By the time the National Bureau of Economic Research finally declares official recession, their astute observation will be only useful to archaeologists attempting to figure out what happened to the deeply buried Kardashian society...
While playing history's greatest central bank following fools, today's gamblers believe that time is on their side. Nothing could be further from the truth. With each passing day the hole gets deeper. But you would have no way of knowing by reading the mainstream financial media. They have a skill at turning all economic risk into gold plated opportunity. If Bernie Madoff was alive he would be head of the SEC.
We have now crossed over into the back half of the year, well into the months (August/September) that have caused the greatest financial dislocation in the past two decades. It appears that for whatever reason, the worst first half stock market performance in 60 years ignited a massive short-covering squeeze. Many hedge funds that were short in the first half decided to book profit. Which means that now currently there is no short buffer below the market:
Bloomberg July 28th, 2022:
BEARS UNWINDING SHORTS LEAVES STOCKS EXPOSED
"The rally, and attendant change in sentiment, has forced speculators to unwind bearish positions that once served as a key source of (stock) demand...With short sellers retreating, stocks might be exposed to a downdraft if the Fed turns more aggressive on future rate increases or corporate profits start to crater"
This implies that there is plenty of room for CTAs to start building up short positions again.”
In other words, shorts covered despite the fact that risks have grown steadily since the beginning of the year. Goldman Sachs started the year with a prediction for four rate hikes in 2022 (1%) and they are currently predicting 16 rate hikes (4%). All Wall Street economic growth predictions have now been updated with minus signs.
We can see the reduction in short positions via the CBOE option skew which is an indicator of short positions in the options market:
Basically what happened since the end of the first half is that bearish money managers took profit while betting the worst was over. When in actual fact the worst hasn't even started yet.
Which is why investors are now praying for recession to get them to their imaginary promised land of a Fed reversal near the zero bound. Their safety net is no longer shorting, their new safety net is believing that the Fed can finish tightening and pivot to bailout fast enough to prevent wholesale meltdown.
Even at this late juncture I have yet to hear ONE pundit inform the public that a 2.5% Fed Funds rate is not enough to prevent economic depression, much less deep recession.
Yield curve inversion is now the flattest in forty years, meaning that long-term rates are significantly lower than short-term rates as the bond market predicts the Fed is making a COLOSSAL mistake by overtightening:
So it is that investors now believe that all bad news is good news for stocks. Their new buying mantra. A mantra that has been assiduously cultivated during the era of financial Disneyland that has abided since 2008.
Today's CPI showed that inflation may well be peaking, however some context is in order, because the CPI is still a long way from where the Fed will stop raising interest rates. If the past twenty years is any guide, that level comes in at about 4.5% on the CPI:
Deja vu of the March rally, this latest rally is an overthrow of the June high and a backtest of the 200 dma, coming off of the lowest volatility of 2022. In addition, VIX below 20 attracts a lot of bulls who believe it's a sign the bear market is over. It was a bull trap in April but for these amnesiacs that is long forgotten.
Here we see via AAII positioning data, the shocking divergence in cash balances from 2008 versus now:
https://www.aaii.com/assetallocationsurvey
In summary, it's abundantly clear that today's investors missed the "pivot" from inflation to deflation and from fantasy to reality.
And who can we thank for that but all of the pundits who told them that inflation was NOT transitory in 2022.
Wrong again. This time with no cash buffer AND no monetary safety net.
