Thursday, September 8, 2022


Prior to Bernie Madoff's Ponzi scheme imploding in the Fall of 2008, a financial analyst named Harry Markopolos warned it was a Ponzi scheme. But, none of the investors would listen. Because they were fat and happy. Until it exploded...

Likewise, those of us who questioned the borrow-your-way-out-of-debt strategy were proven wrong by global central banks after 2008. Now however, global central banks are proving us right. It turns out that in a global Ponzi bubble, you only have to be right once. 

Before it explodes and makes everyone look like an idiot. 

When this year started, it looked like China would be the locus of risk for 2022. Their signature COVID ZERO policy was achieving its goal of collapsing growth down to ZERO percent. Meanwhile, China Evergrande - the world's most leveraged property developer was heading for bankruptcy. Subsequently, the entire Chinese real estate market has imploded, and Hong Kong stocks are trading at the lowest level since 2015. 

That risk was soon eclipsed by the Russian war in Ukraine which sent commodity prices sky-rocketing. Europe threatened to cutoff all energy imports from Russia, but they had no way of following through without causing self-imposed depression. All of that sanction posturing led Russia to pre-emptively cut off natural gas to Europe, THIS week. In the meantime, the ECB  has embarked on the most brutal tightening campaign in Euro history, culminating in a super sized .75% rate hike also THIS week. 

Not to be outdone by competitive idiocy, the U.S. entered 2022 as the tallest midget in the circus, but then the CPI skyrocketed and the Fed was forced to abruptly taper QE and begin rate hiking. In June they began Quantitative Tightening and the most aggressive rate hiking regimen since Volcker 1980. Subsequently, stocks entered bear market, GDP crashed, the housing market rolled over, and consumer sentiment hit an all time low.

Ironically, Japan has been the outlier country in 2022. As of this week they have the strongest MAJOR economy in the entire world, in Q2 registering a by comparison blistering 3.5% REAL growth rate. In addition, Japan's inflation rate is also the LOWEST of the major economies. Which is why it makes no sense that the Japanese Yen is trading at the lowest level since 1998. Except in the context of interest rate policy divergence from the U.S. Which is what global hot money traders are betting will continue forever.

We are one global overnight RISK OFF event away from hot money explosion circa 1998 LTCM.  

All of which gets us to this coming week - the anniversary of Lehman collapse in 2008. Then as now, policy-makers are totally concerned with inflation. Also, then as now there is RAMPANT recession denial. However, this time around the falling dominoes that are being ignored are not U.S. banks, they are entire countries.

Right on time, Michael Burry of 2008 Big Short fame was out this week with another warning of bubble collapse. He ticked off SPACs, Cryptos, Meme stocks and Ark ETFs as evidence of collapsing bubbles. However, those risks are CHUMP change compared to the real risks listed above. When this gong show explodes, no one is going to be talking about Gamestop. Which is why most U.S. investors don't see this coming - because even the bears are totally focused on U.S. markets. Whereas the greatest risks are taking place overseas.

Lehman week is bracketed by the two big central bank meetings - ECB and the Fed. This week, the ECB raised rates by .75% which means that AT MINIMUM this month will see 5x the monetary firepower that imploded markets in 2015 and 2018. Not including all of the other smaller central banks. AND not including U.S. QT ramping up to $95 billion this month.

There is one bullish argument that still holds water - which is that the market is relatively oversold. Which I agree, it IS oversold for a BULL market. But by bear market standards, it's not oversold at all. And by bull market standards, positioning is bearish. But by bear market standards, today's positioning is actually very bullish. If you don't believe me, just look at the Fed's own proprietary Financial Stress index which includes 18 different stock and bond market indicators of financial tightening:

In summary, entering Lehman week we are watching all of the risks of all of the past several economic meltdowns coalescing into one massive super clusterfuck. Bought with both hands by zombies on auto-pilot.