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.