Thursday, December 16, 2021

Here Comes Santa Crash

It's the year of Madoff, late in the Ponzi cycle. Now today's Ponzi schemers will find out if they've been naughty or nice...

The Fed just launched double taper as expected. Which sets up 2018 redux, except with a much harder landing. Not only is the Fed boxed in by their own buffoonery, this time the majority of today's pundits have been pounding the table on inflation. So it will take some time until they are begging the Fed to reverse policy. 

Which will be filed under careful what you wish for, this time of year.

Granted, 2021 has seen the largest wage increases in decades, having lagged productivity growth for decades - all of which  gain accrued to corporate profit. And yet shockingly, concern for the middle class vis-a-vis "inflation" only appeared since wages began rising. The REAL inflation in college tuition, healthcare, and housing that has been crushing the middle class for decades has been ignored all along. What we learn in this Supply Side nirvana is that wages as a share of the economy can go down for four decades, but they can't rise for even one year without sparking widespread panic among investors. Nevertheless, the definition of inflation is not a one time unsustainable price increase. As we learned yesterday, retail sales are already beginning to roll over, because "inflation" is weighing on sales. Except, inflation can't weigh on sales because that would imply lower demand. And at the macro level, the definition of inflation is demand that exceeds supply.

"Rising prices on gas and groceries are prompting Americans to pull back in other areas, raising fears that lingering inflation — coupled with a new covid wave — could be slowing economic growth"

I know, it's "stagflation" circa 1979. Get those boogie shoes.  

What I notice is that not EVEN ONE of today's pundits ever mentions the end of the cycle. De-leveraging now is totally unthinkable, because it would rubbish the stagflation fantasy on the way to a totally uncontrolled deflation with a Fed leaning altogether the wrong way. So it's up to me to mention the unthinkable. If that frightens anyone, you are free to return to CNBS and have smoke blown up your ass constantly. Even today's "bearish" pundits couch their forward views with "these valuations imply negative returns for a decade" bullshit. No they don't. What they imply is a MASSIVE one time drawdown accelerated by rampant panic, ending in mass capitulation. And rioting. And then eventually a market that slowly recovers over the balance of the decade. This "negative" returns for decades bullshit is strictly for academics who ignore the trajectory implied by current positioning and valuations. In the 1930s there were 10 bull markets (+20%) and 10 bear markets - roughly one each year. Most people didn't stick around for the ride. 

Granted, this market has done its best to lure in all suckers. It has remained perma-bid to all time highs DESPITE a Fed embarking on a double taper AND a Nasdaq in a stealth bear market. On Twitter I showed this chart of new Nasdaq lows at an S&P all time high hit a record yesterday. Prior to that the record was last month, November 22nd, when the Nasdaq hit its all time high (so far). Before 2021, the record lows at ATH was 185 going back to 1996. Before that, the record was 175 going back to the 1980s. This current record goes back to 1978, life of the data. 


Looking at new Nasdaq lows on S&P up days compared to December 2018 (2020 data suppressed), is that they look very similar. EXCEPT, this time the S&P remains pinned at all time highs.

The extant belief today therefore is that we remain perma-bid at all time highs while the Fed removes all stimulus. Unfortunately, as I've said over and over again, this Fed has a track record for imploding global markets, and once again they are on track for success. Back in December 2018 Powell raised rates and predicted more increases to come in 2019. Only TWO weeks later the S&P was in a bear market and Trump/Mnuchin vowed a change in monetary policy right at Christmas. Powell caved a few days later. In 2019, there were three rate cuts and balance sheet rolloff ended. 

I predict the same thing this time, except FAR MORE dislocation before Powell capitulates. First off, Biden will never interfere in monetary policy. Secondly, this time there are far too many inflation hawks to allow for a quick pivot back to easing policy. The FOMC is now several meetings away from that time of reversal. And when I mean meetings - those will include middle of the night conference calls. Be that as it may, margin clerks work far faster and Millennials don't have that kind of time. 

What we notice from Emerging Markets vis-a-vis 2018 is that back then they double bottomed in December post-FOMC and LED the world higher. This time, they are breaking to a new low. We also notice via U.S. margin debt through November is that U.S. gamblers are totally oblivious as to what's coming.

People think I must be massively short this market and therefore want it to crash. I'm not. I've never shorted a stock or an index in my life. I am a volatility trader, and what I like is two way markets. I did very well this past month as the market rose and fell while most bears got rinsed. What I DON'T like is rigged markets that suck in record amounts of capital in order to be destroyed. I also don't like rampant pump and dump schemes targeted at the naive and gullible. 

But those of us who don't, are clearly in the minority right now. 

Soon I predict we will be in the majority. However, in the year of Madoff, most of today's Ponzi schemers will arrive at that conclusion far too late in the Ponzi cycle.