Today's bullish investors have only one investment strategy right now, which is waiting for bailouts. Therefore they must pray that their bailout karma has not run out after a decade+ of continuous bailouts and ever increasing moral hazard...
mor·al haz·ard
"Lack of incentive to guard against risk where one is protected from its consequences"
Today's investors have ZERO hedge.
The site Zerohedge rose from the ashes of the Great Financial Crisis. The name itself impugns the sheer fantasy of perpetual bailout. But something odd happened over the many years since 2008. That platform morphed from criticizing market delusion INTO monetizing market delusion. They adapted to the "new normal" of what they had originally decried as "Keynesian bailout" culture. What began as a critique of the decadent culture of bailout, ultimately morphed into a 24x7 purveyor of non-stop delusion. So it is that we find ourselves knocking on Heaven's Door of the longest cycle in U.S. history, as retail bagholders FINALLY pile back into "this time is different". While being sold down the same old river by Wall Street. And ironically once again there is NO ONE to warn them. All pundits having surrendered to the siren song of perpetual cheap money bailouts.
Let's see what we have THIS time:
Imploding Tech bubble. Largest Nasdaq losses since 2008.
Collapsing Crypto bubble on a scale larger than subprime circa. 2007
Largest housing bubble in history.
Largest inflation shock since 1980.
Largest oil shock since 1973.
Largest bond collapse in history.
Largest EM currency collapse since 1998.
In other words, the Fed will now successfully navigate all of the risks that caused recession and deep bear market in the past 50 years, without causing a recession or deep bear market. Despite having the least amount of interest rate buffer in history.
This is the current investment delusion:
History will say it took a pandemic to create the worst case scenario of a Fed way behind the curve of monetary tightening at a point when supply side pressures were at cycle high. The first rule of Japanfication is NEVER allow the economy to run too hot. Why? Because when there is too much debt, a hot economy will spike interest rates and bring down the entire house of cards. The pandemic made the perpetual Goldilocks scenario impossible. And yet few of today's pundits see it ending.
Last December, Mohamed El-Erian was one of the first pundits to warn that the Fed was making a huge mistake by keeping policy loose for too long:
December 2021:
"El-Erian has repeatedly said the Fed is underestimating inflation risks as the U.S. economic recovery from last year’s pandemic shock accelerates price increases for everything from energy and food to consumer items"
Failure to do so could result in needing to “hit the brake hard” in a few months, which would risk sending the economy into recession, El-Erian said"
Here we are a "few months" later, and El-Erian's worst case scenario is taking place in real time. The Fed IS hitting the brakes too hard. But what does he say now? He says there is low risk of recession:
STAGFLATION IS COMING. RECESSION UNLIKELY.
"The US economy can potentially dodge a recession, but stagflation is coming"
El-Erian and all of the other inflationists went from seeing the problem, to being the problem. They are now of the same mind as the Fed - that inflation is the biggest worry, NOT recession.
This week's abysmal retail earnings sent retail stocks to their worst performance since 2008. Tech stocks are having their worst two quarters since 2008. Consumer Staples are outperforming the S&P the most since 2008. And Energy stocks are leading the market the most since 2008.
How much warning do these people need?
Back in 2008, economists were still debating whether or not the economy was in recession, NINE MONTHS after it started. There are no economic leading indicators of recession EXCEPT markets themselves. The allocation of risk capital to LATE CYCLE trades is the clearest indication of late cycle risk.
"Stagflation is coming"
We may or may not be in recession at this moment, but it doesn't matter. Because the Fed is going to keep tightening policy until they are CONVINCED that we are in recession. Which means DEEP in recession.
And then they will realize they don't have enough dry powder to get us out again. It will be at THAT point when today's pundits realize pounding the table on inflation for too long facilitated THE LARGEST policy error in Fed history.
Today's older investors have NO EXCUSE not to see it coming. Aside from early onset dementia brought about by 14 years of brain dead investing. They've become fat and lazy. Accustomed to embracing all risk.
Today's young investors believe they are a new hardy breed of investor, unlike their parents who panicked and sold into the past two -50% market collapses. These young people have "diamond hands", meaning they never sell.
That is all well and good, but they have diamond hands in a crystal market. Meaning they won't sell until the Matrix melts down around them like a well cultivated illusion. At which point they will finally realize their entire life has been fed into a corporate hopper and sent to the Cayman Islands for efficient distribution to global Oligarchs.
Yes I feel bad for these young people facing EVERY type of major risk of the past FIVE decades at the same time. Layered on top with a collapsing crypto bubble, a student loan crisis, and a Fed with the least amount of dry powder at any end of cycle in U.S. history. All aided and abetted by the most corrupt and decadent financial commentary in U.S. history.
Recall that brokers lowered commissions to ZERO right before the pandemic, thereby luring an entirely new generation into the casino just before the end of cycle pandemic mega bubble took off. So no wonder they see themselves as the chosen ones of casino gambling.
Be that as it may, history will say they were the ultimate victims of moral hazard and late cycle criminality.
To believe anything else is IDIOTIC.
Could I be wrong that this fairy tale is NOT ending right now?
Sure, there could be ANOTHER chapter of Goldilocks and NO BEARS. Alternatively, this is just ending the worst way possible with the fewest number of people seeing it ending, as one would FULLY expect it would end after 14 years of central bank sponsored moral hazard.
Bet accordingly.
