Sunday, January 9, 2022

Rotation To Obliteration

The Minsky Moment:

"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. Consequently, units with cash flow shortfalls will be forced to try to make position by selling out position. This is likely to lead to a collapse of asset values."

This society now specializes in ignoring risk. Empty talk and empty solutions are the order of the day. Today's denialists are certain they can keep this economic fraud running indefinitely.

Now everyone believes the Fed is invincible. What used to be "don't fight the Fed" has now been conveniently reversed to be whatever happens, the Fed has it covered. So, RISK ON all the time. Ironically, the Fed were the last ones to believe that inflation is no longer transitory. And they're right, it's not transitory, it's cyclical. The call/put ratio shows there has been excessive speculation and NO risk off since the pandemic started two years ago:


As we see below, Treasury inflation expectations peaked back in May of 2021. We also see that every Fed effort to taper QE and/or shrink their balance sheet has imploded inflation expectations. This society is now totally dependent upon dramatic and ongoing fiscal and monetary stimulus. 

The Fed's third accelerated tightening signal via the FOMC meeting minutes this week coincided with the largest hedge fund selling of Tech stocks in a decade. Which is why Technology stocks are now technically broken. Tech Momentum is dead. Therefore hedge funds are now making an ALL IN bet on reflation. Over the course of the past year, the U.S. "Momentum Factor" strategy was swapped out from Technology to Cyclicals. And yet we see it has the same rolling over appearance it had back in 2018. Unlike that era when the Fed reversed policy and momentum stocks bottomed, now if the Fed flinches, this implosion will ACCELERATE and cyclical-heavy hedge funds will implode en masse.

But don't worry, because the Fed itself is now boxed in and they are not going to reverse policy nearly as quickly as they did last time. In order to reverse policy, they would first have to believe that inflation is contained. They would also have to believe that the froth is out of the stock market. And, they would have to believe there is systemic risk. In other words something has to break.

Once something breaks and they finally reverse policy, cyclicals will go bidless, and then unlike every other time they came to the rescue, they will only make things worse.

At that point, panic will ensue.

We also got news this week that the China property crisis is spreading to China's top tier developers. Once again, human history's largest bubble is imploding in broad daylight amid mass complacency. By the time it hits its Lehman Moment it will be far too late to react.

Here we see relative to imploding Chinese stocks that U.S. investors are betting that accelerated tightening will work out BETTER than the last two times when the Fed was forced to reverse policy. They are essentially making an ALL IN bet on implosion:

Lastly, an update on imploding Millennials. The amount of pain in Millennial land is growing towards an extreme meltdown moment. Between the record IPO/SPAC pump and dump, the various Gamestop/AMC Reddit pump and dumps, Crypto Ponzi schemes, and the -50% Arkk ETFs, the amount of pain is enormous. 

And against ALL of that, these newbies are now letting it roll on a Fed hellbent on 3x tightening. It's financial suicide. And guess what NO ONE will tell them. This chart of the Bitcoin Trust shows that social mood aka. greed is running on glue fumes. 

This entire "system" of course is predicated upon the belief in caveat emptor, buyer beware. However, now this system both creates ignorance and preys upon ignorance at the same time. 

We have a financial service industry that actively encourages reckless speculation among the gullible and an SEC that is literally captured by the industry. 

The pandemic and attendant monetary super stimulus set off an end of cycle speculation bonanza. The Fed policy error was allowing this super asset bubble to get out of control. Now, today's newbie gamblers are convinced they are expert traders. When all they are is the latest generation of central bank muppets waiting to implode. And when they implode, everything will implode.

History will say that from a lockdown/travel restriction/work from home/job loss standpoint the pandemic was the most deflationary event in modern history. However, record central bank and fiscal stimulus set off a consumption boom primarily around commodities, homes, cars, and durable goods that fed back into CPI amid cycle high bottlenecks. Which forced the Fed to end the longest cycle in U.S. history at a time when the majority were making an ALL IN bet on sustained inflation.