Wednesday, October 12, 2022


No excuse this time...

Michael Burry:

"How anyone over the age of 40 didn't see this coming is a riddle. The answer is Greed."

Pollyanna predictions still abound. There is no shortage of pundits willing to tell people what they desperately want to hear. Blowing smoke up people's asses became the primary financial model after 2008. Each time markets get bailed out, fraud and corruption increase. However, this time gamblers are sky-diving without a parachute. The one time they didn't hedge is the one time they won't get bailed out. As I said in my last post, this is extreme moral hazard.

A new and extremely dangerous myth has been created that the dumb money is the new smart money. This myth was cultivated during the Gamestop debacle which saw a massive rush of gamblers into the casino. During that pump and dump, the Reddit mob took down a couple of over-leveraged hedge funds. However, there were many MORE hedge funds that shorted Gamestop from the top all the way down. The REAL losers were the legions of newbies who were late to the party and got crushed by short sellers at the end of the pump and dump. Funny how that part of the story never got told.

This newfound *smart money* theory is just another way of ensuring bagholders remain in the market while conflict of interest continues to be assiduously ignored. We need not expect Wall Street to question such a lucrative fantasy.

History says that people who do nothing get officially buried by serial financial psychopaths. 

Wall Street keeps downgrading their market predictions while maintaining buy ratings on every stock. They've been behind the curve all year and they will happily remain far behind the curve, selling stock to useful bagholders. 

The never-ending pivot fantasy remains the clarion call of denial:

Lately I've been reading Paul Volcker's aptly named autobiography "Keeping At It". This is the book J. Powell cited at his Jackson Hole speech. The most interesting part of the book is towards the middle when he is nominated to the Federal Reserve in 1979. Back then Volcker raised rates to 19% and held them at that level until unemployment reached 11% in 1982. He caused two back to back recessions. The current Fed rate is 3% and the unemployment rate is a record LOW 3.5%. Even still, today's bailout junkies are complaining constantly. Just this week Cathie Wood wrote an open letter to the Fed decrying their battle against inflation. Apparently she has a passionate concern for the middle class.  

What is happening right now in the UK is a warning to stock market bulls as to what happens when a central bank tries to pivot in an inflationary environment. It backfires. Expansionary monetary policy only works in a deflationary environment. It does not work at the end of the cycle. Which of course is Econ 101, cycle theory:

"Instead of boosting growth, the IMF made it clear it thought the government’s policies ran a serious risk of provoking a deeper downturn once inflation had stayed too high for too long."

The Bank of England initiated a temporary bond market intervention two weeks ago, but they are warning markets it will end this coming Friday. The BOE has now officially put their credibility on the line and markets will soon test their resolve. Recall that George Soros made his fame and fortune shorting the Pound in the early 1990s. Now there is blood in the water all over again. 

The critical question on the table is how can the BOE defend BOTH the bond market AND the currency market at the same time? They can't. All they can do is sponsor ever-weaker global short-covering rallies, each one conflated as a "new bull market", until the wheels come off the bus for good. 

The RBA is another example of a failing pivot. On October 3rd they shocked markets by raising rates by a much less than expected quarter of a % point. Since then the currency has been bidless, accelerating imported inflation and exacerbating slowdown. 

China is having another devaluation disaster.

Investors came back from Golden Week to find their stocks are back at 2015 lows, on a dollar basis. Where they were the last time China currency devaluation forced a global bailout. 

Here in the casino, the market keeps stair stepping lower amid mass complacency. 
A Lehman-equivalent crash now would equal -60% down, from all time high to low. If this slow bleed lower continues, the final low will only be far worse. Picture a market that trickles down -40% and then explodes lower. Because that's the way things are heading.  

The political ramifications of this disaster are not even remotely priced in. There will be no bailout for the rich this time, which means it will be a corporate mass deleveraging event.

In each of the past two bubbles there was a discovery phase near the end of the bear market in which all of the various scams were revealed. As Warren Buffett says, "When the tide goes out, we find out who's been swimming naked". In 2001 it was of course rampant IPO junk stocks, Worldcom, Tyco, Global Crossing and Enron. In 2008, it was Bernie Madoff's fund and all of Wall Street with their subprime fiasco. Authorities jailed Madoff for his billion dollar scam while they bailed out Wall Street for collapsing the global economy.

This time around, the level of criminality is beyond anything we've seen before: record IPO and SPAC junk, Ark ETFs, Reddit organized pump and dump schemes, rampant Crypto theft, and a record housing bubble. The public will be enraged when the era of mega scams explodes. It will make 2008 seem like a Boy Scout jamboree by comparison. This article from the Wall Street Journal came out this week: 

"Across 50 federal agencies ranging from the Commerce Department to the Treasury Department, more than 2,600 officials reported stock investments in companies while those companies were lobbying their agencies for favorable policies, during both Republican and Democratic administrations. When the financial holdings caused a conflict, the agencies sometimes simply waived the rules"

In summary, there is no shortage of deceivers willing to tell the sheeple what they want to hear, because scams and corruption are widely embraced.

For now.