One could not possibly invent a market scenario more lethal than this one. Today's investors now believe that the Fed has expanded their mandate to include inflating asset bubbles and bailing out investors when they explode. A lethal fantasy that is now boxed in by their primary mandate to keep inflation under control. Add in cycle denial, and it's the perfect recipe for a Hotel California market...
“Reading through various research papers from the Street, I couldn’t find anyone who disagrees with each other. But if we all agree and put on the same positions, who’s going to take us out” of the trade?"
No one. Everyone "knows" cash is trash. Why would you own cash if interest rates can only go higher.
After the jobs report on Friday, now traders are beginning to price in a 50 basis point rate increase for March. Which would be the first 50 bps increase since May 2000, which happens to be the last time a Tech bubble was bursting. Except this time, the everything bubble is bursting.
It all comes down to cycle denial which happens to be a very lucrative business model adopted by the vast majority of today's financial commentators. As long as today's pundits are unwilling to admit this is the end of the cycle then they will continue to push the higher rate scenario. Until such time as investors realize they are ALL on the same side of the boat and it's about to u-turn to recession.
Another thing today's pundits don't admit is that the Fed can now basically manage the economy SOLELY using their balance sheet. As interest rates have sunk lower and lower over past decades, the efficacy of conventional interest rate policy has likewise collapsed. The Fed hasn't even raised rates yet, but already the two year yield has round-tripped to the pre-pandemic level. The market is tightening for them.
Also late this week, the ECB shocked markets as well:
"Central banks are actively trying to tighten financial conditions ... they are moving faster than expected"
Morgan Stanley said markets were now facing "the largest quantitative tightening in history"
All of which means that imploding global markets which are used to receiving a bailout at about this time, are further from a bailout than they've ever been. Which means that liquidity is about to collapse at the same time as margin calls arrive for FOMO traders front-running imaginary bailouts.
Another critical delusion is the belief that only small growth stocks are overvalued. That delusion has driven money out of small caps into mega caps, driving their over-valuation higher. The same thing happened in Y2K, before Cisco lost -80% of its value.
This past week, new Nasdaq lows eclipsed the 2008 level. However, there are far more junk stocks in the market now than there were back then, so I'm sure someone can turn that into a positive argument. Even at this late juncture, the burden of truth remains on the truth.
As we see above and below, this end of cycle denial is deja vu of 2008. Except, unlike back then, markets remain much closer to their all time highs, as investors buy every dip per the Fed's imaginary mandate to keep the asset bubble inflated at the new permanent plateau of over-valuation, while they vanquish inflation.
A ludicrous delusion that goes unquestioned.
Sadly, there is no easy way out of this Hotel California of mandatory denial. This multi-decade failed Supply Side gambit was always going to fail at the zero bound at the hands of denialists recycling the same playbook that abided when the middle class was still strong and healthy.
Today's Idiocracy of pundits don't see this coming, because they all expect the middle class to come floating back from China any day now.
After all, no one would want to admit that they've been party to four decades of failure.
