The Eye Of The Hurricane

The front wall of the hurricane weakens the structure, the back wall blows it away...

We are in the midst of a Lehman style collapse in real-time, but there's no way of knowing because today's pundits are broadcasting sugar coated bullshit across every media channel. The sheeple wouldn't have it any other way. No one would pay for what I have to say, nevertheless it will turn out to be exorbitantly unaffordable.

We live in a society of useful idiots, who are convinced there's strength in numbers.

Last Friday I posted this chart on Twitter showing that to-date the volatility at the 200 day moving average was the highest since March 2020. The third highest was March 2000.

In other words we are in the midst of a bear market rally. The path of this bear decline is so far following the Y2k sequence: First junk Tech stocks got obliterated, which began a year ago. After that mega cap Tech took the lead, which continued until  November. Then, cyclicals led in December. Finally everything imploded in January. Except Energy stocks which I will discuss further below. 

Now investors are getting worried as January was the S&P's worst month since March 2020. For the Nasdaq, it was the worst month since December 2018, tied for the worst month since 2008. Had January ended last Friday it would have been the worst month for the Nasdaq since 2008.

Therefore, to placate their investors, every advisor and pundit is working overtime to keep the sheeple from bolting out of the casino. At the prime broker level, Marko Kolanovic is "pounding the table" for everyone to buy stocks. 

Many market metrics such as recent performance of high vs. low beta stocks and valuations of small-caps are already fully pricing in a recession — something we do not see materializing,”

The flip side of this argument comes from Alfonso Peccatiello, author of The Macro Compass blog, who notes the spread on overnight index swaps is dangerously close to inverting"

As I've said many times, buying cyclicals going into a recession, is a very bad idea. They get demolished. Unfortunately, the imploding Tech bubble gives investors fewer and fewer places to hide. So what to do, push investors into cyclicals and tell them recession is off the table. 

Unfortunately, every spike in inflation for the past 70 years has preceded recession.

Another asinine assumption Kolanovic makes is regarding the bullish aspect of collapsed small caps. Below we see that January had the worst Nasdaq breadth in HISTORY. And comparing to 2008, the maximum breadth collapse occurred in October 2008 which was four months before the market bottomed. In other words, margin clerks won't be selling the small caps anymore, now they will dump the big caps that have been holding up the market.

This chart is also testament to the RECORD amount of junk stocks that got dumped into the market in 2021.

Another dumbfuck assumption getting bought with both hands is that we are "early" in the rate hiking cycle. You have to have amnesia or dementia to believe this argument. First off, as we see below, interest rates have been in a downtrend for four decades. Secondly, as we see also see, this relative move in rates is unprecedented. Somehow we are to believe that post-pandemic price increases in the order of 8% justify increasing interest rates 400%. Because we all know that the price of money is not a "cost" to the consumer in the most leveraged society in history.

Sure. 

Which gets us to the massive Energy sector outperformance in January. Here we see that Energy outperformance has attended EVERY end of cycle/bear market in the past thirty years. And January's monthly outperformance is the largest in the life of the data.

Similarly, the monthly VIX is warning that we are heading into recession AND bear market.

But among the most dangerous assumptions being made right now, including by Kolanovic, is that cyclicals are NOT overvalued. This is how all of today's pundits are able to ignore the meltdown in Tech stocks, because they tell themselves that Cyclicals are "value" stocks. 

Unfortunately, nothing could be further from the inconvenient truth. 

But what better sector to prove it than the Wall Street brokers now pushing out all of this end of cycle bullshit in 2022 after having dumped RECORD amounts of junk stocks into the market in 2021. 

Rule #1 of survival: Never trust proven liars just trying to make the quarter.

"Many investors are grappling with their portfolios turning negative and the rotation into value is depressing appetite for the growth stocks"

In New York, the market turmoil has made at least nine firms call off IPOs"