Tuesday, August 16, 2022


The bullish case is borderline hyper moronic, but in the spirit of "fair and balanced" reporting, no theory is too asinine not to be bought and believed on a massive scale...

I've had it with trolls on Twitter so now I've blocked all comments. Unfortunately, I have to block the good with the bad, because I can't afford to have my sanity polluted by the dregs of humanity. That said, from time to time I review the "other" standpoint to see where or when it may actually be correct. So now I will tackle the bullish point of view and show where it's right, and where it's wrong. 

Fortunately, the entire bullish pivot theory can easily be evaluated since it already recently happened in back in late 2018. Back then the Fed was tightening on both ends of the curve at the same time as they are now. In December 2018 the market imploded into bear market and the Fed pivoted from a hawkish stance to a dovish stance and the market took off. 

So, why can't it happen now?

From a purely technical point of view, this rally has the same breadth thrust as the one from early 2019 (see second chart below). Which is another point for the bulls. This is what has caused the majority of bullish pundits to assume the "bear market is over". No question, it's a strong technical signal with a good track record in economic expansions, but unfortunately one indicator does not erase all other risk. 

So here are the differences between the 2018 pivot and now:

First off, there was no capitulation this time around, whereas the put/call ratio spiked in late 2018. Here we see the equity put/call ratio is lower this year than during every other market event since 2008. And of course we also see the other huge difference in the CPI. Back during every other Fed bailout, the CPI was falling and already at or below 2%. Right now, it's still above 8%. 

The entire bullish thesis is predicated on the idea that the Fed is almost done raising rates and will soon be lowering them. 

Another difference is that back then Trump demanded the Fed pivot and a week later Powell acquiesced. This time, Trump has not demanded the Fed pivot and Powell has not signaled that he will. Quite the contrary, recently Fed members have been taking turns informing the public that interest rate hikes will not end any time soon. 

Back in the Spring of 2019 the economy was stalling, so the Fed gave forward guidance of potential rate cuts in the summer, which kept the rally going. And then they cut rates three times over the summer of 2019. In addition, they phased out QT and re-started QE during the repo crisis in September 2019. That juiced the market even higher. 

All of which you can see in the chart below:

Now let's revisit these same factors for this "Pivot" time period. This time, the economy is ALREADY in recession. CME Fed futures are right now pricing in 100% chance of rate hike in September: 60% chance of a .5% rate hike and 40% chance of a .75% rate hike. There were no rate hikes larger than .25% in the prior rate hiking period (2017-2018). In addition, QT will be at $95b/month in September, which is DOUBLE what it was in early 2019. 

There you have it. Story time is over.

Here is where it gets interesting.

While so many people are in a hurry to tell me my timing is "bad", I happened to notice that this meltdown is taking place at the exact same rate as the one in 2008. The top was in late 2007/2022. There was a lower high in Spring 2008/2022, and a third lower high in August. 

Another myth that's circulating is that hedge funds and institutions are bearish and waiting to buy stocks. However, they were TWICE as bearish in August 2008 and yet still the market crashed in the Fall. We also recall that even after Lehman failed the Fed was STILL preoccupied with inflation. So they committed a policy error of letting Lehman fail. 

Imagine if China melts down tomorrow and the Fed meets and decides that inflation is the greater risk. Because that's what is  very likely going to happen. I predict the Fed will be very slow to reach a neutral stance this time around. And even slower reaching panic mode of re-starting QE. 

Another thing I predict is that over these coming weeks ALL risk markets from stocks, cryptos, commodities, junk bonds are going to explode at the same time. Making what happened in 2008 seem like a picnic. The inflation hypothesis has caused investors to hold too little cash which will lead to a global liquidity crisis. 

My last prediction is that when markets do crash, the NBER will come forward and state that we are now officially in a recession that started at the beginning of this year. And then, trapped bulls will learn the true meaning of bad timing.  

Too late.