what is coming. The Tech decline will be on par with Feb. 2020 and the down volume will be similar to the Feb. 2021 debacle. Meaning this event will be a multiplier of those two events.

It couldn't be the end of the cycle if Wall Street wasn't minting coin at the sheeple's expense. Today we learned that Goldman made more money in the first three quarters than they've ever made in a full year:

In summary, bidding up every asset class to record valuations ahead of a global crash is a bad idea. the Fed is totally out of ammo, so markets are now running on 100% empty bullshit. What saved the markets in 2020 and 2008 was their ability to cut rates drastically after the collapse. This time they have nowhere to go on rates. Those who think they can bail out all gamblers at the same time are ignoring the lessons from Japan and now China. Contrary to popular belief, the U.S. is on the exact same path to a hard landing, but you can't warn the sheeple.

I've tried.

Wednesday, October 13, 2021

The New Permanent Plateau Of Bullshit

"There is no means of avoiding the final collapse of a boom brought about by credit expansion" - Ludwig Von Mises

The ideological consequences of this super asset bubble collapsing will be of such a magnitude that most of today's pundits are incapable of acknowledging them. This market has done nothing "wrong" other than to remain artificially pinned at all time highs while the sheeple threw their life savings into it. Bulls can afford to be fat and happy, because they are sitting atop the largest uncorrected rally since 1933 and that fact is not the slightest concern to them. Unfortunately, contrary to popular belief, there is no pot of gold at the end of this rainbow. On the other side of super asset bubble meltdown, gamblers will come to realize that all they bought was the biggest empty load of hot air in human history...

The greatest fear I've heard over and over again is that we are headed for "stagflation", and of course there is a trade for that - commodities, Bitcoins, alt-currencies, real estate etc. Never mind that those asset classes are part of the super asset bubble. This argument of stagflation is of course wishful thinking for those who are whistling past the graveyard of the greatest debt bubble in human history. It conveniently fits with the right leaning desire that Biden's economic recovery is doomed to fail, but not catastrophically. It will fail in a late 1970s peak middle class kind of way that proves Supply Side economics was the right choice all along. It WON'T fail to the extent that it reveals four decades of Reaganomics to be an abject human catastrophe. Because that would be bad and ideologically terminal.

Wishful thinking.

It never once occurs to any of these people that they are watching a credit crisis unfold in real-time. Not A credit crisis - THE CREDIT CRISIS. 

Here we see gasoline adjusted for inflation is either at a three year high OR at the same level as 2005, depending upon who you believe.

This chart of global (wealthy nation) real estate is a good proxy for the overall relative magnitude of each serial asset bubble. What it shows is that each bubble has exploded with greater and greater dislocation, followed by a bailout and an even larger bubble. Many people seem to forget that there was a financial crisis that preceded the financial crisis. It was the Savings and Loan Crisis:

"The roots of the S&L crisis lay in excessive lending, speculation, and risk-taking driven by the moral hazard created by deregulation and taxpayer bailout guarantees"

In other words, the roots of the Global Financial Crisis of 2008 are the EXACT same as the roots of the S&L crisis, only of much larger magnitude. AND the roots of this impending crisis are the exact same as the roots of those two prior crises only once again of much greater magnitude. Fraud and criminality encouraged via continuous monetary bailout since 2008.

Of course, societal moral collapse has been front-running this latent disaster all along. Which is why even now so few people question it. Most people in positions of wealth and authority today are the prime beneficiaries of this mega fraud and hence they have no incentive to warn against it. Why would they want to see a paradigm shift that could have them at the bottom instead of the top?

All of which preamble gets us to the Casino...

As the saying goes, tops are a "process" not an event. I say, tops are a process followed by an event. In this case, a super cycle top which is even a longer process than usual. Here we see the Dow has been topping since last May which is now five months and who's counting? 

The 2018 Q4 deflationary collapse is the analog of choice. It featured the following similarities:

Fiscal stimulus withdrawal, monetary stimulus withdrawal, a peak in oil, a massive spike in natural gas, peak Treasury reflation expectations, heavy distribution (negative money flow), Chinese stock meltdown, dollar rally, massive breadth divergence, a double breakout in Nasdaq new lows, record option skew, and a second growth stock blow-off top in the same year. The first one being February. The main difference we see below however is that investor positioning (IMX) increased since February whereas in 2018 it decreased.

Note the current position (main pane) and the circle from October 2018:

Here we see Brent Crude is literally identical to 2018:

Among the reflation sectors, airlines have the clearest wave count:

In summary, Chinese markets have been bouncing this week as gamblers BTFD deja vu.

The reason why you don't hear much concern about China Lehman is because these people can't afford to be wrong this time.